- Quarterly Report (10-Q)

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 Quarterly Period Ended March 31, 2009


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-51459

PATRIOT CAPITAL FUNDING, INC.

(Exact name of registrant as specified in its charter)


Delaware		74-3068511

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

274 Riverside Avenue Westport, CT (Address of principal executive office)		06880 (Zip Code)

(203) 429-2700
(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of May 8, 2009 was 20,950,501.

PATRIOT CAPITAL FUNDING, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets at March 31, 2009 and December 31, 2008	1
	Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008	2
	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2009 and 2008	3
	Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008	4
	Consolidated Schedule of Investments as of March 31, 2009	5
	Consolidated Schedule of Investments as of December 31, 2008	11
	Notes to Consolidated Financial Statements	17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION	39

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults upon Senior Securities	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

Signatures		41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patriot Capital Funding, Inc.

Consolidated Balance Sheets

(unaudited)


	March 31,			December 31,
	2009			2008

ASSETS
Investments at fair value:
Non-control/non-affiliate investments (cost of $229,604,443 - 2009, $269,577,008 - 2008)	$	220,408,409		$	240,486,620
Affiliate investments (cost of $52,990,210 - 2009, $53,129,533 - 2008)		49,806,458			51,457,082
Control investments (cost of $64,573,917 - 2009, $43,192,484 - 2008)		29,297,277			30,427,046

Total investments		299,512,144			322,370,748
Cash and cash equivalents		14,230,158			6,449,454
Restricted cash		15,795,067			22,155,073
Interest receivable		1,333,041			1,390,285
Other assets		1,934,259			1,897,086


TOTAL ASSETS	$	332,804,669		$	354,262,646


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Borrowings	$	157,600,000		$	162,600,000
Interest payable		290,352			514,125
Dividends payable		—			5,253,709
Accounts payable, accrued expenses and other		4,689,208			5,777,642


TOTAL LIABILITIES		162,579,560			174,145,476


COMMITMENTS

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.01 par value, 49,000,000 shares authorized; 20,950,501 and 20,827,334 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		209,506			208,274
Paid-in capital		234,948,393			234,385,063
Accumulated net investment income (loss)		1,446,795			(1,912,061	)
Distributions in excess of net investment income		—			(1,758,877	)
Net realized loss on investments		(15,654,717	)		(4,053,953	)
Net unrealized depreciation on interest rate swaps		(2,914,535	)		(3,097,384	)
Net unrealized depreciation on investments		(47,810,333	)		(43,653,892	)


TOTAL STOCKHOLDERS’ EQUITY		170,225,109			180,117,170


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	332,804,669		$	354,262,646


NET ASSET VALUE PER COMMON SHARE	$	8.13		$	8.65

See Notes to Consolidated Financial Statements.

Patriot Capital Funding, Inc.

Consolidated Statements of Operations

(unaudited)


	Three Months Ended
	March 31,
	2009			2008

INVESTMENT INCOME
Interest and dividends:
Non-control/non-affiliate investments	$	6,190,762		$	8,298,333
Affiliate investments		1,331,559			2,514,423
Control investments		836,630			178,466

Total interest and dividend income		8,358,951			10,991,222

Fees:
Non-control/non-affiliate investments		110,717			168,697
Affiliate investments		21,888			38,661
Control investments		34,545			6,250

Total fee income		167,150			213,608

Other investment income:
Non-control/non-affiliate investments		8,804			39,855

Total other investment income		8,804			39,855

Total Investment Income		8,534,905			11,244,685


EXPENSES
Compensation expense		921,121			1,498,175
Interest expense		1,586,437			2,059,523
Professional fees		328,920			262,527
General and administrative expense		580,694			638,560

Total Expenses		3,417,172			4,458,785

Net Investment Income		5,117,733			6,785,900


NET REALIZED GAIN (LOSS) AND NET UNREALIZED APPRECIATION (DEPRECIATION)
Net realized loss on investments — non-control/non-affiliate		—			(89,550	)
Net realized loss on investments — control		(11,600,764	)		—
Net unrealized appreciation (depreciation) on investments - non-control/non-affiliate		9,530			(6,411,284	)
Net unrealized depreciation on investments — affiliate		(1,511,301	)		(2,591,990	)
Net unrealized depreciation on investments — control		(2,654,670	)		(848,000	)
Net unrealized appreciation (depreciation) on interest rate swaps		182,849			(752,851	)

Net Realized Gain (Loss) and Net Unrealized Appreciation (Depreciation)		(15,574,356	)		(10,693,675	)


NET LOSS	$	(10,456,623	)	$	(3,907,775	)


Loss per share, basic and diluted	$	(0.50	)	$	(0.19	)

Weighted average shares outstanding, basic and diluted		20,929,973			20,650,455

See Notes to Consolidated Financial Statements.

Patriot Capital Funding, Inc.

Consolidated Statements of Changes in Net Assets

(unaudited)


	Three Months Ended
	March 31,
	2009			2008

Operations:
Net investment income	$	5,117,733		$	6,785,900
Net realized loss on investments		(11,600,764	)		(89,550	)
Net unrealized depreciation on investments		(4,156,441	)		(9,851,274	)
Net unrealized appreciation (depreciation) on interest rate swaps		182,849			(752,851	)

Net decrease in net assets from operations		(10,456,623	)		(3,907,775	)


Stockholder transactions:
Distributions to stockholders from net investment income		—			(6,785,900	)
Distributions in excess of net investment income		—			(28,750	)

Net decrease in net assets from stockholder distributions		—			(6,814,650	)


Capital share transactions:
Issuance of common stock under dividend reinvestment plan		364,499			—
Stock option compensation		200,063			182,063

Net increase in net assets from capital share transactions		564,562			182,063


Total decrease in net assets		(9,892,061	)		(10,540,362	)

Net assets at beginning of period		180,117,170			221,597,684


Net assets at end of period	$	170,225,109		$	211,057,322


Net asset value per common share	$	8.13		$	10.22


Common shares outstanding at end of period		20,950,501			20,650,455

See Notes to Consolidated Financial Statements.

Patriot Capital Funding, Inc.

Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended
	March 31,
	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,456,623	)	$	(3,907,775	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization		164,469			98,111
Change in interest receivable		57,244			381,280
Realized loss on sale of investments		11,600,764			89,550
Change in unrealized depreciation on investments		4,156,441			9,851,274
Change in unrealized (appreciation) depreciation on interest rate swaps		(182,849	)		752,851
Payment-in-kind interest and dividends		(1,087,159	)		(1,453,912	)
Stock-based compensation expense		200,063			182,063
Change in unearned income		(242,383	)		(356,002	)
Change in interest payable		(223,773	)		(303,522	)
Change in other assets		(201,641	)		(16,195	)
Change in accounts payable, accrued expenses and other		(905,586	)		(2,126,838	)

Net cash provided by operating activities		2,878,967			3,190,885


CASH FLOWS FROM INVESTING ACTIVITIES:
Funded investments		(4,075,088	)		(5,141,406	)
Principal repayments on investments		12,506,029			19,441,899
Proceeds from sale of investments		—			10,347,950
Purchases of furniture and equipment		—			(3,927	)

Net cash provided by investing activities		8,430,941			24,644,516


CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings		7,500,000			6,052,500
Repayments on borrowings		(12,500,000	)		(27,952,500	)
Dividends paid		(4,889,210	)		(6,814,650	)
Deferred offering costs		—			(23,633	)
Change in restricted cash		6,360,006			1,425,181

Net cash used for financing activities		(3,529,204	)		(27,313,102	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		7,780,704			522,299

CASH AND CASH EQUIVALENTS AT:
Beginning of Period		6,449,454			789,451

End of Period	$	14,230,158		$	1,311,750

Supplemental information:
Interest paid	$	1,678,482		$	2,363,045

Non-cash financing activities:
Dividends reinvested in common stock	$	364,499		$	—
Dividends declared but not paid		—			6,814,650

See Notes to Consolidated Financial Statements.

Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
March 31, 2009
(unaudited)


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost			Value


Control investments:


Aylward Enterprises, LLC (5)	Manufacturer of packaging equipment	Revolving Line of Credit
(Machinery)		(5.3%, Due 2/12) (3)	$	3,700,000	$	3,651,432		$	3,651,432

		Senior Secured Term Loan A
		(5.7%, Due 2/12) (3)		8,085,938		8,010,003			2,247,565

		Senior Subordinated Debt
		(22.0%, Due 8/12) (2)		7,730,791		6,747,301			—

		Subordinated Member Note
		(8.0%, Due 2/13) (2)		154,558		148,491			—

		Membership Interest (1,250,000 units) (4)				1,250,000			—


Encore Legal Solutions, Inc.	Legal document management services	Junior Secured Term Loan A
(Printing & Publishing)		(6.2%, Due 12/10) (2) (3)		4,020,456		4,009,847			4,009,847

		Junior Secured Term Loan B
		(8.9%, Due 12/10) (2) (3)		7,390,687		7,361,384			—

		Common Stock (30,000 shares) (4)				5,159,567			—


Fischbein, LLC	Designer and manufacturer of packaging	Senior Subordinated Debt
(Machinery)	equipment	(16.5%, Due 5/13) (2) (3)		3,532,641		3,512,275			3,582,934

		Membership Interest - Class A (2,800,000 units) (4)				2,800,000			3,477,800


L.A. Spas, Inc.	Manufacturer of above ground spas	Revolving Line of Credit
(Chemicals, Plastics & Rubber)		(8.8%, Due 12/09) (3)		1,000,000		990,794			990,794

		Senior Secured Term Loan
		(8.8%, Due 12/09) (3)		4,165,430		4,092,364			399,134
		Charge-off of principal
		of impaired loan (7)				(3,693,230	)		—

		Senior Subordinated Debt
		(17.5%, Due 1/10) (2) (3)		8,132,897		7,907,534			—
		Charge-off of principal
		of impaired loan (7)				(7,907,534	)		—

		Common Stock (1,125,000 shares) (4)				188			—

		Common Stock Warrants (13,828 warrants) (4)				3,963			—


Nupla Corporation (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (7.3%, Due 9/12) (3)		1,020,000		1,007,348			1,007,348

		Senior Secured Term Loan A
		(8.0%, Due 9/12) (3)		5,246,876		5,210,656			5,075,280

		Senior Subordinated Debt
		(15.0%, Due 3/13) (2) (3)		3,162,122		3,142,356			2,396,334

		Preferred Stock Class A (475 shares) (2)				564,638			—

		Preferred Stock Class B (1,045 shares) (2)				1,131,921			—

		Common Stock (1,140,584 shares) (4)				80,000			—


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value

Sidump’r Trailer Company, Inc.	Manufacturer of side dump trailers	Revolving Line of Credit
(Automobile)		(7.3%, Due 1/11) (3)		950,000		934,432		934,432

		Senior Secured Term Loan A
		(7.3%, Due 1/11) (3)		2,047,500		2,036,677		1,524,377

		Senior Secured Term Loan B
		(8.8%, Due 1/11) (3)		2,320,625		2,301,926		—

		Senior Secured Term Loan C
		(16.5%, Due 7/11) (2) (3)		2,507,974		2,253,829		—

		Senior Secured Term Loan D
		(7.3%, Due 7/11)		1,700,000		1,700,000		—

		Preferred Stock (49,635.5 shares) (2)				165,730		—

		Common Stock (64,050 shares) (4)				25		—


Total Control investments (represents 9.8% of total investments at fair value)					$	64,573,917	$	29,297,277


Affiliate investments:


Boxercraft Incorporated	Supplier of spiritwear and campus apparel	Senior Secured Term Loan A
(Textiles & Leather)		(8.0%, Due 9/13) (3)	$	5,148,387	$	5,098,108	$	5,098,108

		Senior Secured Term Loan B
		(8.5%, Due 9/13) (3)		5,466,266		5,412,038		5,412,038

		Senior Subordinated Debt
		(16.8%, Due 3/14) (2) (3)		6,669,957		6,606,144		6,606,144

		Preferred Stock (1,000,000 shares) (4)				1,054,722		676,500

		Common Stock (10,000 shares) (4)				100		—


KTPS Holdings, LLC	Manufacturer and distributor of specialty	Revolving Line of Credit
(Textiles & Leather)	pet products	(7.0%, Due 1/12) (3)		900,000		887,906		887,906

		Senior Secured Term Loan A
		(5.9%, Due 1/12) (3)		4,996,875		4,956,633		4,956,659

		Senior Secured Term Loan B
		(14.0%, Due 1/12) (3)		465,000		460,613		460,613

		Junior Secured Term Loan
		(17.0%, Due 3/12) (2) (3)		4,239,362		4,206,379		4,206,379

		Membership Interest - Class A (730.02 units) (4)				730,020		439,600

		Membership Interest -
		Common (199,795.08 units) (4)				—		—


Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Membership Interest - Class B (1,218 units) (4)				1,280,403		—

		Membership Interest - Class D (1 unit) (4)				290,333		—


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Sport Helmets Holdings, LLC (5)	Manufacturer of protective headgear	Senior Secured Term Loan A
(Personal & Nondurable Consumer Products)		(5.4%, Due 12/13) (3)		4,443,750		4,393,144		4,239,594

		Senior Secured Term Loan B
		(5.9%, Due 12/13) (3)		7,481,250		7,385,358		7,126,708

		Senior Subordinated Debt -
		Series A (15.0%, Due 6/14) (2) (3)
				7,052,500		6,954,090		6,954,090

		Senior Subordinated Debt -
		Series B (15.0%, Due 6/14) (2)		1,274,219		1,274,219		1,274,219

		Common Stock (20,000 shares) (4)				2,000,000		1,467,900


Total Affiliate investments (represents 16.6% of total investments at fair value)					$	52,990,210	$	49,806,458


Non-control/non-affiliate investments:


ADAPCO, Inc.	Distributor of specialty chemicals and	Revolving Line of Credit
(Ecological)	contract application services	(10.3%, Due 7/11) (3)	$	800,000	$	785,553	$	785,553

		Senior Secured Term Loan A
		(10.3%, Due 6/11) (3)		7,890,625		7,849,393		7,849,393

		Common Stock (5,000 shares) (4)				500,000		137,000


Aircraft Fasteners International, LLC	Distributor of fasteners and related hardware	Senior Secured Term Loan
(Machinery)	for use in aerospace, electronics and defense industries	(4.2%, Due 11/12) (3)		5,443,000		5,367,416		5,217,116

		Junior Secured Term Loan
		(14.0%, Due 5/13) (2) (3)		5,333,075		5,273,251		5,273,251

		Convertible Preferred Stock (32,500 shares) (2)				270,935		493,100


Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4,000 shares) (4)				463,168		110,600


Arrowhead General Insurance Agency, Inc. (6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (9.5%, Due 2/13) (3)		5,000,000		5,000,000		4,061,400


Borga, Inc.	Manufacturer of pre-fabricated metal	Revolving Line of Credit
(Mining, Steel, Iron & Nonprecious Metals)	building systems	(6.5%, Due 5/10) (3)		800,000		795,074		795,074

		Senior Secured Term Loan B
		(10.0%, Due 5/10) (3)		1,629,534		1,614,306		1,614,306

		Senior Secured Term Loan C
		(19.0%, Due 5/10) (2) (3)		8,198,709		8,164,229		8,164,229

		Common Stock Warrants (33,750 warrants) (4)				15,816		—


Caleel + Hayden, LLC (5) (Personal & Nondurable Consumer Products)	Provider of proprietary branded professional skincare and cosmetic products to physicians and spa communities	Junior Secured Term Loan B (9.8%, Due 11/11) (3)		9,996,558		9,901,060		9,901,060

		Senior Subordinated Debt
		(16.5%, Due 11/12) (3)		6,250,000		6,193,894		6,256,394
		Common Stock (7,500 shares) (4)				750,000		786,500


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


CDW Corporation (6)	Direct marketer of computer and	Senior Secured Term Loan
(Electronics)	peripheral equipment	(4.0%, Due 10/14)		1,995,909		1,784,513		1,017,900


CS Operating, LLC (5)	Provider of maintenance, repair and replacement of	Revolving Line of Credit
(Buildings & Real Estate)	HVAC, electrical, plumbing, and foundation repair	(6.0%, Due 1/13) (3)		200,000		195,006		195,006

		Senior Secured Term Loan A
		(6.6%, Due 7/12) (3)		1,748,814		1,728,522		1,728,522

		Senior Subordinated Debt
		(16.5%, Due 1/13) (2) (3)		2,657,752		2,629,039		2,629,039


Copernicus Group	Provider of clinical trial review services	Revolving Line of Credit
(Healthcare, Education & Childcare)		(8.8%, Due 10/13) (3)		250,000		231,762		231,762

		Senior Secured Term Loan A
		(8.8%, Due 10/13) (3)		7,837,500		7,720,740		7,720,740

		Senior Subordinated Debt
		(16.0%, Due 4/14) (3)		12,233,120		12,056,330		12,056,330

		Preferred Stock - Series A (1,000,000 shares) (4)				1,000,000		1,068,900


Copperhead Chemical Company, Inc.	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt
(Chemicals, Plastics & Rubber)		(21.0%, Due 1/13) (2) (3)		3,749,492		3,722,703		3,722,703


Custom Direct, Inc. (6)	Direct marketer of checks and other	Senior Secured Term Loan
(Printing & Publishing)	financial products and services	(4.0%, Due 12/13) (3)		1,847,386		1,613,302		1,293,200

		Junior Secured Term Loan
		(7.2%, Due 12/14) (3)		2,000,000		2,000,000		1,200,000


Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (30,974 shares) (4)				148,200		66,000


Employbridge Holding Company (5) (6)	A provider of specialized staffing	Junior Secured Term Loan
(Personal, Food & Miscellaneous Services)	services	(9.3%, Due 10/13) (3)		3,000,000		3,000,000		300,000


EXL Acquisition Corp.	Manufacturer of lab testing supplies	Senior Secured Term Loan A
(Electronics)		(4.9%, Due 3/11) (3)		2,864,871		2,848,357		2,721,187

		Senior Secured Term Loan B
		(5.2%, Due 3/12) (3)		4,357,370		4,313,325		4,119,955

		Senior Secured Term Loan C
		(5.7%, Due 3/12) (3)		2,687,523		2,652,236		2,532,913

		Senior Secured Term Loan D
		(15.0%, Due 3/12) (3)		6,366,381		6,313,891		6,313,891

		Common Stock - Class A (2,475 shares) (4)				2,475		309,400

		Common Stock - Class B (25 shares) (2)				285,410		289,700


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Fairchild Industrial Products, Co.	Manufacturer of industrial controls and	Senior Secured Term Loan A
(Electronics)	power transmission products	(5.9%, Due 7/10) (3)		1,538,366		1,529,009		1,507,743

		Senior Secured Term Loan B
		(7.7%, Due 1/11) (3)		4,414,375		4,389,448		4,328,473

		Senior Subordinated Debt
		(14.8%, Due 7/11) (3)		5,460,000		5,422,141		5,422,141

		Preferred Stock - Class A (378.4 shares) (2)				359,900		365,000

		Common Stock - Class B (27.5 shares) (4)				121,598		359,800


Hudson Products Holdings, Inc. (6)	Manufactures and designs air-cooled heat	Senior Secured Term Loan
(Mining, Steel, Iron & Nonprecious Metals)	exchanger equipment	(8.0%, Due 8/15) (3)		7,462,500		7,253,501		6,401,000


Impact Products, LLC	Distributor of janitorial supplies	Junior Secured Term Loan
(Machinery)		(6.6%, Due 9/12) (3)		8,875,000		8,824,101		8,799,501

		Senior Subordinated Debt
		(15.0%, Due 9/12) (3)		5,547,993		5,519,836		5,519,836


Label Corp Holdings, Inc. (6)	Manufacturer of prime labels	Senior Secured Term Loan
(Printing & Publishing)		(8.0%, Due 8/14) (3)		6,467,500		6,171,841		5,560,500


LHC Holdings Corp.	Provider of home healthcare services	Senior Secured Term Loan A
(Healthcare, Education & Childcare)		(4.5%, Due 11/12) (3)		3,855,339		3,816,427		3,704,588

		Senior Subordinated Debt
		(14.5%, Due 5/13) (3)		4,565,000		4,520,600		4,520,600

		Membership Interest (125,000 units) (4)				125,000		183,000


Mac & Massey Holdings, LLC	Broker and distributor of ingredients to	Senior Subordinated Debt
(Grocery)	manufacturers of food products	(15.8%, Due 2/13) (2) (3)		8,066,238		8,039,213		8,039,213

		Common Stock (250 shares) (4)				238,916		386,300


Northwestern Management Services, LLC	Provider of dental services	Revolving Line of Credit
(Healthcare, Education & Childcare)		(5.8%, Due 12/12) (3)		125,000		117,091		117,091

		Senior Secured Term Loan A
		(4.5%, Due 12/12) (3)		5,430,000		5,385,468		5,099,368

		Senior Secured Term Loan B
		(5.1%, Due 12/12) (3)		1,234,375		1,223,890		1,223,890

		Junior Secured Term Loan
		(15.0%, Due 6/13) (2) (3)		2,860,658		2,838,218		2,838,218

		Common Stock (500 shares) (4)				500,000		408,100


Prince Mineral Company, Inc.	Manufacturer of pigments	Junior Secured Term Loan
(Metals & Minerals)		(6.2%, Due 12/12) (3)		11,250,000		11,113,401		10,727,901

		Senior Subordinated Debt
		(14.0%, Due 7/13) (2) (3)		12,064,491		11,956,048		11,705,457


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Quartermaster, Inc.	Retailer of uniforms and tactical equipment to	Revolving Line of Credit
(Retail Stores)	law enforcement and security professionals	(6.5%, Due 12/10) (3)		2,150,000		2,133,615		2,133,615

		Senior Secured Term Loan A
		(6.8%, Due 12/10) (3)		2,981,500		2,958,273		2,958,273

		Senior Secured Term Loan B
		(8.1%, Due 12/10) (3)		2,537,500		2,522,409		2,522,409

		Senior Secured Term Loan C
		(15.0%, Due 12/11) (2) (3)		3,425,317		3,403,295		3,403,295


R-O-M Corporation	Manufacturer of doors, ramps and bulk heads for	Revolving Line of Credit
(Automobile)	fire trucks and food transportation	(4.8%, Due 2/13) (3)		375,000		354,446		354,446

		Senior Secured Term Loan A
		(3.3%, Due 2/13) (3)		6,340,000		6,288,368		5,977,668

		Senior Secured Term Loan B
		(4.8%, Due 5/13) (3)		8,357,625		8,272,925		7,863,300

		Senior Subordinated Debt
		(15.0%, Due 8/13) (3)		7,100,000		7,015,559		7,015,559


Total Non-control/non-affiliate investments (represents 73.6% of total investments at fair value)					$	229,604,443	$	220,408,409


Total Investments					$	347,168,570	$	299,512,144


(1)		Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the “1940 Act”), as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.

(2)		Amount includes payment-in-kind (PIK) interest or dividends.

(3)		Pledged as collateral under the Company’s Amended Securitization Facility. See Note 6 to Consolidated Financial Statements.

(4)		Non-income producing.

(5)		Some of the investments listed are issued by an affiliate of the listed portfolio company.

(6)		Syndicated investment which has been originated by another financial institution and broadly distributed.

(7)		All or a portion of the loan is considered permanently impaired and, accordingly, the charge-off of the principal balance has been recorded as a realized loss for financial reporting purposes.

See Notes to Consolidated Financial Statements

PATRIOT CAPITAL FUNDING, INC.

Consolidated Schedule of Investments

December 31, 2008


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Control investments:


Encore Legal Solutions, Inc.	Legal document management services	Junior Secured Term Loan A
(Printing & Publishing)		(6.2%, Due 12/10) (2) (3)	$	4,020,456	$	4,007,366	$	3,537,910

		Junior Secured Term Loan B (9.2%, Due 12/10) (2) (3)		7,390,687		7,355,975		6,492,888

		Common Stock (30,000 shares) (4)				5,159,567		326,900


Fischbein, LLC	Designer and manufacturer of packaging	Senior Subordinated Debt
(Machinery)	equipment	(16.5%, Due 5/13) (2) (3)		3,492,760		3,471,147		3,540,987

		Membership Interest – Class A (2,800,000 units) (4)				2,800,000		3,876,000


Nupla Corporation (Home & Office Furnishings, Housewares & Durable Consumer Products)	Manufacturer and marketer of professional high-grade fiberglass-handled striking and digging tools	Revolving Line of Credit (7.3%, Due 9/12) (3)		870,000		856,425		856,425

		Senior Secured Term Loan A
		(8.0%, Due 9/12) (3)		5,354,688		5,315,741		5,166,852

		Senior Subordinated Debt
		(15.0%, Due 3/13) (2) (3)		3,123,084		3,102,059		2,192,375

		Preferred Stock Class A (475 shares) (2)				550,584		15,900

		Preferred Stock Class B (1,045 shares) (2)				1,101,001		1,101,500

		Common Stock (1,140,584 shares) (4)				80,000		—


Sidump’r Trailer Company, Inc.	Manufacturer of side dump trailers	Revolving Line of Credit
(Automobile)		(7.3%, Due 1/11) (3)		950,000		934,432		934,432

		Senior Secured Term Loan A
		(7.3%, Due 1/11) (3)		2,047,500		2,036,677		2,036,677

		Senior Secured Term Loan B
		(8.8%, Due 1/11) (3)		2,320,625		2,301,926		—

		Senior Secured Term Loan C
		(16.5%, Due 7/11) (2) (3)		2,406,374		2,253,829		—

		Senior Secured Term Loan D
		(7.3%, Due 7/11)		1,700,000		1,700,000		348,200

		Preferred Stock (49,635.5 shares) (2)				165,730		—

		Common Stock (64,050 shares) (4)				25		—


Total Control investments (represents 9.4% of total investments at fair value)					$	43,192,484	$	30,427,046


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Affiliate investments:


Boxercraft Incorporated	Supplier of spiritwear and campus apparel	Senior Secured Term Loan A
(Textiles & Leather)		(8.0%, Due 9/13) (3)		5,328,125		5,273,766		5,273,766

		Senior Secured Term Loan B
		(8.5%, Due 9/13) (3)		5,486,250		5,429,567		5,429,567

		Senior Subordinated Debt
		(16.8%, Due 3/14) (2) (3)		6,591,375		6,524,347		6,524,347

		Preferred Stock (1,000,000 shares) (4)				1,029,722		849,500

		Common Stock (10,000 shares) (4)				100		—


KTPS Holdings, LLC	Manufacturer and distributor of specialty	Revolving Line of Credit
(Textiles & Leather)	pet products	(5.0%, Due 1/12) (3)		1,000,000		986,840		986,840

		Senior Secured Term Loan A
		(5.1%, Due 1/12) (3)		4,996,875		4,950,978		4,951,005

		Senior Secured Term Loan B
		(12.0%, Due 1/12) (3)		465,000		460,265		460,265

		Junior Secured Term Loan (15.0%, Due 3/12) (2) (3)		4,207,806		4,172,076		4,172,076

		Membership Interest – Class A (730.02 units) (4)				730,020		721,200

		Membership Interest – Common (199,795.08 units) (4)				—		—


Smart, LLC (5) (Diversified/Conglomerate Service)	Provider of tuition management services	Membership Interest – Class B (1,218 units) (4)				1,280,403		311,500

		Membership Interest – Class D (1 unit) (4)				290,333		312,000


Sport Helmets Holdings, LLC (5)	Manufacturer of protective headgear	Senior Secured Term Loan A
(Personal & Nondurable Consumer Products)		(5.9%, Due 12/13) (3)		4,500,000		4,445,614		4,282,314

		Senior Secured Term Loan B
		(6.4%, Due 12/13) (3)		7,500,000		7,400,148		7,128,048

		Senior Subordinated Debt -
		Series A (15.0%, Due 6/14) (2) (3)		7,000,000		6,896,866		6,896,866

		Senior Subordinated Debt -
		Series B (15.0%, Due 6/14) (2)		1,258,488		1,258,488		1,258,488

		Common Stock (20,000 shares) (4)				2,000,000		1,899,300


Total Affiliate investments (represents 16.0% of total investments at fair value)					$	53,129,533	$	51,457,082


Non-control/non-affiliate investments:


ADAPCO, Inc.	Distributor of specialty chemicals and	Senior Secured Term Loan A
(Ecological)	contract application services	(11.5%, Due 6/11) (3)	$	8,103,125	$	8,056,102	$	8,056,102

		Common Stock (5,000 shares) (4)				500,000		108,800


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Aircraft Fasteners International, LLC (Machinery)	Distributor of fasteners and related hardware for use in aerospace, electronics and defense industries	Senior Secured Term Loan (4.1%, Due 11/12) (3)		5,528,000		5,446,932		5,208,632

		Junior Secured Term Loan (14.0%, Due 5/13) (2) (3)		5,306,249		5,242,761		5,242,761

		Convertible Preferred Stock (32,500 shares) (2)				273,397		503,600


Allied Defense Group, Inc. (Aerospace & Defense)	Diversified defense company	Common Stock (4,000 shares) (4)				463,168		173,600


Arrowhead General Insurance Agency, Inc. (6) (Insurance)	Insurance agency and program specialist	Junior Secured Term Loan (7.7%, Due 2/13) (3)		5,000,000		5,000,000		4,048,200


Aylward Enterprises, LLC (5)	Manufacturer of packaging equipment	Revolving Line of Credit
(Machinery)		(10.0%, Due 2/12) (3)	$	3,700,000		$3,647,158		$3,647,158

		Senior Secured Term Loan A
		(11.6%, Due 2/12) (3)		8,085,938		7,999,958		3,572,320

		Senior Subordinated Debt
		(22.0%, Due 8/12) (2)		7,328,591		6,747,301		—

		Subordinated Member Note
		(8.0%, Due 2/13) (2)		151,527		148,491		—

		Membership Interest (1,250,000 units) (4)				1,250,000		—


Borga, Inc.	Manufacturer of pre-fabricated metal	Revolving Line of Credit
(Mining, Steel, Iron & Nonprecious Metals)	building systems	(4.9%, Due 5/10) (3)		800,000		793,950		793,950

		Senior Secured Term Loan A
		(5.4%, Due 5/09) (3)		328,116		325,903		325,903

		Senior Secured Term Loan B
		(8.4%, Due 5/10) (3)		1,635,341		1,617,095		1,617,095

		Senior Secured Term Loan C
		(16.0%, Due 5/10) (2) (3)		8,117,266		8,074,916		8,074,916

		Common Stock Warrants (33,750 warrants) (4)				14,805		—


Caleel + Hayden, LLC (5)	Provider of proprietary branded professional skincare and	Junior Secured Term Loan B
(Personal & Nondurable Consumer Products)	cosmetic products to physicians and spa communities	(4.7%, Due 11/11) (3)		10,771,562		10,668,072		10,668,072

		Senior Subordinated Debt
		(14.5%, Due 11/12) (3)		6,250,000		6,190,008		6,252,608

		Common Stock (7,500 shares) (4)				750,000		862,100


CDW Corporation (6) (Electronics)	Direct marketer of computer and peripheral equipment	Senior Secured Term Loan (6.7%, Due 10/14)		2,000,000		1,780,924		920,000


CS Operating, LLC (5)	Provider of maintenance, repair and replacement of	Revolving Line of Credit
(Buildings & Real Estate)	HVAC, electrical, plumbing, and foundation repair	(6.8%, Due 1/13) (3)		200,000		194,564		194,564

		Senior Secured Term Loan A
		(6.6%, Due 7/12) (3)		1,855,064		1,832,122		1,832,122

		Senior Subordinated Debt
		(16.5%, Due 1/13) (2) (3)		2,616,863		2,586,496		2,586,496


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Copernicus Group	Provider of clinical trial review services	Revolving Line of Credit
(Healthcare, Education & Childcare)		(8.8%, Due 10/13) (3)		150,000		130,753		130,753

		Senior Secured Term Loan A
		(9.0%, Due 10/13) (3)		8,043,750		7,917,470		7,917,470

		Senior Subordinated Debt
		(16.0%, Due 4/14) (3)		12,112,000		11,926,408		11,926,408

		Preferred Stock – Series A (1,000,000 shares) (4)				1,000,000		1,033,000


Copperhead Chemical Company, Inc.	Manufacturer of bulk pharmaceuticals	Senior Subordinated Debt
(Chemicals, Plastics & Rubber)		(21.0%, Due 1/13) (2) (3)		3,693,195		3,664,655		3,664,655


Custom Direct, Inc. (6) (Printing & Publishing)	Direct marketer of checks and other financial products and services	Senior Secured Term Loan (4.2%, Due 12/13) (3)		1,847,386		1,603,118		1,330,100

		Junior Secured Term Loan
		(7.5%, Due 12/14) (3)		2,000,000		2,000,000		880,000


Dover Saddlery, Inc. (Retail Stores)	Equestrian products catalog retailer	Common Stock (30,974 shares) (4)				148,200		41,500


Employbridge Holding Company (5) (6)	A provider of specialized staffing	Junior Secured Term Loan
(Personal, Food & Miscellaneous Services)	services	(10.4%, Due 10/13) (3)		3,000,000		3,000,000		1,050,000


EXL Acquisition Corp.	Manufacturer of lab testing supplies	Senior Secured Term Loan A
(Electronics)		(6.6%, Due 3/11) (3)		3,278,998		3,258,757		3,072,159

		Senior Secured Term Loan B
		(6.9%, Due 3/12) (3)		4,499,911		4,452,650		4,196,539

		Senior Secured Term Loan C
		(7.4%, Due 3/12) (3)		2,775,439		2,737,602		2,579,563

		Senior Secured Term Loan D
		(15.0%, Due 3/12) (3)		6,557,997		6,501,063		6,501,063

		Common Stock – Class A (2,475 shares) (4)				2,475		269,000

		Common Stock – Class B (25 shares) (2)				279,222		281,900


Fairchild Industrial Products, Co.	Manufacturer of industrial controls and	Senior Secured Term Loan A
(Electronics)	power transmission products	(5.8%, Due 7/10) (3)		1,690,402		1,678,459		1,652,157

		Senior Secured Term Loan B
		(7.7%, Due 1/11) (3)		4,477,500		4,448,975		4,379,475

		Senior Subordinated Debt
		(14.8%, Due 7/11) (3)		5,460,000		5,418,066		5,418,066

		Preferred Stock – Class A (378.4 shares) (2)				353,573		353,573

		Common Stock – Class B (27.5 shares) (4)				121,598		410,000


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Hudson Products Holdings, Inc. (6) (Mining, Steel, Iron & Nonprecious Metals)	Manufactures and designs air-cooled heat exchanger equipment	Senior Secured Term Loan (8.0%, Due 8/15) (3)		7,481,250		7,265,876		6,433,900


Impact Products, LLC	Distributor of janitorial supplies	Junior Secured Term Loan
(Machinery)		(7.0%, Due 9/12) (3)		8,893,750		8,839,775		8,418,625

		Senior Subordinated Debt
		(15.0%, Due 9/12) (3)		5,547,993		5,517,791		5,517,791


Keltner Enterprises, LLC (5)	Distributor of automotive oils, chemicals	Senior Subordinated Debt
(Oil & Gas)	and parts	(14.0%, Due 12/11) (3)		3,850,000		3,840,677		3,840,677


Label Corp Holdings, Inc. (6) (Printing & Publishing)	Manufacturer of prime labels	Senior Secured Term Loan (8.0%, Due 8/14) (3)		6,483,750		6,176,385		5,592,200


L.A. Spas, Inc. (Chemicals, Plastics & Rubber)	Manufacturer of above ground spas	Revolving Line of Credit (8.8%, Due 12/09) (3)		1,000,000		990,794		990,794

		Senior Secured Term Loan
		(8.8%, Due 12/09) (3)		4,165,430		4,092,364		4,092,364

		Senior Subordinated Debt
		(17.5%, Due 1/10) (2) (3)		8,011,600		7,907,534		599,193

		Common Stock (250,000 shares) (4)				100		—

		Common Stock Warrants (13,828 warrants) (4)				3,963		—


LHC Holdings Corp.	Provider of home healthcare services	Senior Secured Term Loan A
(Healthcare, Education & Childcare)		(4.5%, Due 11/12) (3)		4,100,403		4,057,774		3,927,171

		Senior Subordinated Debt
		(14.5%, Due 5/13) (3)		4,565,000		4,517,936		4,517,936

		Membership Interest (125,000 units) (4)				125,000		159,500


Mac & Massey Holdings, LLC (Grocery)	Broker and distributor of ingredients to manufacturers of food products	Senior Subordinated Debt (16.5%, Due 2/13) (2) (3)		7,942,142		7,913,369		7,913,369

		Common Stock (250 shares) (4)				242,820		365,200


Northwestern Management Services, LLC	Provider of dental services	Senior Secured Term Loan A
(Healthcare, Education & Childcare)		(4.5%, Due 12/12) (3)		5,580,000		5,531,693		5,531,693

		Senior Secured Term Loan B
		(5.0%, Due 12/12) (3)		1,237,500		1,226,436		1,226,436

		Junior Secured Term Loan
		(15.0%, Due 6/13) (2) (3)		2,839,310		2,815,535		2,815,535

		Common Stock (500 shares) (4)				500,000		315,200


Company(1)
*(Industry)*	Company Description	Investment	Principal		Cost		Value


Prince Mineral Company, Inc. (Metals & Minerals)	Manufacturer of pigments	Junior Secured Term Loan (5.5%, Due 12/12) (3)		11,275,000		11,131,129		10,750,129

		Senior Subordinated Debt
		(14.0%, Due 7/13) (2) (3)		12,034,071		11,918,351		11,703,780


Quartermaster, Inc.	Retailer of uniforms and tactical equipment to	Revolving Line of Credit
(Retail Stores)	law enforcement and security professionals	(6.7%, Due 12/10) (3)		1,750,000		1,731,275		1,731,275

		Senior Secured Term Loan A
		(6.8%, Due 12/10) (3)		3,225,250		3,197,369		3,197,369

		Senior Secured Term Loan B
		(8.1%, Due 12/10) (3)		2,543,750		2,526,377		2,526,377

		Senior Secured Term Loan C
		(15.0%, Due 12/11) (2) (3)		3,399,818		3,375,763		3,375,763


R-O-M Corporation	Manufacturer of doors, ramps and bulk heads for	Senior Secured Term Loan A
(Automobile)	fire trucks and food transportation	(3.4%, Due 2/13) (3)		6,640,000		6,582,627		6,266,127

		Senior Secured Term Loan B
		(4.9%, Due 5/13) (3)		8,379,000		8,290,058		7,890,766

		Senior Subordinated Debt
		(15.0%, Due 8/13) (3)		9,100,000		9,011,070		9,011,070


Total Non-control/non-affiliate investments (represents 74.6% of total investments at fair value)					$	269,577,008	$	240,486,620


Total Investments					$	365,899,025	$	322,370,748


(1)		Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the “1940 Act”), as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.

(2)		Amount includes payment-in-kind (PIK) interest or dividends.

(3)		Pledged as collateral under the Company’s Amended Securitization Facility. See Note 6 to Consolidated Financial Statements.

(4)		Non-income producing.

(5)		Some of the investments listed are issued by an affiliate of the listed portfolio company.

(6)		Syndicated investment which has been originated by another financial institution and broadly distributed.

See Notes to Consolidated Financial Statements

Patriot Capital Funding, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1. Description of Business

Patriot Capital Funding, Inc. (the “Company”) is a specialty finance company that provides customized financing solutions to small- to mid-sized companies. The Company typically invests in companies with annual revenues between $10 million and $100 million, and companies which operate in diverse industry sectors. Investments usually take the form of senior secured loans, junior secured loans and subordinated debt investments — which may contain equity or equity-related instruments. The Company also offers “one-stop” financing, which typically includes a revolving credit line, one or more senior secured term loans and a subordinated debt investment.

The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company has also previously elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).

Note 2. Going Concern

The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern. However, on April 3, 2009, a termination event occurred under the Company’s second amended and restated securitization revolving credit facility (the “Amended Securitization Facility”) with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company due to the amount of the Company’s advances outstanding under the Amended Securitization Facility exceeding the maximum availability under the Amended Securitization Facility for more than three consecutive business days. The maximum availability under the Amended Securitization Facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the Amended Securitization Facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, the Company’s advances outstanding under the facility exceeded the maximum availability under the Amended Securitization Facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009, which disclosed that we were under-collateralized by approximately $9.8 million. As of such date, the Company had $157.6 million outstanding under the Amended Securitization Facility. On May 8, 2009, $142.9 million was outstanding under the Amended Securitization Facility.

As a result of the occurrence of the termination event under the Amended Securitization Facility, the Company can no longer request additional advances under the Amended Securitization Facility. In addition, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. Also, the terms of the Amended Securitization Facility require that all principal, interest and fees collected from the debt investments secured by the Amended Securitization Facility must be used to pay down amounts outstanding under the Amended Securitization Facility within 24 months following the date of the termination event. The Amended Securitization Facility also permits the lenders, upon notice to the Company, to accelerate amounts outstanding under the Amended Securitization Facility and exercise other rights and remedies provided by the Amended Securitization Facility, including the right to sell the collateral under the Amended Securitization Facility. As of the date hereof, the Company has not received any such notice from the lenders. At March 31, 2009, the interest rate under the Amended Securitization Facility was 2.2% and increased to 5.25% on April 3, 2009.

These matters raise substantial doubt about the Company’s ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon the Company’s ability to meet its financing requirements, raise additional capital, and the success of its future operations. In addition, because substantially all of the Company’s debt investments are secured by the Company’s Amended Securitization Facility, the Company cannot provide any assurance that it will have sufficient cash and liquid assets to fund its operations and dividend distributions to its stockholders. If the Company does not distribute at least a certain percentage of its taxable income annually, it will suffer adverse tax consequences, including possible loss of its status as a RIC. The Company is in active discussions with the Amended Securitization Facility lenders to seek relief from certain of the terms of the Amended Securitization Facility, including the requirement under the Amended Securitization Facility that the Company use all principal, interest and fees collected from the debt investments secured by the Amended Securitization Facility to pay down amounts outstanding under the Amended Securitization Facility within 24 months following the date of the termination event. However, the Company cannot provide any assurance that the lenders will agree to provide the Company any relief from any terms of the Amended Securitization Facility. As a result, the Company is also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions. There can be no assurance that the actions presently being taken by the Company with respect to the matters described above will be successful. The financial statements do not include any adjustments that might result from these uncertainties.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements reflect the consolidated accounts of the Company and its special purpose financing subsidiary, Patriot Capital Funding, LLC I (see Note 6. Borrowings), with all significant intercompany balances eliminated. The financial results of the Company’s portfolio investments are not consolidated in the Company’s financial statements.

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the current period are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the December 31, 2008 financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC.

Recently Issued or Adopted Accounting Pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”). SFAS No. 161 requires specific disclosures regarding the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because SFAS No. 161 impacts the Company’s disclosure and not its accounting treatment for derivative instruments and related hedged items, the Company’s adoption of SFAS No. 161 has not impacted the results of operations or financial condition; however, derivative instruments and hedging activities disclosure has been expanded, as disclosed in Note 12. Hedging Activities.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented will be adjusted retrospectively (including interim financial statements and selected financial data) to conform to the provisions of FSP EITF 03-6-1. Early application was not permitted. On August 14, 2008 and March 3, 2009, the Company’s Board of Directors approved the issuance of 187,500 and 446,250 shares, respectively, of restricted stock to the Company’s executive officers and employees. The Company has determined that these shares of restricted stock are participating securities prior to vesting. For the three months ended March 31, 2009, such shares were considered in the Company’s EPS computations.

In October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”). FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. FSP 157-3 does not change the fair value measurement principles set forth in SFAS No. 157. Since adopting SFAS 157 in January 2008, the Company’s practices for determining the fair value of the investments in its portfolio have been, and continue to be, consistent with the guidance provided in the example in FSP 157-3. Therefore, the Company’s adoption of FSP 157-3 did not affect its practices for determining the fair value of the investments in its portfolio and did not have a material effect on its financial position or results of operations.

In April 2009, the FASB issued Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique and inputs used, the objective for the fair value measurement is unchanged from what it would be if markets were operating at normal activity levels or transactions were orderly; that is, to determine the current exit price. FSP 157-4 sets forth additional factors that should be considered to determine whether there has been a significant decrease in volume and level of activity when compared with normal market activity. The reporting entity shall evaluate the significance and relevance of the factors to determine whether, based on the weight of evidence, there has been a significant decrease in activity and volume. FSP 157-4 indicates that if an entity determines that either the volume or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. FSP 157-4 further notes that a fair value measurement should include a risk adjustment to reflect the amount market participants would demand because of the risk (uncertainty) in the cash flows.

FSP 157-4 also requires a reporting entity to make additional disclosures in interim and annual periods. FSP 157-4 is effective for interim periods ending after June 15, 2009, with early application permitted for periods ending after March 15, 2009. Revisions resulting from a change in valuation techniques or their application are accounted for as a change in accounting estimate. The Company adopted FSP 157-4 as of January 1, 2009. However, since adopting SFAS No. 157 in January 2008, the Company’s practices for determining fair value and for disclosures about the fair value of the investments in its portfolio have been, and continue to be, consistent with the guidance provided in FSP 157-4. Therefore, the Company’s adoption of FSP 157-4 has not had any effect on its financial position or results of operations (See Note 4. Investments).

Interest, Dividends, Fees, and Other Investment Income

Interest and dividend income is recognized as revenue when earned according to the terms of the investment, and when in the opinion of management, it is collectible. Premiums paid and discounts obtained, including discounts in the form of fees, are amortized into interest income over the estimated life of the investment using the interest method. Fees consist principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Equity structuring fees are recognized as earned, which is generally when the investment transaction closes. Other investment income consists principally of the recognition of unamortized deferred financing fees received from portfolio companies on the repayment of their debt investment, the sale of the debt investment or a reduction of available credit under the debt investment.

Federal Income Taxes

The Company has elected to be treated as a RIC under the Code. The Company’s RIC tax year was initially filed on a July 31 basis. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31 to December 31, effective on December 31, 2007. Accordingly, the Company has filed a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter. The Company’s policy has historically been to comply with the requirements of the Code that are applicable to RICs and to distribute substantially all of its taxable income to its stockholders. In light of the matters described in Note 2, it may not be possible for the Company to continue to comply with these requirements. However, the Company intends to take all steps possible to maintain its RIC tax status. Therefore, no federal income tax provision is included in the accompanying financial statements. However, to the extent that the Company is not able to maintain its RIC tax status, it would incur tax liability not currently provided for in the Company’s balance sheet.

The Company adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes on January 1, 2007. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Adoption of FIN 48 was applied to all open taxable years as of the effective date. The adoption of FIN 48 did not have an effect on the financial position or results of operations of the Company as there was no liability for unrecognized tax benefits and no change to the beginning capital of the Company. Management’s determinations regarding FIN 48 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.

Dividends Paid

Distributions to stockholders are recorded on the declaration date. The Company is required to pay out to its shareholders at least 90% of its net ordinary income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. Historically it has been the policy of the Company to pay out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend has traditionally been determined by the Board of Directors each quarter based on the annual estimate of the Company’s taxable income by the management of the Company. At its year-end the Company may pay a bonus distribution, in addition to the other distributions, to ensure that it has paid out at least 90% of its net ordinary taxable income and net realized short-term capital gains in excess of net realized long-term capital losses for the year. The Board of Directors has determined to postpone taking any action with regard to dividends until the matter described in Note 2 is resolved. Through December 31, 2008, the Company has made all required distributions on its 2008 distributable income to satisfy its RIC requirements.

Distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as distributions in excess of net investment income and net realized capital gains, respectively. To the extent that they exceed net investment income and net realized gains for tax purposes, they are reported as distributions of paid-in capital (i.e., return of capital).

Note 4. Investments

As described below (see Note 5. Fair Value Measurements), effective January 1, 2008, the Company adopted Statement of Financial Standards No. 157—Fair Value Measurements , (“SFAS No. 157”). At March 31, 2009 and December 31, 2008, investments consisted of the following:


	March 31, 2009				December 31, 2008
	Cost		Fair Value		Cost		Fair Value
Investments in debt securities	$	325,875,542	$	288,486,944	$	344,683,219	$	308,079,975
Investments in equity securities		21,293,028		11,025,200		21,215,806		14,290,773


Total	$	347,168,570	$	299,512,144	$	365,899,025	$	322,370,748

At March 31, 2009 and December 31, 2008, $117.9 million and $123.5 million, respectively, of the Company’s portfolio investments at fair value were at fixed rates, which represented approximately 39% and 38%, respectively, of the Company’s total portfolio of investments at fair value. The Company generally structures its subordinated debt at fixed rates, while most of its senior secured and junior secured loans are at variable rates determined on the basis of a benchmark LIBOR or prime rate. The Company’s loans generally have stated maturities ranging from 4 to 7.5 years.

At March 31, 2009 and December 31, 2008, the Company had equity investments and warrant positions designed to provide the Company with an opportunity for an enhanced internal rate of return. These instruments generally do not produce a current return, but are held for potential investment appreciation and capital gains.

During the three months ended March 31, 2009, the Company realized a loss of $11.6 million due to the permanent impairment of loans to one of our portfolio companies. During the three months ended March 31, 2008, the Company realized a loss of $90,000 on the sale of one portfolio debt investment. During the three months ended March 31, 2009 and 2008, the Company recorded unrealized depreciation of $4.2 million and $9.9 million, respectively.

The composition of the Company’s investments as of March 31, 2009 and December 31, 2008 at cost and fair value was as follows:


	March 31, 2009										December 31, 2008
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Senior Secured Debt	$	166,887,662		48.1	%	$	149,468,394		49.9	%	$	171,889,470		47.0	%	$	156,638,667		48.6	%
Junior Secured Debt		63,527,641		18.3			51,317,557		17.1			64,232,689		17.5			58,076,196		18.0
Subordinated Debt		95,460,239		27.5			87,700,993		29.3			108,561,060		29.7			93,365,112		29.0
Warrants / Equity		21,293,028		6.1			11,025,200		3.7			21,215,806		5.8			14,290,773		4.4


Total	$	347,168,570		100.0	%	$	299,512,144		100.0	%	$	365,899,025		100.0	%	$	322,370,748		100.0	%


(1)		Represents percentage of total portfolio.

The composition of the Company’s investment portfolio by industry sector, using Moody’s Industry Classifications as of March 31, 2009 and December 31, 2008 at cost and fair value was as follows:


	March 31, 2009										December 31, 2008
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Machinery	$	51,375,041		14.8	%	$	38,262,535		12.8	%	$	51,384,711		14.0	%	$	39,527,874		12.3	%
Health Care, Education & Childcare		39,535,526		11.4			39,172,587		13.1			39,749,005		10.9			39,501,102		12.2
Personal & Nondurable Consumer Products		38,851,765		11.2			38,006,465		12.7			39,609,196		10.8			39,247,796		12.2
Automobile		31,323,917		9.0			23,669,782		7.9			33,276,374		9.1			26,487,272		8.2
Electronics		30,022,303		8.7			29,288,103		9.8			31,033,364		8.5			30,033,495		9.3
Textiles & Leather		29,412,663		8.5			28,743,947		9.6			29,557,681		8.1			29,368,566		9.1
Printing & Publishing		26,315,941		7.6			12,063,547		4.0			26,302,411		7.2			18,159,998		5.6
Metals & Minerals		23,069,449		6.7			22,433,358		7.5			23,049,480		6.3			22,453,909		7.0
Mining, Steel, Iron & Nonprecious Metals		17,842,926		5.1			16,974,609		5.7			18,092,545		4.9			17,245,764		5.3
Retail Stores		11,165,792		3.2			11,083,592		3.7			10,978,984		3.0			10,872,284		3.4
Housewares & Durable Consumer Products		11,136,919		3.2			8,478,962		2.8			11,005,810		3.0			9,333,052		2.9
Ecological		9,134,946		2.6			8,771,946		2.9			8,556,102		2.3			8,164,902		2.5
Grocery		8,278,129		2.4			8,425,513		2.8			8,156,189		2.2			8,278,569		2.6
Chemicals, Plastic & Rubber		5,116,782		1.5			5,112,631		1.7			16,659,410		4.6			9,347,006		2.9
Insurance		5,000,000		1.4			4,061,400		1.4			5,000,000		1.4			4,048,200		1.3
Buildings & Real Estate		4,552,567		1.3			4,552,567		1.5			4,613,182		1.3			4,613,182		1.4
Personal, Food & Miscellaneous Services		3,000,000		0.8			300,000		0.1			3,000,000		0.8			1,050,000		0.3
Diversified/Conglomerate Service		1,570,736		0.5			—		—			1,570,736		0.4			623,500		0.2
Aerospace & Defense		463,168		0.1			110,600		0.0			463,168		0.1			173,600		0.1
Oil & Gas		—		—			—		—			3,840,677		1.1			3,840,677		1.2


Total	$	347,168,570		100.0	%	$	299,512,144		100.0	%	$	365,899,025		100.0	%	$	322,370,748		100.0	%


(1)		Represents percentage of total portfolio.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “Control.” Generally, under the 1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments. At March 31, 2009 and December 31, 2008, the Company owned greater than 5% but less than 25% of the voting securities in four companies. At March 31, 2009 and December 31, 2008, the Company owned 25% or more of the voting securities in six and four companies, respectively.

Note 5. Fair Value Measurements

The Company accounts for its portfolio investments and interest rate swaps at fair value. As a result, the Company adopted the provisions of SFAS No. 157 in the first quarter of 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. SFAS No. 157 defines fair value as the price that would be established to sell an asset or transfer a liability in an orderly transaction between market participants in what would be the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to determining the fair value of these assets and liabilities, are as follows:

Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the financial instruments carried at fair value as of March 31, 2009, by caption on the Consolidated Balance Sheet for each of the three levels of hierarchy established by SFAS No. 157.


	As of March 31, 2009
			Internal Models with			Internal Models with		Total Fair Value
	Quoted Market Prices		Significant Observable			Significant Unobservable		Reported in
	in Active Markets		Market Parameters			Market Parameters		Consolidated
	(Level 1)		(Level 2)			(Level 3)		Balance Sheet
Investments

Non-affiliate investments	$	176,600	$	19,834,000		$	200,397,809	$	220,408,409
Affiliate investments		—		—			49,806,458		49,806,458
Control investments		—		—			29,297,277		29,297,277

Total investments at fair value	$	176,600	$	19,834,000		$	279,501,544	$	299,512,144


Liabilities

Interest rate swaps	$	—	$	(2,914,535	)	$	—	$	(2,914,535	)

Total liabilities at fair value	$	—	$	(2,914,535	)	$	—	$	(2,914,535	)

The following table provides a roll-forward in the changes in fair value from December 31, 2008 to March 31, 2009, for all investments for which the Company determines fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors, are the most significant, to the overall fair value measurement. However, Level 3 financial instruments also typically include, in addition to the unobservable or Level 3 components, observable components (that is, Level 1 and Level 2 components that are actively quoted and can be validated to external sources). Accordingly, the appreciation (depreciation) in the table below includes changes in fair value due in part to observable Level 1 and Level 2 factors that are part of the valuation methodology.


	Fair value measurements using unobservable inputs (Level 3)
	Non-affiliate			Affiliate			Control
	Investments			Investments			Investments			Total

Fair Value December 31, 2008	$	220,017,120		$	51,457,082		$	30,427,046		$	301,901,248
Total realized losses		—			—			(11,600,764	)		(11,600,764	)
Change in unrealized depreciation		465,285			(1,511,300	)		(2,654,672	)		(3,700,687	)(a)
Purchases, issuances, settlements, and other, net		(7,182,767	)		(139,324	)		223,838			(7,098,253	)
Transfers within Level 3		(12,901,829	)		—			12,901,829			—
Transfers in (out) of Level 3		—			—			—			—

Fair Value as of March 31, 2009	$	200,397,809		$	49,806,458		$	29,297,277		$	279,501,544


(a)		Relates to assets held at March 31, 2009

The Company estimates the fair value of its Level 3 debt investments by first estimating the enterprise value of the portfolio company which issued the debt investment and augments the valuation techniques it uses to estimate the fair value of its debt investments where there is not a readily available market value (Level 3). To estimate the enterprise value of a portfolio company, the Company analyzed various factors, including the portfolio companies historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value.

In estimating a multiple to use for valuation purposes, the Company looked to private merger and acquisition statistics, discounted public trading multiples or industry practices. In some cases, the valuation may be based on a combination of valuation methodologies, including but not limited to, multiple based, discounted cash flow and liquidation analysis. If a portfolio company was distressed, a liquidation analysis may have provided the best indication of enterprise value.

The Company uses a bond-yield model to value these investments based on the present value of expected cash flows. The primary inputs into the model are market interest rates for debt with similar characteristics and an adjustment for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. During the three months ended March 31, 2009 and 2008, the Company recorded net unrealized depreciation of $4.2 million and $9.9 million, respectively, on its investments. For 2009, the Company’s net unrealized depreciation consists of the following: approximately $417,000 of unrealized depreciation resulted from quoted market prices on its syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $4.5 million of unrealized depreciation resulted from a decline in cash flows of its portfolio companies; offset by approximately $770,000 of unrealized appreciation which resulted from SFAS No. 157. For 2008, a portion of the Company’s net unrealized depreciation, approximately $1.2 million, resulted from quoted market prices on its syndicated loan portfolio as a result of disruption in the financial credit markets for broadly syndicated loans; approximately $4.2 million, resulted from a decline in cash flows of its portfolio companies; and approximately $4.5 million, resulted from SFAS No. 157.

Note 6. Borrowings

On September 18, 2006, the Company, through a consolidated wholly-owned bankruptcy remote, special purpose subsidiary, entered into an amended and restated securitization revolving credit facility (the “Securitization Facility”) with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). The Securitization Facility allowed the special purpose subsidiary to borrow up to $140 million through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Securitization Facility also required bank liquidity commitments (“Liquidity Facility”) to provide liquidity support to the conduit. The Liquidity Facility was provided by the lender that participated in the Securitization Facility for a period of 364-days and was renewable annually thereafter at the option of the lender. On May 2, 2007, the Company amended its Securitization Facility to lower the interest rate payable on any outstanding borrowings under the Securitization Facility from the commercial paper rate plus 1.35% to the commercial paper rate plus 1.00% during the period of time the Company was permitted to make draws under the Securitization Facility. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, the Company amended its Securitization Facility to increase its borrowing capacity thereunder by $35 million. The amendment also extended the commitment termination date from July 23, 2009 to July 22, 2010 and reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility provided for the payment by the Company to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility.

On April 11, 2008, the Company entered into the Amended Securitization Facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (the “Lenders”). The Amended Securitization Facility amended and restated the Securitization Facility to, among other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend the maturity date from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an additional 364-day period with the consent of the lenders thereto); (iii) increase the interest rate payable under the facility from the commercial paper rate plus 1.00% to the commercial paper rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to $50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25% per annum to 0.30% per annum.

Similar to the Securitization Facility, the Amended Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. These restrictions could have affected the amount of notes the Company’s special purpose subsidiary could issue from time to time. The Amended Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could have resulted in the early termination of the Amended Securitization Facility. The Amended Securitization Facility also requires the maintenance of the Liquidity Facility. The Liquidity Facility was provided by the Lenders that participate in the Securitization Facility for a period of 364-days and was renewable annually thereafter at the option of the lenders. The Liquidity Facility was scheduled to be renewed in April 2009. The Amended Securitization Facility is secured by all of the loans held by the Company’s special purpose subsidiary.

On April 3, 2009 a termination event occurred under the Amended Securitization Facility due to the amount of the Company’s advances outstanding under the facility exceeding the maximum availability under the facility for more than three consecutive business days. The maximum availability under the facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, the Company’s advances outstanding under the facility exceeded the maximum availability under the facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009. As of such date, the Company had $157.6 million outstanding under the facility. As a result of the occurrence of the termination event under the facility, the Company can no longer make additional advances under the facility. Also, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. In addition, the terms of the facility require that all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. The facility also permits the lenders, upon notice to the Company, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. The Company has not received any such notice from the lenders.

In connection with the origination and amendment of the Securitization Facility and the Amended Securitization Facility, the Company incurred $2.4 million of fees which are being amortized over the term of the facility.

At March 31, 2009 and December 31, 2008, $157.6 million and $162.6 million, respectively, of borrowings were outstanding under the Amended Securitization Facility. At March 31, 2009, the interest rate under the Amended Securitization Facility was 2.2% and increased to 5.25% on April 3, 2009. Interest expense for the three months ended March 31, 2009 and 2008 consisted of the following:


	Three Months Ended March 31,
	2009		2008

Interest charges	$	1,399,221	$	1,986,376
Amortization of debt issuance costs		131,728		58,904
Unused facility fees		55,488		14,243

Total	$	1,586,437	$	2,059,523

Note 7. Stock Option Plan and Restricted Stock Plan

As of March 31, 2009, 3,644,677 shares of common stock are reserved for issuance upon exercise of options to be granted under the Company’s stock option plan and 2,065,045 shares of the Company’s common stock were reserved for issuance under the Company’s employee restricted stock plan (the “Plans”). On March 3, 2009, awards of 446,250 shares of restricted stock were granted to the Company’s executive officers with a fair value of $1.27 (the closing price of the common stock at date of grant). The total fair value of $567,000 will be expensed over a four year vesting period. As of March 31, 2009, 3,188,968 options were outstanding, 2,567,219 of which were exercisable and 633,750 shares of restricted stock were outstanding, none of which are vested. The options have a weighted average remaining contractual life of 7.3 years, a weighted average exercise price of $12.43, and an aggregate intrinsic value of $0. The restricted stock vests over four years.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” (“SFAS 123R”). The Company has elected the “modified prospective method” of transition as permitted by SFAS 123R. Under this transition method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. For shares granted in February 2008, this model used the following assumptions: annual dividend rate of 11.8%, risk free interest rate of 3.0%, expected volatility of 26%, and the expected life of the options of 6.5 years. The Company calculated its expected term assumption using guidance provided by SEC Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 allows companies to use a simplified expected term calculation in instances where no historical experience exists, provided that the companies meet specific criteria. Expected volatility was based on the Company’s historical volatility.

Assumptions used with respect to future grants may change as the Company’s actual experience may be different. The fair value of options granted in 2008 was approximately $0.47, using the Black-Scholes option pricing model. The Company has adopted the policy of recognizing compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. For the three months ended March 31, 2009 and 2008, the Company recorded compensation expense related to stock awards of approximately $200,000 and $182,000, respectively, which is included in compensation expense in the consolidated statements of operations. The Company has not historically recorded the tax benefits associated with the expensing of stock options since the Company elected to be treated as a RIC under Subchapter M of the Internal Revenue Code and as such, the Company is not subject to federal income tax on the portion of taxable income and gains distributed to stockholders, provided that at least 90% of its annual taxable income is distributed. As of March 31, 2009, there was $345,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over 1.9 years. As of March 31, 2009, there was $1.7 million of unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over 2.9 years.

Note 8. Share Data and Common Stock

The following table sets forth a reconciliation of weighted average shares outstanding for computing basic and diluted loss per common share for the three months ended March 31, 2009 and 2008.


	Three Months Ended March 31,
	2009		2008

Weighted average common shares outstanding, basic		20,929,973		20,650,455
Effect of dilutive restricted stock awards and options		—		—


Weighted average common shares outstanding, diluted		20,929,973		20,650,455

The dilutive effect of stock options is computed using the treasury stock method. Options on 3.2 million shares (2009 and 2008), and restricted stock of 633,750 shares (2009), were anti-dilutive and therefore excluded from the computation of diluted loss per share.

In 2005, the Company established a dividend reinvestment plan, and during the three months ended March 31, 2009 and the year ended December 31, 2008, issued 123,000 and 177,000 shares, respectively, in connection with dividends paid. The following table reflects the Company’s dividends paid since March 31, 2008:


Date Declared	Record Date	Payment Date	Amount

October 30, 2008	December 22, 2008	January 15, 2009	$0.25
July 30, 2008	September 12, 2008	October 15, 2008	$0.33
May 2, 2008	June 5, 2008	July 16, 2008	$0.33
February 27, 2008	March 14, 2008	April 16, 2008	$0.33

Note 9. Commitments and Contingencies

The balance of unused commitments to extend credit was $22.0 million and $23.8 million at March 31, 2009 and December 31, 2008, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as contingent investment draws, revolving credit arrangements or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Since April 3, 2009, the date of the termination event under the Amended Securitization Facility, the Company has funded revolver draws under our outstanding commitments. The Company is currently in negotiation with the Lenders to have eligible revolver draws funded by the Lenders going forward. Ineligible revolver draw requests, those requests on loans outside of the Amended Securitization Facility, will not be funded by the Lenders. The Company may not have the ability to fund the ineligible revolver draw requests in the future or eligible revolver draw requests if the Lenders refuse to accommodate the request.

In connection with borrowings under the Amended Securitization Facility, the Company’s special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. The Company has agreed to guarantee the payment of certain swap breakage costs that may be payable by the Company’s special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions (see Note 6. Borrowings).

The Company leases its corporate offices and certain equipment under operating leases with terms expiring in 2011. Future minimum lease payments due under operating leases at March 31, 2009 are as follows: $181,000 — remainder of 2009, $247,000 — 2010, $21,000 — 2011. Rent expense was approximately $59,000 and $68,000 for the three months ended March 31, 2009 and 2008, respectively. At March 31, 2009, the Company had an outstanding letter of credit in the amount of $38,000 as security deposit for the lease of the Company’s corporate offices.

Note 10. Concentrations of Credit Risk

The Company’s portfolio companies are primarily small- to mid-sized companies that operate in a variety of industries.

At March 31, 2009 and December 31, 2008, the Company did not have any investment in excess of 10% of the total investment portfolio at fair value. Investment income, consisting of interest, dividends, fees, and other investment income, can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given period can be highly concentrated among several portfolio companies. During the three months ended March 31, 2009 and 2008, the Company did not record investment income from any portfolio company in excess of 10.0% of total investment income.

Note 11. Income Taxes

Effective August 1, 2005, the Company elected to be treated as a RIC. Accordingly, the Company’s RIC tax year was initially filed on a July 31 basis. On February 11, 2008, the Company was granted permission by the Internal Revenue Service to change its RIC tax year from July 31 to December 31, effective on December 31, 2007. Accordingly, the Company has prepared a short period tax return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter. The Company’s policy has historically been to comply with the requirements of Subchapter M of the Code that are applicable to RICs and to distribute substantially all of its taxable income to its shareholders. In light of the matters described in Note 2, it may not be possible for the Company to continue to comply with these requirements. However, the Company intends to take all steps possible to maintain its RIC tax status. Therefore, no federal, state or local income tax provision is included in the accompanying financial statements. However, to the extent that the Company is not able to maintain its RIC tax status, it would incur tax liability not currently provided for in the Company’s balance sheet.

Tax loss for the period January 1, 2009 through March 31, 2009 is as follows:


	January 1, 2009
	to
	March 31, 2009
GAAP net investment income	$	5,118,000
Tax timing differences of:
Origination fees, net		(296,000	)
Permanent impairment on loans		(11,826,000	)
Stock compensation expense, original issue discount and depreciation and amortization		780,000

Tax loss	$	(6,224,000	)

Distributable income (loss) differs from GAAP net investment income primarily due to: (1) origination fees received in connection with investments in portfolio companies are treated as taxable income upon receipt; (2) certain stock compensation expense is not currently deductible for tax purposes and a bonus accrual carryover, as a result of the change in the Company’s tax year described above, until actually paid; (3) certain debt investments that generate original issue discount; (4) depreciation and amortization; and (5) permanent impairment on loans.

Distributions which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capital). The taxability of the distributions made during 2009 will be determined by the Company’s tax earnings and profits for its tax year ending December 31, 2009.

The tax cost basis of the Company’s investments as of March 31, 2009 approximates the book cost. There were no capital gain distributions in 2009 or 2008.

At March 31, 2009, the Company had a net capital loss carryforward of $4.1 million to offset net capital gains, to the extent provided by federal tax law. Of the total capital loss carryforward, $3.2 million will expire in the Company’s tax year ending December 31, 2013, and $900,000 will expire in the Company’s tax year ending December 31, 2015.

Note 12. Hedging Activities

The Company has variable-rate debt financing. These obligations expose the Company to variability in interest payments and therefore fluctuations in interest expense and cash flows due to changes in interest rates. The Company uses interest rate swaps in order to minimize significant fluctuations in earnings that are caused by interest rate volatility. Interest rate swaps involve the exchange of variable-rate interest payments for fixed-rate interest payments based on the contractual underlying notional amount. Gains and losses on the interest rate swaps that are linked to the debt being hedged are expected to substantially offset this variability in earnings. The swaps are reported on the balance sheet at fair value. The Company determines the value of each interest rate swap on a quarterly basis, and changes in value result in unrealized appreciation or depreciation being recognized in the Company’s statement of operations.

Since 2006, the Company, through its special purpose subsidiary, entered into eight interest rate swap agreements. As of March 31, 2009, the Company included the $(2.9) million fair value of these interest rate swaps in the accounts payable, accrued expenses and other line of the liabilities section of the Consolidated Balance Sheets. During the three months ended March 31, 2009, the Company recorded $183,000 of unrealized appreciation on the fair value on these interest rate swaps in the Consolidated Statement of Operations. The Company did not designate any of its interest rate swaps as hedges for financial accounting purposes. Each month these interest rate swaps are settled for cash.

No new interest rate swap agreements were executed during the three months ended March 31, 2009. The following table summarizes the Company’s existing interest rate swaps with BMO Capital Markets as the counterparty:


													Three months ended
													March 31, 2009
						As of March 31, 2009							Unrealized
Date	Date		Interest							Fair			Appreciation
Entered	Expiring		Rate			Notional		Cost		Value			(Depreciation)
03/06		01/11		5.04	%	$	10,334,395	$	—	$	(466,622	)	$	89,149
12/06		02/12		4.84	%		3,300,177		—		(338,177	)		10,882
08/07		04/12		5.17	%		3,962,202		—		(468,185	)		16,358
09/07		04/12		4.98	%		3,826,627		—		(419,102	)		14,792
12/07		01/11		4.28	%		736,120		—		(52,092	)		3,183
04/08		12/12		3.51	%		9,323,080		—		(606,248	)		(1,080	)
05/08		09/10		3.32	%		1,119,757		—		(19,067	)		7,766
10/08		10/12		3.54	%		12,931,823		—		(545,042	)		41,799

Total						$	45,534,181	$	—	$	(2,914,535	)	$	182,849

Note 13. Financial Highlights


	For the Three Months Ended
	March 31,
	2009			2008
Per Share Data:
Net asset value at beginning of period	$	8.65		$	10.73
Net investment income		.24			.33
Net change in unrealized appreciation (depreciation) on investments		(.20	)		(.48	)
Realized loss		(.55	)		—
Effect of issuance of common stock		(.03	)		—
Distributions from net investment income		—			(.33	)
Distributions in excess of net investment income		—			—
Net change in unrealized swap depreciation		.01			(.04	)
Stock based compensation expense		.01			.01

Net asset value at end of period	$	8.13		$	10.22


Total net asset value return (1)		(6.0	)%		(1.7	)%

Per share market value, beginning of period	$	3.64		$	10.09
Per share market value, end of period	$	1.83		$	10.47

Total market value return (2)		(49.7	)%		7.0	%

Shares outstanding at end of period		20,950,501			20,650,455


Ratios and Supplemental Data:
Net assets at end of period	$	170,225,000		$	211,057,000
Average net assets		178,894,000			218,247,000
Ratio of operating expenses to average net assets (annualized)		7.6	%		8.2	%
Ratio of net investment income (loss) to average net assets (annualized)		11.4	%		12.4	%
Average borrowings outstanding	$	151,156,000		$	152,702,000
Average amount of borrowings per share	$	7.21		$	7.39


(1)		The total net asset value return (not annualized) reflects the change in net asset value of a share of stock, plus dividends.

(2)		The total market value return (not annualized) reflects the change in the ending market value per share plus dividends, divided by the beginning market value per share.

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

The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

	•		Our ability to negotiate an arrangement with the lenders of our Amended Securitization Facility for repayment terms that do not require us to use all principal and interest collected from the debt investments secured by the facility to pay down amounts outstanding thereunder;

	•		Our ability to maintain our status as a RIC under the Code;

	•		Our future operating results;

	•		Our business prospects and the prospects of our portfolio companies;

	•		The ability of our portfolio companies to achieve their objectives;

	•		Our expected financings and investments;

	•		Future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies and RIC’s;

	•		The adequacy of our cash resources and working capital; and

	•		The timing of cash flows, if any, from the operations of our portfolio companies.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in this quarterly report on Form 10-Q and in our 2008 annual report on Form 10-K.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

We are a specialty finance company that provides customized financing solutions to small- to mid-sized companies. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer a comprehensive suite of financing solutions, including “one-stop” financing. In August 2005, we completed an initial public offering of shares of our common stock and we elected to be treated as a business development company under the 1940 Act in connection with our initial public offering. We have also elected to be treated as a RIC under Subchapter M of the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income or gains we distribute (actually or as a deemed dividend) to our stockholders as dividends, provided that we satisfy certain requirements.

In light of the unprecedented instability in the financial markets and the severe slowdown in the overall economy, we do not have adequate liquidity, including access to the debt and equity capital markets, to operate our business in the manner in which we have historically operated. As a result, our short-term business focus has shifted from making debt and equity investments to preserving our liquidity position. In this regard, on April 3, 2009, a termination event occurred under the Amended Securitization Facility due to the amount of our advances outstanding under the facility exceeding the maximum availability under the facility for more than three consecutive business days. The maximum availability under the facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum availability under the facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009. As a result of the

occurrence of the termination event under the facility, we can no longer make additional advances under the facility. Also, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. In addition, the terms of the facility require that all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. Substantially all of our debt investments are secured under our Amended Securitization Facility. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. To date, we have not received any such notice from the lenders. At March 31, 2009, the interest rate under the Amended Securitization Facility was 2.2% and increased to 5.25% on April 3, 2009.

Moreover, our independent registered public accounting firm issued an opinion on our December 31, 2008 consolidated financial statements that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that the uncertainty regarding the renewal of our liquidity facility raises substantial doubt about our ability to continue as a going concern. At the time our independent registered public accounting firm issued this opinion, we were negotiating the renewal of the liquidity facility, which matured on April 11, 2009, that supported our Amended Securitization Facility with certain liquidity banks. In the event that the liquidity banks did not renew the liquidity facility, the terms of the Amended Securitization Facility would require, among other things, that all principal and interest collected from the debt investments secured by the facility be used to pay down amounts outstanding under the facility by April 2011. Subsequent to the issuance of this opinion by our independent registered public accounting firm, the liquidity banks determined not to renew the liquidity facility supporting our Amended Securitization Facility.

We are in active discussions with the Amended Securitization Facility lenders to seek relief from certain terms of the facility, including the requirement under the facility that we use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility by April 3, 2011. However, we cannot provide any assurance that the lenders will agree to provide us any relief from any terms of the facility. Moreover, even if we are successful in seeking relief from the lenders of the facility, our ability to operate our business in the manner in which we have historically operated will be constrained until our ability to access the debt and equity capital markets improves. As a result, we are also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions.

Portfolio Composition

Our primary business is lending to and investing in small- to mid-sized businesses through investments in senior secured loans, junior secured loans, subordinated debt investments and equity-based investments, including warrants. The fair value of our portfolio was $299.5 million and $322.4 million at March 31, 2009 and December 31, 2008, respectively.

Total portfolio investment activity as of and for the three months ended March 31, 2009 and the year ended December 31, 2008 was as follows:


	March 31, 2009			December 31, 2008
Beginning portfolio at fair value	$	322,370,748		$	384,725,753
Investments in debt securities		4,075,000			79,096,786
Investments in equity securities		88			3,245,937
Investment repayments		(12,506,029	)		(95,018,988	)
Increase in payment-in-kind interest/dividends		1,087,159			5,452,124
Sale of investments		—			(15,267,401	)
Change in unearned revenue		242,383			(129,458	)
Realized loss on investments		(11,600,764	)		—
Decrease in fair value of investments		(4,156,441	)		(39,992,921	)

Ending portfolio at fair value	$	299,512,144		$	322,370,748

As of March 31, 2009 and December 31, 2008, the composition of our portfolio at fair value was as follows:


	March 31, 2009					December 31, 2008
	Investments at		Percentage of			Investments at		Percentage of
	Fair Value		Total Portfolio			Fair Value		Total Portfolio
Senior secured revolving lines of credit	$	12,084,459		4.0	%	$	10,266,191		3.2	%
Senior secured term loans		137,383,935		45.9			146,372,476		45.4
Junior secured term loans		51,317,557		17.1			58,076,196		18.0
Senior subordinated debt		87,700,993		29.3			93,365,112		29.0
Investments in equity securities		11,025,200		3.7			14,290,773		4.4


Totals	$	299,512,144		100.0	%	$	322,370,748		100.0	%

For the three months ended March 31, 2009 and year ended December 31, 2008, the weighted average yield on all of our outstanding debt investments was approximately 10.9% and 12.1%, respectively. The weighted average fair value balance of our debt investment portfolio during the three months ended March 31, 2009 was $308.4 million, down from $333.2 million during the fourth quarter of 2008. Yields are computed using actual interest income earned for the year (annualized for the three months ended March 31, 2009), including amortization of loan fees and original issue discount, divided by the weighted average fair value of debt investments. As of March 31, 2009 and December 31, 2008, $117.9 million and $123.5 million, respectively, of our portfolio investments at fair value were at fixed interest rates, which represented approximately 39% and 38%, respectively, of our total portfolio of investments at fair value. We generally structure our subordinated debt investments at fixed rates while many of our senior secured and junior secured loans are, and will be, at variable rates.

At March 31, 2009 and December 31, 2008, our equity investments consisted of common and preferred stock, LLC membership interests and warrants to acquire equity interests in certain of our portfolio companies. Warrants to acquire equity interests allow us to participate in the potential appreciation in the value of the portfolio company, while minimizing the amount of upfront cost to us.

The composition of our investment portfolio by industry sector, using Moody’s Industry Classifications as of March 31, 2009 and December 31, 2008 at cost and fair value was as follows:


	March 31, 2009										December 31, 2008
	Cost		% (1)			Fair Value		% (1)			Cost		% (1)			Fair Value		% (1)
Machinery	$	51,375,041		14.8	%	$	38,262,535		12.8	%	$	51,384,711		14.0	%	$	39,527,874		12.3	%
Health Care, Education & Childcare		39,535,526		11.4			39,172,587		13.1			39,749,005		10.9			39,501,102		12.2
Personal & Nondurable Consumer Products		38,851,765		11.2			38,006,465		12.7			39,609,196		10.8			39,247,796		12.2
Automobile		31,323,917		9.0			23,669,782		7.9			33,276,374		9.1			26,487,272		8.2
Electronics		30,022,303		8.7			29,288,103		9.8			31,033,364		8.5			30,033,495		9.3
Textiles & Leather		29,412,663		8.5			28,743,947		9.6			29,557,681		8.1			29,368,566		9.1
Printing & Publishing		26,315,941		7.6			12,063,547		4.0			26,302,411		7.2			18,159,998		5.6
Metals & Minerals		23,069,449		6.7			22,433,358		7.5			23,049,480		6.3			22,453,909		7.0
Mining, Steel, Iron & Nonprecious Metals		17,842,926		5.1			16,974,609		5.7			18,092,545		4.9			17,245,764		5.3
Retail Stores		11,165,792		3.2			11,083,592		3.7			10,978,984		3.0			10,872,284		3.4
Housewares & Durable Consumer Products		11,136,919		3.2			8,478,962		2.8			11,005,810		3.0			9,333,052		2.9
Ecological		9,134,946		2.6			8,771,946		2.9			8,556,102		2.3			8,164,902		2.5
Grocery		8,278,129		2.4			8,425,513		2.8			8,156,189		2.2			8,278,569		2.6
Chemicals, Plastic & Rubber		5,116,782		1.5			5,112,631		1.7			16,659,410		4.6			9,347,006		2.9
Insurance		5,000,000		1.4			4,061,400		1.4			5,000,000		1.4			4,048,200		1.3
Buildings & Real Estate		4,552,567		1.3			4,552,567		1.5			4,613,182		1.3			4,613,182		1.4
Personal, Food & Miscellaneous Services		3,000,000		0.8			300,000		0.1			3,000,000		0.8			1,050,000		0.3
Diversified/Conglomerate Service		1,570,736		0.5			—		—			1,570,736		0.4			623,500		0.2
Aerospace & Defense		463,168		0.1			110,600		0.0			463,168		0.1			173,600		0.1
Oil & Gas		—		—			—		—			3,840,677		1.1			3,840,677		1.2


Total	$	347,168,570		100.0	%	$	299,512,144		100.0	%	$	365,899,025		100.0	%	$	322,370,748		100.0	%


(1)		Represents percentage of total portfolio.

At March 31, 2009 and December 31, 2008, we did not have any investment in excess of 10% of the total investment portfolio at fair value. Investment income, consisting of interest, dividends and fees can fluctuate dramatically upon repayment of an investment or sale of an equity interest. Revenue recognition in any given period can be highly concentrated among several portfolio companies. During the three months ended March 31, 2009 and 2008, the Company did not record investment income from any portfolio company in excess of 10.0% of total investment income.

Portfolio Asset Quality

We utilize a standard investment rating system for our entire portfolio of debt investments. Investment Rating 1 is used for investments that exceed expectations and/or a capital gain is expected. Investment Rating 2 is used for investments that are generally performing in accordance with expectations. Investment Rating 3 is used for performing investments that require closer monitoring. Investment Rating 4 is used for investments performing below expectations where a higher risk of loss exists. Investment Rating 5 is used for investments performing significantly below expectations where we expect a loss.

The following table shows the distribution of our debt investments on the 1 to 5 investment rating scale at fair value as of March 31, 2009 and December 31, 2008:


	March 31, 2009					December 31, 2008
	Investments at		Percentage of			Investments at		Percentage of
Investment Rating	Fair Value		Total Portfolio			Fair Value		Total Portfolio
1	$	97,349,622		33.7	%	$	82,179,735		26.7	%
2		145,022,413		50.3			184,507,897		59.9
3		31,239,645		10.8			21,275,475		6.9
4		9,413,394		3.3			8,477,320		2.7
5		5,461,870		1.9			11,639,548		3.8


Totals	$	288,486,944		100.0	%	$	308,079,975		100.0	%

At March 31, 2009 and December 31, 2008, we had loans from four and three, respectively, of our portfolio companies on non-accrual status. See “—Critical Accounting Policies — Interest and Dividend Income Recognition” for a discussion of when we place debt investments on non-accrual status.

In the event that the United States economy continues into a prolonged recession, it is possible that the financial results of small- to mid-sized companies, similar to those in which we invest, could experience further deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. We can provide no assurance that the performance of certain of our portfolio companies will not be negatively impacted by these economic or other conditions which could have a negative impact on our future results.

Results of Operations

The principal measure of our financial performance is net income (loss) which includes net investment income, net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and our operating expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net unrealized appreciation (depreciation) on interest rate swaps is the net change in the fair value of our outstanding swap agreements. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

Comparison for the three months ended March 31, 2009 and 2008

Total Investment Income

Total investment income includes interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and waiver fees. Other investment income consists primarily of the accelerated recognition of deferred financing fees received from our portfolio companies on the repayment of the outstanding investment, the sale of the investment or reduction of available credit.

Total investment income for the three months ended March 31, 2009 and 2008, was $8.5 million and $11.2 million, respectively. For the three months ended March 31, 2009, this amount consisted of interest income of $19,000 from cash and cash equivalents, $8.3 million of interest and dividend income from portfolio investments (which included $1.1 million in payment-in-kind or PIK interest and dividends), $167,000 in fee income and $9,000 in other investment income. For the three months ended March 31, 2008, this amount consisted of interest income of $53,000 from cash and cash equivalents, $11.0 million of interest and dividend income from portfolio investments (which included $1.5 million in payment-in-kind or PIK interest and dividends), $214,000 in fee income and $40,000 in other investment income.

The decrease in our total investment income for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 was primarily attributable to a decrease in the weighted average fair value balance outstanding of our interest-bearing investment portfolio during the quarter ended March 31, 2009. The primary reason behind the decrease in total investment income was a decrease in interest income due to the decrease in the weighted average fair value balance of our investment portfolio, and a decrease in the weighted average yield of our investments. During the three months ended March 31, 2009, the weighted average fair value balance outstanding of our interest-bearing investment portfolio was approximately $308.4 million as compared to approximately $363.2 million during the three months ended March 31, 2008. The weighted average yield decreased as a result of an increase in the number of loans on non-accrual status and an overall decrease in market interest rates.

Expenses

Expenses include compensation expense, interest on our outstanding indebtedness, professional fees, and general and administrative expenses.

Expenses for the three months ended March 31, 2009 and 2008, were $3.4 million and $4.5 million, respectively. Expenses decreased for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 by approximately $1.1 million, primarily as a result of lower compensation expense which decreased by $577,000, lower interest expense which decreased by $473,000, and lower general and administrative expenses which decreased by $58,000, offset by higher professional fees of $66,000. The lower compensation expense was principally attributable to the elimination of bonus accruals given the impact of the current market environment on our financial performance, reduction of employee headcount during the fourth quarter of 2008 and the first quarter of 2009, partially offset by an increase in non-cash stock award compensation of $18,000 due to the granting of additional stock options in 2008 and restricted stock awards in August 2008 and March 2009, and an increase in base salary for three of our executive officers. The decrease in interest expense was attributable to a decrease in market interest rates during the first quarter of 2009 and a decrease in weighted average borrowings outstanding, which were approximately $151.2 million during the three months ended March 31, 2009, as compared to $152.7 million during the three months ended March 31, 2008. Such borrowings historically were used primarily to fund investments. The decrease in general and administrative expenses is primarily the result of reduced travel and investor relations expenses. The increase in professional fees expense is primarily due to additional legal fees we incurred in 2009.

Realized Gain (Loss) on Sale of Investments

Net realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. During the three months ended March 31, 2009, we realized a loss of $11.6 million due to the permanent impairment of loans to one of our portfolio companies. During the three months ended March 31, 2008, we sold one investment in which we realized a loss of $90,000.

Net Change in Unrealized Appreciation or Depreciation on Investments

Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the three months ended March 31, 2009 and 2008, we recorded net unrealized depreciation of $4.2 million and $9.9 million, respectively, on our investments. The unrealized depreciation in 2009 is net of an adjustment to reverse unrealized depreciation due to the permanent impairment of loans to one of our portfolio companies in connection with which we recognized a realized loss of $11.6 million. For 2009, our net unrealized depreciation consists of the following: approximately $417,000 of unrealized depreciation resulted from the decrease in quoted market prices on our syndicated loan portfolio as a result of the disruption in the credit markets for broadly syndicated loans; approximately $4.5 million resulted from a decline in the financial performance of our portfolio companies; offset by approximately $770,000 of unrealized appreciation which resulted from SFAS No. 157.

Net Unrealized Depreciation on Interest Rate Swaps

Net unrealized appreciation (depreciation) on interest rate swaps represents the change in value of the swap agreements. For the three months ended March 31, 2009 and 2008, we recorded unrealized appreciation (depreciation) of approximately $183,000 and ($753,000), respectively, on our interest rate swap agreements. The 2008 unrealized depreciation in the value of our interest rate swap agreements resulted from the volatility and corresponding reduction in variable interest rates during the period.

Net Loss

Net loss was $10.5 million for the quarter ended March 31, 2009 as compared to a net loss of $3.9 million for the quarter ended March 31, 2008. The net loss for the three months ended March 31, 2009 principally related to realized loss of $11.6 million on our investments, unrealized depreciation of $4.2 million on our investments, which was partially offset by unrealized appreciation of $183,000 on our interest rate swap agreements.

Financial Condition, Liquidity and Capital Resources

Cash, Cash Equivalents and Restricted Cash

At March 31, 2009 and December 31, 2008, we had $14.2 million and $6.4 million, respectively, in cash and cash equivalents. In addition, at March 31, 2009 and December 31, 2008, we had $15.8 million and $22.2 million, respectively, in restricted cash which we maintained in accordance with the terms of our Amended Securitization Facility. A portion of the December 31, 2008 funds were released or available to us on January 12, 2009. Due to the termination event under the Amended Securitization Facility on April 3, 2009, a portion of the March 31, 2009 funds, which would have been released to us on April 13, 2009, were instead used to reduce the outstanding borrowings under our Amended Securitization Facility. As a result, any future funds that get released under the Amended Securitization Facility will be used to reduce outstanding borrowings until fully repaid. On May 8, 2009, $142.9 million was outstanding under the Amended Securitization Facility.

For the three months ended March 31, 2009, net cash provided by operating activities totaled $2.9 million, compared to net cash provided by operating activities of $3.2 million for the comparable 2008 period. This change was due primarily to a increase in net loss, a decrease in interest receivable, an increase in unrealized depreciation on investments, an increase in unrealized appreciation on swaps, and an decrease in unearned income. Those amounts were offset by a decrease in realized loss on investments, and a decrease in PIK interest and dividends. Cash provided by investing activities totaled $8.4 million and $24.6 million for the three months ended March 31, 2009 and 2008, respectively. This change was principally due to lower investment origination in the amount of $1.1 million, and lower loan repayments and amortization of $6.9 million, and a decrease in investment sales of $10.3 million during the first quarter of 2009. Cash used for financing activities totaled $3.5 million and $27.3 million in the three months ended March 31, 2009 and 2008, respectively. This change was principally due to a net decrease of $16.9 million in our net borrowings and a decrease of $1.9 million in dividends paid, both of which were offset by an increase in restricted cash in the amount of $4.9 million.

Liquidity and Capital Resources

We have historically relied on cash generated from our operations and debt and equity financings to fund our business. We primarily used these funds to make investments in portfolio companies in accordance with our investment objective, to pay our operating expenses and to make cash distributions to the holders of our common stock. However, since mid-2007, global credit and other financial markets have suffered substantial stress, volatility, illiquidity and disruption. These forces reached unprecedented levels in late 2008, resulting in the bankruptcy or acquisition of, or government assistance to, several major domestic and international financial institutions. In particular, the financial services sector has been negatively impacted by significant write-offs related to sub-prime mortgages and the re-pricing of credit risk. These events have significantly diminished overall confidence in the debt and equity markets and caused increasing economic uncertainty. This reduced confidence and uncertainty has severely hampered our ability to obtain equity and debt financing.

As a result of this turmoil in the financial markets and our greatly diminished access to equity and debt financing, we had previously taken a number of steps to help improve the availability of liquidity, including:

	•		curtailing our investment originations;

	•		reducing our operating expenses;

	•		obtaining stockholder approval at our 2008 annual meeting of stockholders to sell shares of our common stock below the then current net asset value per share in one or more offerings for a period of one year ending on June 17, 2009; and

	•		delaying the payment of our 2009 dividends to our stockholders.

However, in light of the termination event which occurred under the Amended Securitization Facility on April 3, 2009, we can no longer make additional advances under the facility and must use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility by April 3, 2011. Because substantially all of our debt investments are secured by our Amended Securitization Facility, we cannot provide any assurance that we will have sufficient cash and liquid assets to fund our operations and dividend distributions to our stockholders. We are in active discussions with the facility lenders to seek relief from certain of the terms of the facility, including the requirement under the facility that we use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility by April 3, 2011. Moreover, even if we are successful in seeking relief from the lenders of the facility, our ability to operate our business in the manner in which we have historically operated will be constrained until our ability to access the debt and equity capital markets improves. In this regard, because our common stock has traded at a price significantly below our current net asset value per share over the last several months and we are limited in our ability to sell our common stock at a price below net asset value per share without first obtaining stockholder approval (which approval we are not seeking at our 2009 annual meeting of stockholders), we may continue to be limited in our ability to raise equity capital. In addition, as a business development company, we generally are required to meet a coverage ratio of total assets less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. As of March 31, 2009, this ratio was 208%. As a result, we are also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions.

Borrowings

Securitization Revolving Credit Facility. On September 18, 2006, we, through a consolidated wholly-owned bankruptcy remote, special purpose subsidiary, entered into an amended and restated securitization revolving credit facility (the “Securitization Facility”) with an entity affiliated with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). The Securitization Facility allowed the special purpose subsidiary to borrow up to $140 million through the issuance of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The Securitization Facility also required bank liquidity commitments (the “Liquidity Facility”) to provide liquidity support to the conduit. The Liquidity Facility was provided by the lender that participated in the Securitization Facility for a period of 364-days and was renewable annually thereafter at the option of the lender. On May 2, 2007, we amended the Securitization Facility to lower the interest rate payable on any outstanding borrowings under the Securitization Facility from the commercial paper rate plus 1.35% to the commercial paper rate plus 1.00% during the period of time the Company was permitted to make draws under the Securitization Facility. The amendment also reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31, 2007, we amended the Securitization Facility to increase our borrowing capacity thereunder by $35 million. The amendment also extended the commitment termination date from July 23, 2009 to July 22, 2010 and reduced or eliminated certain restrictions pertaining to certain loan covenants. The Securitization Facility provided for the payment by us to the lender of a monthly fee equal to 0.25% per annum on the unused amount of the Securitization Facility.

On April 11, 2008, we entered into the Amended Securitization Facility with an entity affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (the “Lenders”). The Amended Securitization Facility amended and restated the Securitization Facility to, among other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend the maturity date from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an additional 364-day period with the consent of the lenders thereto); (iii) increase the interest rate payable under the facility from the commercial paper rate plus 1.00% to the commercial paper rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to $50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25% per annum to 0.30% per annum.

Similar to the Securitization Facility, the Amended Securitization Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. These restrictions could have affected the amount of notes our special purpose subsidiary could issue from time to time. The Amended Securitization Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could have resulted in the early termination of the Amended Securitization Facility. The Amended Securitization Facility also requires the maintenance of the Liquidity Facility. The Liquidity Facility was provided by the Lenders that participate in the Securitization Facility for a period of 364-days and was renewable annually thereafter at the option of the lenders. The Liquidity Facility was scheduled to be renewed in April 2009. The Amended Securitization Facility is secured by all of the loans held by the Company’s special purpose subsidiary.

On April 3, 2009, a termination event occurred under the Amended Securitization Facility due to the amount of our advances outstanding under the facility exceeding the maximum availability under the facility for more than three consecutive business days. The maximum availability under the facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum availability under the facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009. As of such date, we had $157.6 million outstanding under the facility. As a result of the occurrence of the termination event under the facility, we can no longer make additional advances under the facility. Also, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. In addition, the terms of the facility require that all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. To date, we have not received any such notice from the lenders. Furthermore, we are in active discussions with the facility lenders to seek relief from certain of the terms of the facility, including the requirement under the facility that we use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility within 24 months following the date of the termination event. However, we cannot provide any assurance that the lenders will agree to provide us any relief from any terms of the facility. As a result, we are also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions.

At March 31, 2009, $157.6 million was outstanding under the Amended Securitization Facility. At March 31, 2009, the interest rate payable on amounts outstanding under the Amended Securitization Facility was 2.2% and increased to 5.25% on April 3, 2009.

Since 2006, the Company, through our special purpose subsidiary, entered into eight interest rate swap agreements. The swap agreements have a fixed rate range of 3.3% to 5.2% on an initial notional amount of $53.6 million. The swap agreements generally expire up to five years from issuance. The swaps were put into place to hedge against changes in variable interest payments on a portion of our outstanding borrowings. For the three months ended March 31, 2009 and 2008, net unrealized appreciation (depreciation) attributed to the swaps were approximately $183,000 and ($753,000), respectively. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower rates with respect to the outstanding borrowings.

Regulated Investment Company Status and Dividends

Effective August 1, 2005, the Company elected to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis. In light of the matters described above regarding the Amended Securitization Facility, we may not be able to continue to qualify as a RIC. However, we intend to take all steps possible to maintain our RIC tax status.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To obtain and maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). In order to avoid certain excise taxes imposed on RICs, we must distribute, with respect to each calendar year, an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. To the extent our taxable earnings for a fiscal tax year falls below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level, if at all. As a result of the termination event that occurred under the Amended Securitization Facility on April 3, 2009, we are required to dedicate a significant portion of our operating cash flow to repay the principal amount outstanding under the Amended Securitization Facility by April 2011. As a result, we may be required to severely limit or otherwise cease making cash distributions to our stockholders. If we do not distribute at least a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.

Going Concern

A fundamental principle of the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. As a result of the termination event that occurred under the Amended Securitization Facility, we can no longer make additional advances under the facility. In addition, the terms of the facility require that all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. We have not received any such notice from the lenders. Furthermore, we are in active discussions with the facility lenders to seek relief from certain of the terms of the facility, including the requirement under the facility that we use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility within 24 months following the date of the termination event. While we have prepared our consolidated financial statements on a going concern basis, if we are unable to obtain relief from certain terms of the facility, our ability to continue as a going concern may be severely impacted. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements included in this quarterly report on Form 10-Q do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

Valuation of Portfolio Investments

The most significant estimate inherent in the preparation of our financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

Under SFAS No. 157, we principally utilize the market approach to estimate the fair value of our investments where there is not a readily available market and we also utilize the income approach to estimate the fair value of our debt investments. Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. We generally require portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flows, net income, revenues, or in limited cases, book value.

Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business. We also use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.

The fair value of our investments at March 31, 2009, and December 31, 2008 was determined in good faith by our board of directors. Duff & Phelps, LLC, an independent valuation firm (“Duff & Phelps”), provided third party valuation consulting services to us which consisted of certain mutually agreed upon limited procedures that we engaged them to perform. At March 31, 2009 and at December 31, 2008, we asked Duff & Phelps to perform the limited procedures on investments in 9 and 12 portfolio companies, respectively, comprising approximately 27% and 38% of the total investments at fair value, respectively. Upon completion of their limited procedures, Duff & Phelps concluded that the fair value of those investments subjected to the limited procedures did not appear to be unreasonable. Our Board of Directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Fee Income Recognition

We receive a variety of fees in the ordinary course of our business, including arrangement fees and loan fees. We account for our fee income in accordance with Emerging Issues Task Force Issue 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of a company’s accounting for arrangements containing multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (i.e., there are separate units of accounting). EITF 00-21 states that the total consideration received for the arrangement be allocated to each unit based upon each unit’s relative fair value. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. In determining fair value of various fee income we receive, we will first rely on data compiled through our investment and syndication activities and secondly on independent third party data. The timing of revenue recognition for a given unit of accounting depends on the nature of the deliverable(s) in that accounting unit (and the corresponding revenue recognition model) and whether the general conditions for revenue recognition have been met. Fee income for which fair value cannot be reasonably ascertained is recognized using the interest method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (“SFAS No. 91”). We have historically recognized fee income in accordance with SFAS No. 91. In addition, we capitalize and offset direct loan origination costs against the origination fees received and only defer the net fee.

Payment-in-Kind or PIK Interest and Dividends

We include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind or PIK interest or dividends, which represents either contractually deferred interest added to the loan balance that is generally due at the end of the loan term or contractually deferred dividends added to our equity investment in the portfolio company. We will cease accruing PIK interest if we do not expect the portfolio company to be able to pay all principal and interest due, and we will cease accruing PIK dividends if we do not expect the portfolio company to be able to make PIK dividend payments in the future. In certain cases, a portfolio company makes principal payments on its loan prior to making payments to reduce the PIK loan balances and, therefore, the PIK portion of a portfolio company’s loan can increase while the total outstanding amount of the loan to that portfolio company may stay the same or decrease. Accrued PIK interest and dividends represented $6.4 million or 2.1% of our portfolio of investments at fair value as of March 31, 2009 and $6.6 million or 2.0% of our portfolio of investments at fair value as of December 31, 2008. The net increase in loan and equity balances as a result of contracted PIK arrangements are separately identified on our statements of cash flows.

PIK related activity for the three months ended March 31, 2009 was as follows:


	Three Months Ended
	March 31, 2009
Beginning PIK balance	$	6,605,194
PIK interest and dividends earned during the period		1,087,159
PIK write-off (1)		(1,110,041	)
PIK receipts during the period		(214,045	)


Ending PIK balance	$	6,368,267


(1)		Write-off is the result of the permanent impairment of loans to one of our portfolio companies.

Interest and Dividend Income Recognition

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. When a loan or debt security becomes 90 days or more past due, or if we otherwise do not expect the debtor to be able to service its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. At March 31, 2009 and December 31, 2008, we had loans from four and three, respectively, of our portfolio companies on non-accrual status.

Dividend income on preferred equity securities is recorded on an accrual basis to the extent that such amounts are expected to be collected. Dividend income on equity securities is recorded on the record date for private companies and the ex-dividend date for publicly traded companies.

Off-Balance Sheet Arrangements

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting extensive due diligence, negotiating appropriate financial covenants and obtaining collateral where necessary. As of March 31, 2009, we had unused commitments to extend credit to our portfolio companies of $22.0 million, which are not reflected on our balance sheet. Since April 3, 2009, the date of the termination event under the Amended Securitization Facility, we have funded revolver draws under our outstanding commitments. We are currently in negotiation with the Lenders to have eligible revolver draws, which are requests on loans that secure the Amended Securitization Facility, funded by the Lenders going forward. Ineligible revolver draw requests, those requests on loans outside of the Amended Securitization Facility, will not be funded by the Lenders. We may not have the ability to fund the ineligible revolver draw requests in the future or eligible revolver draw requests if the Lenders refuse to accommodate this request.

In connection with our Amended Securitization Facility, our consolidated special purpose subsidiary may be required under certain circumstances to enter into interest rate swap agreements or other interest rate hedging transactions. We have agreed to guarantee the payment of certain swap breakage costs that may be payable by our special purpose subsidiary in connection with any such interest rate swap agreements or other interest rate hedging transactions. At March 31, 2009, we had eight such agreements.

Contractual Obligations

As of March 31, 2009, we had $157.6 million outstanding under the Amended Securitization Facility. On April 3, 2009, a termination event occurred under the Amended Securitization Facility due to the amount of our advances outstanding under the facility exceeding the maximum availability under the facility for more than three consecutive business days. The maximum availability under the facility is determined by, among other things, the fair market value of all eligible loans serving as collateral under the facility. Because the fair market value of certain eligible loans decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum availability under the facility. This determination was made in connection with the delivery of a borrowing base report to the facility lenders on March 31, 2009. As a result of the occurrence of the termination event under the facility, we can no longer make additional advances under the facility. Also, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. In addition, the terms of the facility require that all principal, interest and fees collected from the debt investments secured by the facility must be used to pay down amounts outstanding under the facility within 24 months following the date of the termination event. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other rights and remedies provided by the facility, including the right to sell the collateral under the facility. To date, we have not received any such notice from the lenders. Furthermore, we are in active discussions with the facility lenders to seek relief from certain of the terms of the facility, including the requirement under the facility that we use all principal, interest and fees collected from the debt investments secured by the facility to pay down amounts outstanding under the facility within 24 months following the date of the termination event. However, we cannot provide any assurance that the lenders will agree to provide us any relief from any terms of the facility. As a result, we are also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions. At March 31, 2009, the interest rate under the Amended Securitization Facility was 2.2% and increased to 5.25% on April 3, 2009.

On August 11, 2005, we entered into a lease agreement for office space expiring on January 15, 2011. Future minimum lease payments due under the office lease and for certain office equipment are as follows: remainder of 2009 — $181,000; 2010 — $247,000; 2011 — $21,000.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in quantitative and qualitative disclosures about market risks since December 31, 2008.

Item 4. Controls and Procedures

(a)		As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

(b)		There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.

Item 1A. Risk Factors

Except as noted below, there were no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2008.

An event of termination occurred under our Amended Securitization Facility which allows our lenders to accelerate repayment of the outstanding obligations under the facility and exercise other rights and remedies provided by the Amended Securitization Facility, including the right to sell the collateral under the Amended Securitization Facility.

On April 3, 2009, a termination event occurred under our Amended Securitization Facility. As a result of the occurrence of the termination event under the Amended Securitization Facility, we can no longer make additional advances under the Amended Securitization Facility. In addition, the interest rate payable under the Amended Securitization Facility increased from the commercial paper rate plus 1.75% to the prime rate plus 2%. Also, the terms of the Amended Securitization Facility require that all principal, interest and fees collected from the debt investments secured by the Amended Securitization Facility must be used to pay down amounts outstanding under the Amended Securitization Facility within 24 months following the date of the termination event. The Amended Securitization Facility also permits the lenders, upon notice to us, to accelerate amounts outstanding under the Amended Securitization Facility and exercise other rights and remedies provided by the Amended Securitization Facility, including the right to sell the collateral under the Amended Securitization Facility. As of the date hereof, we have not received any such notice from the lenders; however, there can be no assurance that they will not accelerate repayment in the future. We do not have sufficient cash resources to repay these obligations should the lenders accelerate these obligations. Acceleration of the amounts outstanding under the Amended Securitization Facility could have a material adverse impact on our liquidity, financial condition and operations.

While we are in active discussions with the Amended Securitization Facility lenders to seek relief from certain of the terms of the Amended Securitization Facility, including the requirement under the Amended Securitization Facility that we use all principal, interest and fees collected from the debt investments secured by the Amended Securitization Facility to pay down amounts outstanding under the Amended Securitization Facility by April 3, 2011, we cannot provide any assurance that the lenders will agree to provide us any relief from any terms of the Amended Securitization Facility. As a result, we are also currently evaluating other financing and/or strategic alternatives, including possible debt or equity financing, acquisition or disposition of assets, and other strategic transactions. There can be no assurance that the actions we are presently taking with respect to the matters described above will be successful.

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

During the three months ended March 31, 2009, we issued 123,000 shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate offering price for the shares of common stock sold under the dividend reinvestment plan was approximately $364,000.

Item 3. Defaults Upon Senior Securities

For a detailed discussion of a termination event that occurred under the Amended Securitization Facility, please see Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of this Form 10-Q and the Form 8-K that we filed with the SEC on April 7, 2009.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation
S-K):


Exhibit
Number		Description of Document

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).

32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).


*		Submitted herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 11, 2009.


		PATRIOT CAPITAL FUNDING, INC.

		By:		/s/ Richard P. Buckanavage Richard P. Buckanavage
				Chief Executive Officer and President

		By:		/s/ William E. Alvarez, Jr. William E. Alvarez, Jr.
				Executive Vice President, Chief
				Financial Officer and Secretary

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