Summary of TRIANGLE CAPITAL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with the Unaudited Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report contains forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of the statements in this Quarterly Report constitute forward-looking statements because they relate to future events or our future performance or financial condition. Forward-looking statements may include, among other things, statements as to our future operating results, our business prospects and the prospects of our portfolio companies, the impact of the investments that we expect to make, the ability of our portfolio companies to achieve their objectives, our expected financings and investments, the adequacy of our cash resources and working capital, and the timing of cash flows, if any, from the operations of our portfolio companies. Words such as "expect," "anticipate," "target," "goals," "project," "intend," "plan," "believe," "seek," "estimate," "continue," "forecast," "may," "should," "potential," variations of such words, and similar expressions indicate a forward-looking statement, although not all forward-looking statements include these words. Readers are cautioned that the forward-looking statements contained in this Quarterly Report are only predictions, are not guarantees of future performance, and are subject to risks, events, uncertainties and assumptions that are difficult to predict. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors discussed in Item 1A entitled "Risk Factors" in Part I of our 2008 Annual Report on Form 10-K. Other factors that could cause actual results to differ materially include changes in the economy, risks associated with possible disruption due to terrorism in our operations or the economy generally, and future changes in laws or regulations and conditions in our operating areas. These statements are based on our current expectations, estimates, forecasts, information and projections about the industry in which we operate and the beliefs and assumptions of our management as of the date of this Quarterly Report. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law. 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 directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview of Our Business
We are a Maryland corporation which has elected to be treated and operates as an internally managed business development company, or BDC, under the Investment Company Act of 1940, or 1940 Act. Our wholly owned subsidiary, Triangle Mezzanine Fund LLLP (the "Fund") is licensed as a small business investment company, or SBIC, by the United States Small Business Administration, or SBA, and has also elected to be treated as a BDC under the 1940 Act. We and the Fund invest primarily in debt instruments, equity investments, warrants and other securities of lower middle market privately held companies located in the United States.
Our business is to provide capital to lower middle market companies in the United States. We define lower middle market companies as those with annual revenues between $10.0 and $100.0 million. We focus on investments in companies with a history of generating revenues and positive cash flows, an established market position and a proven management team with a strong operating discipline. Our target portfolio company has annual revenues between $20.0 and $75.0 million and annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $2.0 and $20.0 million.
We invest primarily in senior and subordinated debt securities secured by first and second lien security interests in portfolio company assets, coupled with equity interests. Our investments generally range from $5.0 to $15.0 million per portfolio company. In certain situations, we have partnered with other funds to provide larger financing commitments.
We generate revenues in the form of interest income, primarily from our investments in debt securities, loan origination and other fees and dividend income. Fees generated in connection with our debt investments are recognized over the life of the loan using the effective interest method or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity-related securities that we acquire from our portfolio companies. Our debt investments generally have a term of between three and seven years and typically bear interest at fixed rates between 11.0% and 16.0% per annum. Certain of our debt investments have a form of interest, referred to as paid-in-kind, or PIK, interest, that is not paid currently but that is accrued and added to the loan balance and paid at the end of the term. Cash interest on our debt investments is generally payable monthly;

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however, some of our debt investments pay cash interest on a quarterly basis. As of both September 30, 2009 and December 31, 2008, the weighted average yield on all of our outstanding debt investments (including PIK interest) was approximately 14.4%. The weighted average yield on all of our outstanding investments (including equity and equity-linked investments) was approximately 13.3% and 13.2% as of September 30, 2009 and December 31, 2008, respectively.
The Fund is eligible to sell debentures guaranteed by the SBA in the capital markets at favorable interest rates and invest these funds in portfolio companies. We intend to continue to operate the Fund as an SBIC, subject to SBA approval, and to utilize the proceeds of the sale of the Fund's SBA-guaranteed debentures, referred to herein as SBA leverage, to enhance returns to our stockholders.
Portfolio Composition
The total value of our investment portfolio was $188.4 million as of September 30, 2009, as compared to $182.1 million as of December 31, 2008. As of September 30, 2009, we had investments in 36 portfolio companies with an aggregate cost of $201.9 million. As of December 31, 2008, we had investments in 34 portfolio companies with an aggregate cost of $180.2 million. As of both September 30, 2009 and December 31, 2008, none of our portfolio investments represented greater than 10% of the total fair value of our investment portfolio.
As of September 30, 2009 and December 31, 2008, our investment portfolio consisted of the following investments:

                                                                                   Percentage of Total                                Percentage of Total
                                                                 Cost                   Portfolio                Fair Value                Portfolio

September 30, 2009:
Subordinated debt and 2nd lien notes                        $ 167,380,542                        83 %          $ 153,498,784                        82 %
Senior debt                                                    16,834,740                         9               16,440,952                         9
Equity shares/membership interests                             14,366,846                         7               13,663,300                         7
Equity warrants                                                 2,415,370                         1                3,929,000                         2
Royalty rights                                                    874,400                         -                  859,000                         -

                                                            $ 201,871,898                       100 %          $ 188,391,036                       100 %


December 31, 2008:
Subordinated debt and 2nd lien notes                        $ 147,493,871                        82 %          $ 143,015,291                        79 %
Senior debt                                                    16,269,628                         9               16,269,628                         9
Equity shares/membership interests                             13,684,269                         8               17,301,372                         9
Equity warrants                                                 1,829,370                         1                4,644,600                         3
Royalty rights                                                    874,400                         -                  874,400                         -

                                                            $ 180,151,538                       100 %          $ 182,105,291                       100 %

Investment Activity
During the nine months ended September 30, 2009, we made four new investments totaling $24.0 million and five investments in existing portfolio companies totaling approximately $4.0 million. We sold investments in two portfolio companies for total proceeds of approximately $1.9 million, received a full repayment from one portfolio company totaling approximately $2.0 million, received partial repayments of loans from five portfolio companies totaling approximately $4.4 million and received payment in kind (PIK) interest repayments totaling approximately $1.6 million. In addition, we received normal principal repayments totaling approximately $1.0 million in the nine months ended September 30, 2009.
During the nine months ended September 30, 2008, we made ten new investments totaling $72.5 million, one additional debt investment in an existing portfolio company of $1.0 million and three additional equity investments in existing portfolio companies of approximately $0.1 million. We also sold two investments in portfolio companies for approximately $0.3 million, resulting in realized gains totaling $0.1 million. We had two portfolio company loans repaid at par in the amount of $4.8 million. In addition, we received normal principal repayments, partial loan prepayments and PIK interest repayments totaling approximately $4.0 million in the nine months ended September 30, 2008.

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Total portfolio investment activity for the nine months ended September 30, 2009 and 2008 was as follows:

                                                                    Nine Months Ended          Nine Months Ended
                                                                   September 30, 2009         September 30, 2008


Fair value of portfolio, beginning of period                       $     182,105,291          $     113,036,240
New investments                                                           27,943,735                 73,645,254
Loan origination fees received                                              (540,000 )               (1,351,996 )
Proceeds from sales of investments                                        (1,888,384 )                 (275,361 )
Principal repayments received                                             (7,400,722 )               (8,785,117 )
Paid-in-kind interest earned                                               3,587,786                  2,555,053
Paid-in-kind interest received                                            (1,579,429 )                 (766,069 )
Accretion of loan discounts                                                  306,075                     95,132
Accretion of deferred loan origination revenue                               443,135                    278,515
Realized gains on investments                                                848,164                     51,089
Unrealized losses on investments                                         (15,434,615 )                 (718,784 )


Fair value of portfolio, end of period                             $     188,391,036          $     177,763,956


Weighted average yield on debt investments at end of period                     14.4 %                     14.2 %

Weighted average yield on total investments at end of period                    13.3 %                     13.0 %

Non-Accrual Assets
As of September 30, 2009, the fair value of our non-accrual assets comprised 3.7% of the total fair value of our portfolio, and the cost of our non-accrual assets comprised 8.5% of the total cost of our portfolio. Our non-accrual assets as of September 30, 2009 are as follows:
Gerli and Company
In the third quarter of 2008, we recognized an unrealized loss of $0.3 million on our subordinated note investment in Gerli and Company ("Gerli"), which has a cost as of September 30, 2009 of approximately $3.1 million. This unrealized loss reduced the fair value of our investment in Gerli to $2.8 million as of September 30, 2008. During the third quarter of 2008, we continued to receive interest payments in accordance with our loan agreement. In November 2008, we placed our investment in Gerli on non-accrual status. As a result, under generally accepted accounting principles ("GAAP"), we no longer recognize interest income on our investment in Gerli for financial reporting purposes. Additionally, in the fourth quarter of 2008, we recognized an additional unrealized loss on our investment in Gerli of $0.9 million and in the nine months ended September 30, 2009, we recognized an additional unrealized loss on our investment in Gerli of $0.4 million. As of September 30, 2009, the fair value of our investment in Gerli is $1.5 million.
Fire Sprinkler Systems, Inc.
In 2008, we recognized an unrealized loss of $1.4 million on our subordinated note investment in Fire Sprinkler Systems, Inc. ("Fire Sprinkler Systems"), which has a cost as of September 30, 2009 of approximately $2.4 million. This unrealized loss reduced the fair value of our investment in Fire Sprinkler Systems to $1.0 million as of December 31, 2008. Through the first nine months of 2008, we continued to receive interest and principal payments in accordance with our loan agreement. In October 2008, we placed our investment in Fire Sprinkler Systems on non-accrual status. As a result, under GAAP, we no longer recognize interest income on our investment in Fire Sprinkler Systems for financial reporting purposes. In the first nine months of 2009, we recognized an additional unrealized loss on our investment in Fire Sprinkler Systems of $0.2 million. As of September 30, 2009, the fair value of our investment in Fire Sprinkler Systems is $0.8 million.
American De-Rosa Lamparts, LLC and Hallmark Lighting In 2008, we recognized an unrealized loss of $1.2 million on our subordinated note investment in American De-Rosa Lamparts, LLC and Hallmark Lighting (collectively "ADL"), which had a cost as of September 30, 2009 of approximately $8.2 million. This unrealized loss reduced the fair value of our investment in ADL to $6.9 million as of December 31, 2008. In the nine months ended September 30, 2009, we recognized an additional unrealized loss on our investment in ADL of $3.2 million. As of September 30, 2009, the fair value of our investment in ADL was approximately $3.9 million. Through August 31, 2009, we continued to receive interest payments from ADL in accordance with the loan agreement. In September 2009, we received notification from ADL's senior lender that ADL was blocked from making interest payments to us for a period of six months. As a result, we placed our investment

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in ADL on non-accrual status and under GAAP, we no longer recognize interest income on our investment in ADL for financial reporting purposes.
FCL Graphics, Inc. 2nd Lien Note
In the first six months of 2009, we recognized an unrealized loss of $1.7 million on our 2nd Lien note investment in FCL Graphics, Inc. ("FCL"). During the first eight months of 2009, we received cash interest on our 2nd lien note in FCL at the stated contractual rate (20% per annum as of September 30, 2009). In September 2009, FCL did not make the scheduled interest payments on its 2nd Lien notes. As a result, we have placed our 2ndLien note in FCL on non-accrual status and therefore, under GAAP, we no longer recognize interest income on our 2nd Lien note investment in FCL for financial reporting purposes. We are currently in negotiations with FCL and FCL's other lenders to amend the terms of our note. The terms of the proposed amendment provide for cash interest at a rate of LIBOR plus 250 basis points per annum and PIK interest at a rate of 8% per annum. In the third quarter of 2009, we recognized an additional unrealized loss on our 2nd Lien note investment in FCL of approximately $0.9 million, which has a cost as of September 30, 2009 of approximately $3.4 million. The fair value of our 2nd Lien note investment in FCL as of September 30, 2009 is approximately $0.8 million. Results of Operations
Comparison of three months ended September 30, 2009 and September 30, 2008 Investment Income
For the three months ended September 30, 2009, total investment income was $7.1 million, a 21% increase from $5.9 million of total investment income for the three months ended September 30, 2008. This increase was primarily attributable to a $1.1 million increase in total loan interest (including PIK interest), fee and dividend income due to net increase in our portfolio investments from September 30, 2008 to September 30, 2009. We recognized non-recurring fee income of $0.2 million for the three months ended September 30, 2009 as compared to $0.1 million for the three months ended September 30, 2008.
Expenses
For the three months ended September 30, 2009, expenses increased by 27% to $3.4 million from $2.7 million for the three months ended September 30, 2008. The increase in expenses was primarily attributable to a $0.6 million increase in interest expense due to higher average balances of SBA-guaranteed debentures outstanding during the three months ended September 30, 2009 than in the comparable period in 2008.
Net Investment Income
As a result of the $1.2 million increase in total investment income and the $0.7 million increase in expenses, net investment income for the three months ended September 30, 2009 was $3.7 million compared to net investment income of $3.2 million during the three months ended September 30, 2008. Net Decrease in Net Assets Resulting From Operations We recognized no realized gains or losses on investments in the three months ended September 30, 2009. During the three months ended September 30, 2008, we recognized a realized gain on the sale of one investment totaling $0.1 million.
During the three months ended September 30, 2009, we recorded net unrealized depreciation of investments in the amount of $4.5 million, comprised of unrealized depreciation on seventeen investments totaling $5.5 million and unrealized appreciation on nine investments totaling $1.0 million. In the three months ended September 30, 2008, we recorded net unrealized depreciation of investments in the amount of $0.7 million, comprised of unrealized appreciation on ten investments totaling $1.8 million and unrealized depreciation on ten investments totaling $2.5 million.
As a result of these events, our net decrease in net assets resulting from operations during the three months ended September 30, 2009 was $0.8 million as compared to a net increase in net assets resulting from operations of $2.5 million for the three months ended September 30, 2008.
Comparison of nine months ended September 30, 2009 and September 30, 2008 Investment Income
For the nine months ended September 30, 2009, total investment income was $20.2 million, a 37% increase from $14.8 million of

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total investment income for the nine months ended September 30, 2008. This increase was attributable to a $5.3 million increase in total loan interest (including PIK interest), fee and dividend income due to net increase in our portfolio investments from September 30, 2008 to September 30, 2009. We recognized non-recurring fee income of $0.5 million for the nine months ended September 30, 2009 as compared to $0.4 million for the nine months ended September 30, 2008.
Expenses
For the nine months ended September 30, 2009, expenses increased by 44% to $10.2 million from $7.1 million for the nine months ended September 30, 2008. The increase in expenses was primarily attributable to a $2.6 million increase in interest expense and a $0.4 million increase in general and administrative expenses. The increase in interest expense is related to higher average balances of SBA-guaranteed debentures outstanding during the nine months ended September 30, 2009 than in the comparable period in 2008. In addition, we experienced an increase in general and administrative costs in 2009, primarily related to compensation costs (including stock-based compensation) and facility costs.
Net Investment Income
As a result of the $5.4 million increase in total investment income and the $3.1 million increase in expenses, net investment income for the nine months ended September 30, 2009 was $10.0 million compared to net investment income of $7.7 million during the nine months ended September 30, 2008. Net Decrease in Net Assets Resulting From Operations In the nine months ended September 30, 2009, we recorded net realized gains of $0.8 million, consisting primarily of i) a realized gain on the sale of one investment of $1.8 million and ii) a loss on the recapitalization of another investment of $0.9 million. During the nine months ended September 30, 2008, we recognized a realized gain on the sale of one investment totaling $0.1 million.
In the nine months ended September 30, 2009, we recorded net unrealized depreciation of investments in the amount of $15.0 million, comprised of net unrealized depreciation reclassification adjustments totaling $0.6 million related to i) the sale of one investment and ii) the recapitalization of another investment noted above, as well as unrealized depreciation on seventeen investments totaling $17.8 million and unrealized appreciation on eleven investments totaling $3.3 million. In the nine months ended September 30, 2008, we recorded net unrealized depreciation of investments in the amount of $1.4 million, comprised of unrealized appreciation on ten investments totaling $4.0 million and unrealized depreciation on thirteen investments totaling $5.4 million.
As a result of these events, our net decrease in net assets resulting from operations during the nine months ended September 30, 2009 was $4.2 million as compared to a net increase in net assets resulting from operations of $6.1 million for the nine months ended September 30, 2008. Liquidity and Capital Resources
We believe that our current cash and cash equivalents on hand, our available SBA leverage and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.
In the future, depending on the valuation of the Fund's assets pursuant to SBA guidelines, the Fund may be limited by provisions of the Small Business Investment Act of 1958, and SBA regulations governing SBICs, in making certain distributions to Triangle Capital Corporation that may be necessary to enable Triangle Capital Corporation to make the minimum required distributions to its stockholders and continue to qualify as a RIC. Cash Flows
For the nine months ended September 30, 2009, we experienced a net increase in cash and cash equivalents in the amount of $6.2 million. During that period, our operating activities used $11.3 million in cash, consisting primarily of purchases of investments totaling $27.9 million, offset by i) net investment income and ii) sales/repayments of portfolio investments of $9.3 million. In the nine months ended September 30, 2009, financing activities provided $17.6 million of cash, consisting of proceeds from our public stock offerings of $27.1 million, net of cash dividends and distributions to stockholders totaling $9.3 million. At September 30, 2009, we had $33.4 million of cash and cash equivalents on hand.
For the nine months ended September 30, 2008, we experienced a net decrease in cash and cash equivalents in the amount of $5.9 million. During that period, our operating activities used $58.2 million in cash, consisting primarily of new portfolio investments of $73.6 million, offset by repayments of loans received and proceeds from sales of investments of $9.1 million. We generated $52.3 million of cash from financing activities, consisting of proceeds from borrowings under SBA guaranteed debentures payable of $56.1 million and short-term borrowings of $5.1 million, partially offset by financing fees paid to the SBA of $2.3 million and cash

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dividends paid of $6.6 million. At September 30, 2008, we had $15.9 million of cash and cash equivalents on hand.
Financing Transactions
Due to the Fund's status as a licensed SBIC, the Fund has the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC (or group of SBICs under common control) can have outstanding at any time debentures guaranteed by the SBA in an amount up to three times the amount of its regulatory capital, which generally is the amount raised from private investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by the SBA issued by a single SBIC is currently $150.0 million. Debentures guaranteed by the SBA have a maturity of ten years, with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time. Debentures issued prior to September 2006 were subject to pre-payment penalties during their first five years. Those pre-payment penalties no longer apply to debentures issued after September 1, 2006.
In June 2009, the Fund received a new leverage commitment from the SBA which increased the Fund's ability to issue SBA guaranteed debentures up to the maximum statutory limit of $150.0 million. As of September 30, 2009, the Fund has $115.1 million of SBA guaranteed debentures outstanding. In addition to the one-time 1.0% fee on the total commitment from the SBA, the Company also pays a one-time 2.425% fee on the amount of each debenture issued. These fees are capitalized as deferred financing costs and are amortized over the term of the . . .