**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

** **

| **ý**                                | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                      |
| **FOR  THE QUARTER ENDED JUNE 30, 2003.** |
|                                      |
| **o**                                     | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**COMMISSIONFILE NUMBER: 814-00237**

 

**GLADSTONE CAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **MARYLAND**                                                   |   | **54-2040781**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**1616 ANDERSON ROAD, SUITE 208MCLEAN, VIRGINIA 22102**

(Address of principal executive office)

 

**(703) 286-7000**

(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý  No o.

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes ý  No o.

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.  Thenumber of shares of the issuer’s Common Stock, $0.001 par value, outstanding asof August 8, 2003 was 10,071,844.

 

 

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**GLADSTONECAPITAL CORPORATION**

**TABLEOF CONTENTS**

 
| PART I.    | FINANCIAL INFORMATION                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                             |
| Item 1.    | Financial  Statements (Unaudited)                                                                                |
|       |                                                                                                             |
|       | Consolidated Balance Sheets  as of June 30, 2003 and September 30, 2002                                          |
|       | Schedule  of Investments as of June 30, 2003 and September 30, 2002                                              |
|       | Consolidated  Statements of Operations for the three months ended June 30, 2003 and June  30, 2002               |
|       | Consolidated Statements of  Operations for the nine months ended June 30, 2003 and June 30, 2002                 |
|       | Consolidated  Statements of Stockholders’ Equity for the nine months ended June 30, 2003  and June 30, 2002 |
|       | Consolidated  Statements of Cash Flows for the nine months ended June 30, 2003 and June 30,  2002                |
|       | Financial  Highlights for the three and nine months ended June 30, 2003 and June 30,  2002                       |
|       | Notes to Consolidated  Financial Statements                                                                      |
|       |                                                                                                             |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |
|       |                                                                                                             |
|       | Overview                                                                                                         |
|       | Results  of Operations                                                                                           |
|       | Liquidity and Capital  Resources                                                                                 |
|       |                                                                                                             |
| Item  3.   | Quantitative  and Qualitative Disclosure About Market Risk                                                       |
|       |                                                                                                             |
| Item 4.    | Controls and  Procedures                                                                                         |
|       |                                                                                                             |
| PART  II.  | OTHER  INFORMATION                                                                                               |
|       |                                                                                                             |
| Item 1.    | Legal  Proceedings                                                                                               |
|       |                                                                                                             |
| Item 2.    | Changes in  Securities and Use of Proceeds                                                                       |
|       |                                                                                                             |
| Item 3.    | Defaults Upon Senior  Securities                                                                                 |
|       |                                                                                                             |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                             |
|       |                                                                                                             |
| Item 5.    | Other  Information                                                                                               |
|       |                                                                                                             |
| Item 6.    | Exhibits and Reports  on Form 8-K                                                                                |
|       |                                                                                                             |
| SIGNATURES |

 

2

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**PART I—FINANCIAL INFORMATION**

 

**GladstoneCapital Corporation**

 

**Consolidated FinancialStatements**

 

**(Unaudited)**

 

**June30, 2003**

 

**CONTENTS**

 
| Consolidated Balance Sheets                           |
|-------------------------------------------------------|
|                                                  |
| Schedule  of Investments                              |
|                                                  |
| Consolidated  Statements of Operations                |
|                                                  |
| Consolidated  Statements of Stockholders’ Equity |
|                                                  |
| Consolidated  Statements of Cash Flows                |
|                                                  |
| Financial  Highlights                                 |
|                                                  |
| Notes to Consolidated  Financial Statements           |

 

3

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**GLADSTONECAPITAL CORPORATION**

 

**CONSOLIDATED BALANCE SHEETS**

 

 
|                                                                                                       |   | **June 30,  2003** |        | **September 30,  2002** |       |
|------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|-------------------------|------------|
|                                                                                                       |   | **(Unaudited)**    | ** **  |                    | ** ** |
| **ASSETS**                                                                                                 |   |               |        |                    |       |
| Investments at fair value (Cost 6/30/2003: $104,977,557;  9/30/2002: $79,718,354)                          |   | $                  | 104,975,144 |                    | $          | 79,718,354 |   |
| Cash and cash equivalents                                                                                  |   | 27,066,673         |        | 51,930,529              |       |
| Cash and cash equivalents pledged as collateral                                                            |   | 65,006,677         |        | 39,998,799              |       |
| Interest receivable – investments in debt securities                                                  |   | 1,088,168          |        | 685,274                 |       |
| Interest receivable – cash and cash equivalents                                                       |   | —             |        | 4,389                   |       |
| Interest receivable – officers                                                                        |   | 109,736            |        | 109,874                 |       |
| Prepaid assets                                                                                             |   | 1,432,593          |        | 357,955                 |       |
| Other assets                                                                                               |   | 178,445            |        | 116,865                 |       |
|                                                                                                       |   |               |        |                    |       |
| **TOTAL ASSETS**                                                                                           |   | $                  | 199,857,436 |                    | $          | 172,922,039 |   |
|                                                                                                       |   |               |        |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                             |   |               |        |                    |       |
|                                                                                                       |   |               |        |                    |       |
| **LIABILITIES**                                                                                            |   |               |        |                    |       |
| Accounts payable                                                                                           |   | $                  | 330,269     |                    | $          | — |   |
| Dividends payable                                                                                          |   | 2,920,835          |        | 2,115,087               |       |
| Accrued expenses and deferred liabilities                                                                  |   | 1,547,310          |        | 944,960                 |       |
| Repurchase agreement                                                                                       |   | 63,706,000         |        | 39,198,719              |       |
|                                                                                                       |   |               |        |                    |       |
| **Total Liabilities**                                                                                      |   | $                  | 68,504,414  |                    | $          | 42,258,766 |   |
|                                                                                                       |   |               |        |                    |       |
| **STOCKHOLDERS’  EQUITY**                                                                             |   |               |        |                    |       |
| Common stock, $0.001 par value, 50,000,000 shares authorized and  10,071,844 shares issued and outstanding |   | $                  | 10,072      |                    | $          | 10,072 |   |
| Capital in excess of par value                                                                             |   | 140,266,684        |        | 140,266,684             |       |
| Notes receivable – officers                                                                           |   | (8,983,796         | )           | (8,983,796              | )          |
| Net unrealized depreciation on investments                                                                 |   | (2,413             | )           | —                  |       |
| Undistributed/(overdistributed) net investment income                                                      |   | 62,475             |        | (629,687                | )          |
|                                                                                                       |   |               |        |                    |       |
| **Total Stockholders’ Equity**                                                                        |   | $                  | 131,353,022 |                    | $          | 130,663,273 |   |
|                                                                                                       |   |               |        |                    |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                       |   | $                  | 199,857,436 |                    | $          | 172,922,039 |   |

 

SEE ACCOMPANYINGNOTES.

 

4

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**GLADSTONECAPITAL CORPORATION**

 

**SCHEDULE OF INVESTMENTS**

 

**ASOF JUNE 30, 2003**

 

**(UNAUDITED)**

 
| **COMPANY(1)**                                                                 |      | **INDUSTRY**                           |                        | **INVESTMENT**                           |       | **COST**         |        | **FAIR VALUE**   |   |
|--------------------------------------------------------------------------------|-----------|----------------------------------------|-----------------------------|------------------------------------------|------------|------------------|-------------|------------------|--------|
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| America’s Water  Heater Rentals, LLC                                      |      | Water heater  rentals and servicing    |                        | Senior Term Debt (2)(4)                  |       | $                | 12,000,000  |             | $      | 12,015,000 |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| ARI Holdings,  Inc.                                                            |      | Manufacturing  auto parts              |                        | Junior Subordinated Term Debt (3)        |       | 8,565,416        |        | 8,565,416        |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Coyne International Enterprises Corp.                                          |      | Industrial services                    |                        | Senior Term Debt  (2)(3)(4)              |       | 20,334,866       |        | 20,233,192       |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Finn Corporation                                                               |      | Manufacturing  landscape equipment     |                        | Senior  Subordinated Term Debt  (4) |       | 10,500,000  |        | 10,479,000  |   |
|                                                                           |      |                                   |                        | Common Stock  Warrants for 2% ownership  |       |             | 37,000      |             |   | 431,111 |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Fugate & Associates, Inc.                                                  |      | Imaging supplies                       |                        | Senior Term Debt                         |       | 2,000,000        |        | 2,000,000        |   |
|                                                                           |      |                                   |                        | Senior Term Debt                         |       | 3,500,000        |        | 3,500,000        |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Home Care  Supply, Inc.                                                        |      | Medical  equipment rental              | Senior Term Debt  (2)(4)(5) |                                     | 18,000,000 |             | 18,405,900  |             |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Inca Metal Products Corp.

Kingway Acquisition, Inc.

Clymer Acquisition, Inc. |      | Material handling and storage products |                        | Senior Term  Debt  (2)(4)           |       | 5,850,000        |        | 5,191,875        |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Kozy Shack Enterprises, Inc.                                                   |      | Food production  and sales             |                        | Senior Term Debt  (2)(4)                 |       | 2,400,000        |        | 2,406,000        |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Marcal Paper  Mills, Inc.                                                      |      | Manufacturing paper products           |                        | Senior  Subordinated Term Debt (2)(4)    |       | 7,150,000        |        | 7,114,250        |   |
|                                                                           |      |                                   |                        | First Mortgage  Debt (3)                 |       | 9,140,275        |        | 9,140,275        |   |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Wing Stop Restaurants International, Inc.                                      |      | Restaurant – fast food            |                        | Senior Term Debt  (4)                    |       | 2,000,000        |        | 1,997,500        |   |
| Senior Term Debt  (4)                                                          | 3,500,000 | 3,495,625                              |
|                                                                           |      |                                   |                        |                                     |       |             |        |             |   |
| Totals                                                                         |      |                                   |                        |                                     |       | $                | 104,977,557 |             | $      | 104,975,144 |   |

 

----

(1) We do not“Control,” and are not an “Affiliate” of, any of our portfolio companies, eachas defined in the Investment Company Act of 1940, as amended (the “1940 Act”).In general, under the 1940 Act, we would “Control” a portfolio company if weowned 25% or more of its voting securities and would be an “Affiliate” of aportfolio company if we owned 5% or more of its voting securities.

(2) Last OutTranche of senior debt, meaning if the company is liquidated then the holder ofthe Last Out Tranche is paid after the senior debt.

(3) Has some paidin kind (PIK) interest.  Refer to Note 2“Summary of Significant Accounting Policies” of Form 10-K for the fiscal yearended September 30, 2002.

(4) Fair value wasbased on valuation prepared and provided by Standard & Poor’s LoanEvaluation Services.

(5) Includes asuccess fee with a fair value of $473,400.

 

SEE ACCOMPANYINGNOTES.

 

5

----

 

**GLADSTONECAPITAL CORPORATION**

 

**SCHEDULE OF INVESTMENTS**

 

**ASOF SEPTEMBER 30, 2002**

 

 
| **COMPANY(1)**                        |   | **INDUSTRY**                             |   | **INVESTMENT**                         |   | **COST**         |       | **FAIR VALUE**   |   |
|---------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|------------------|------------|------------------|--------|
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| ARI Holdings, Inc.                    |   | Manufacturing  auto parts                |   | Junior Subordinated Term Debt (3)      |   | $                | 8,250,803  |             | $      | 8,250,803 |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |   |   |
| Coyne International Enterprises Corp. |   | Uniform cleaning and rental              |   | Senior Term Debt  (2)(3)               |   | 16,054,268       |       | 16,054,268       |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Finn Corporation                      |   | Manufacturing landscape equipment        |   | Senior Subordinated Term Debt          |   | 10,500,000  |       | 10,500,000  |   |
|                                  |   |                                     |   | Common Stock Warrants for 2% ownership |   | 37,000           |       | 37,000           |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Home Care Supply, Inc.                |   | Medical  equipment rental                |   | Senior Term Debt  (2)                  |   | 18,000,000       |       | 18,000,000       |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Inca Metal Products Corporation       |   | Manufacturing material handling products |   | Senior Term Debt  (2)                  |   | 6,000,000        |       | 6,000,000        |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Kozy Shack Enterprises, Inc.          |   | Food production  and sales               |   | Senior Term Debt  (2)                  |   | 4,300,000        |       | 4,300,000        |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Marcal Paper Mills, Inc.              |   | Manufacturing paper products             |   | Senior Term Debt  (2)                  |   | 7,500,000        |       | 7,500,000        |   |
|                                  |   |                                     |   | First Mortgage  Debt (3)               |   | 9,076,283        |       | 9,076,283        |   |
|                                  |   |                                     |   |                                   |   |             |       |             |   |
| Totals                                |   |                                     |   |                                   |   | $                | 79,718,354 |             | $      | 79,718,354 |   |

 

----

(1)  We do not “Control,” and are not an“Affiliate” of, any of our portfolio companies, each as defined in theInvestment Company Act of 1940, as amended (the “1940 Act”). In general, underthe 1940 Act, we would “Control” a portfolio company if we owned 25% or more ofits voting securities and would be an “Affiliate” of a portfolio company if weowned 5% or more of its voting securities.

(2) Last OutTranche of senior debt, meaning if the company is liquidated then the holder ofthe Last Out Tranche is paid after the senior debt.

(3) Has some paidin kind (PIK) interest. Refer to Note 2 “Summary of Significant AccountingPolicies” of Form 10-K for the fiscal year ended September 30, 2002.

 

SEE ACCOMPANYINGNOTES.

 

6

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**GLADSTONECAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENT OFOPERATIONS**

 

**(UNAUDITED)**

 
|                                                                                      |   | **Three Months Ended  June 30, 2003** |      | **Three Months Ended  June 30, 2002** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|---------------------------------------|--------|
| **INVESTMENT INCOME**                                                                     |   |                                  |      |                                  |   |
| Interest income – investments                                                        |   | $                                     | 3,684,284 |                                  | $      | 1,808,834 |   |
| Interest income – cash and cash equivalents                                          |   | 79,073                                |      | 351,726                               |   |
| Interest income – notes receivable from officers                                     |   | 109,737                               |      | 108,691                               |   |
| Managerial assistance fees                                                                |   | 125,000                               |      | 645,898                               |   |
| Other income                                                                              |   | 61,650                                |      | —                                |   |
| Total Investment Income                                                                   |   | $                                     | 4,059,744 |                                  | $      | 2,915,149 |   |
|                                                                                      |   |                                  |      |                                  |   |
| **EXPENSES**                                                                              |   |                                  |      |                                  |   |
| Salaries and benefits                                                                     |   | $                                     | 493,901   |                                  | $      | 364,253 |   |
| Rent                                                                                      |   | 54,899                                |      | 36,095                                |   |
| Professional fees                                                                         |   | 101,211                               |      | 119,322                               |   |
| Directors fees                                                                            |   | 20,290                                |      | 7,000                                 |   |
| Insurance                                                                                 |   | 71,883                                |      | 49,802                                |   |
| Stockholder related costs                                                                 |   | 12,227                                |      | 7,210                                 |   |
| Financing fees                                                                            |   | 62,355                                |      | —                                |   |
| General and administrative                                                                |   | 127,242                               |      | 106,893                               |   |
| Total Expenses                                                                            |   | $                                     | 944,008   |                                  | $      | 690,575 |   |
|                                                                                      |   |                                  |      |                                  |   |
| **NET INVESTMENT INCOME**                                                                 |   | $                                     | 3,115,736 |                                  | $      | 2,224,574 |   |
|                                                                                      |   |                                  |      |                                  |   |
| Net unrealized depreciation on investments                                                |   | (744,837)                             |      | —                                |   |
|                                                                                      |   |                                  |      |                                  |   |
| **NET  INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS**                  |   | $                                     | 2,370,899 |                                  | $      | 2,224,574 |   |
|                                                                                      |   |                                  |      |                                  |   |
| **NET  INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE** |   |                                  |      |                                  |   |
| Basic                                                                                     |   | $                                     | 0.24      |                                  | $      | 0.22 |   |
| Diluted                                                                                   |   | $                                     | 0.23      |                                  | $      | 0.22 |   |
|                                                                                      |   |                                  |      |                                  |   |
| **WEIGHTED  AVERAGE SHARES OF COMMON STOCK OUTSTANDING**                                  |   |                                  |      |                                  |   |
| Basic                                                                                     |   | 10,071,844                            |      | 10,071,844                            |   |
| Diluted                                                                                   |   | 10,256,790                            |      | 10,201,052                            |   |

 

SEE ACCOMPANYINGNOTES.

 

7

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**GLADSTONECAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENT OF****OPERATIONS**

 

**(UNAUDITED)**

 
|                                                                                      |   | **Nine Months Ended  June 30, 2003** |       | **Nine Months Ended  June 30, 2002** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|--------|
| **INVESTMENT INCOME**                                                                     |   |                                 |       |                                 |   |
| Interest income – investments                                                        |   | $                                    | 9,887,909  |                                 | $      | 3,735,461 |   |
| Interest income – cash and cash equivalents                                          |   | 390,577                              |       | 1,360,811                            |   |
| Interest income – notes receivable from officers                                     |   | 329,078                              |       | 323,518                              |   |
| Managerial assistance fees                                                                |   | 483,000                              |       | 1,286,809                            |   |
| Other income                                                                              |   | 63,906                               |       | 47,500                               |   |
| Total Investment Income                                                                   |   | $                                    | 11,154,470 |                                 | $      | 6,754,099 |   |
|                                                                                      |   |                                 |       |                                 |   |
| **EXPENSES**                                                                              |   |                                 |       |                                 |   |
| Salaries and benefits                                                                     |   | $                                    | 1,405,002  |                                 | $      | 968,595 |   |
| Rent                                                                                      |   | 164,044                              |       | 83,375                               |   |
| Professional fees                                                                         |   | 302,478                              |       | 334,804                              |   |
| Directors fees                                                                            |   | 54,647                               |       | 14,000                               |   |
| Insurance                                                                                 |   | 216,724                              |       | 147,466                              |   |
| Stockholder related costs                                                                 |   | 123,659                              |       | 78,472                               |   |
| Financing fees                                                                            |   | 62,355                               |       | —                               |   |
| General and administrative                                                                |   | 378,079                              |       | 297,351                              |   |
| Total Expenses                                                                            |   | $                                    | 2,706,988  |                                 | $      | 1,924,063 |   |
|                                                                                      |   |                                 |       |                                 |   |
| **NET INVESTMENT INCOME**                                                                 |   | $                                    | 8,447,482  |                                 | $      | 4,830,036 |   |
|                                                                                      |   |                                 |       |                                 |   |
| Net unrealized depreciation on investments                                                |   | (2,413)                              |       | —                               |   |
|                                                                                      |   |                                 |       |                                 |   |
| **NET  INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS**                  |   | $                                    | 8,445,069  |                                 | $      | 4,830,036 |   |
|                                                                                      |   |                                 |       |                                 |   |
| **NET  INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER COMMON SHARE** |   |                                 |       |                                 |   |
| Basic                                                                                     |   | $                                    | 0.84       |                                 | $      | 0.48 |   |
| Diluted                                                                                   |   | $                                    | 0.83       |                                 | $      | 0.47 |   |
|                                                                                      |   |                                 |       |                                 |   |
| **WEIGHTED  AVERAGE SHARES OF COMMON STOCK OUTSTANDING**                                  |   |                                 |       |                                 |   |
| Basic                                                                                     |   | 10,071,844                           |       | 10,071,844                           |   |
| Diluted                                                                                   |   | 10,160,350                           |       | 10,176,944                           |   |
|                                                                                           |        |                                      |            |                                      |        |  |  |  |

 

SEE ACCOMPANYINGNOTES.

 

8

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**GLADSTONECAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

 

**(UNAUDITED)**

 
|                                                       |       | **Common Stock** |       | **Capital in  Excess of  Par Value** |   | **Notes  Receivable   From Sale of   Common   Stock** |   | **Un/(Over)   Distributed Net   Investment   Income** |   | **Unrealized   Appreciation   (Depreciation)  of Investments** |       | **Total   Stockholders’   Equity** |   |
|------------------------------------------------------------|------------|------------------|------------|--------------------------------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------|--------|----------------------------------------------------------------|------------|-----------------------------------------|--------|
|                                                       |       |             |       |                                 |   |                                                  |
|                                                       |       |             |       |                                 |   |                                                  |
|                                                       |       |             |       |                                 |   |                                                  |
|                                                       | **Shares** |             | **Amount** |                                 |   |                                                  |   |                                                  |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| For the Nine Months Ended June  30, 2002:                  |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Balance at September 30, 2001                              |       | 10,060,178       |       | $                                    | 10,060 |                                                  | $      | 140,131,778                                           |   | $                                                              | (8,800,050 | )                                       | $      | (92,644 | ) | $ | — |   | $ | 131,249,144 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Employee Stock Option Exercise                             |       | 11,666           |       | 12                                   |   | 185,878                                               |   | (185,890                                              | )      |                                                           |       |                                    |   | — |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Offering Costs                                             |       |             |       |                                 |   | (50,972                                               | )      |                                                  |   |                                                           |       |                                    |   | (50,972 | ) |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Repayment of Principal on Notes  Receivable                |       |             |       |                                 |   |                                                  |   | 1,485                                                 |   |                                                           |       |                                    |   | 1,485 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Net Investment Income                                      |       |             |       |                                 |   |                                                  |   |                                                  |   | 4,830,036                                                      |       |                                    |   | 4,830,036 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Net Unrealized Appreciation  (Depreciation) of Investments |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       | —                                  |   | — |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Distributions Declared ($0.60 per  common share)           |       |             |       |                                 |   |                                                  |   |                                                  |   | (6,038,557                                                     | )          |                                    |   | (6,038,557 | ) |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Balance at June 30, 2002                                   |       | 10,071,844       |       | $                                    | 10,072 |                                                  | $      | 140,266,684                                           |   | $                                                              | (8,984,455 | )                                       | $      | (1,301,165 | ) | $ | — |   | $ | 129,991,136 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| For the Nine Months Ended June  30, 2003:                  |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Balance at September 30, 2002                              |       | 10,071,844       |       | $                                    | 10,072 |                                                  | $      | 140,266,684                                           |   | $                                                              | (8,983,796 | )                                       | $      | (629,687 | ) | $ | — |   | $ | 130,663,273 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Net Investment Income                                      |       |             |       |                                 |   |                                                  |   |                                                  |   | 8,447,482                                                      |       |                                    |   | 8,447,482 |   |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Net Unrealized Depreciation of  Investments                |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       | (2,413                                  | )      | (2,413 | ) |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Distributions Declared ($0.77 per  common share)           |       |             |       |                                 |   |                                                  |   |                                                  |   | (7,755,320                                                     | )          |                                    |   | (7,755,320 | ) |
|                                                       |       |             |       |                                 |   |                                                  |   |                                                  |   |                                                           |       |                                    |   |   |   |
| Balance at June 30, 2003                                   |       | 10,071,844       |       | $                                    | 10,072 |                                                  | $      | 140,266,684                                           |   | $                                                              | (8,983,796 | )                                       | $      | 62,475 |   | $ | (2,413 | ) | $ | 131,353,022 |   |

 

SEE ACCOMPANYINGNOTES.

 

9

----

 

**GLADSTONECAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENT OFCASH FLOWS**

 

**(UNAUDITED)**

 
|                                                                                                                                                   |   | **Nine Months   Ended  June 30, 2003** |       | **Nine Months  Ended  June 30, 2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                                                                              |   |                                   |       |                                  |   |
| Net increase in stockholders’ equity resulting from operations                                                                                    |   | $                                      | 8,445,069  |                                  | $      | 4,830,036 |   |
| Adjustments to reconcile net increase in stockholders’ equity  resulting from operations to net cash provided by (used in) operating  activities: |   |                                   |       |                                  |   |
| Depreciation                                                                                                                                           |   | 21,236                                 |       | —                                |   |
| Net unrealized depreciation                                                                                                                            |   | 2,413                                  |       | —                                |   |
| Increase in interest receivable                                                                                                                        |   | (398,367                               | )          | (591,034                              | )      |
| Increase in other assets                                                                                                                               |   | (1,686                                 | )          | (206,730                              | )      |
| Increase in accrued expenses and deferred liabilities                                                                                                  |   | 602,350                                |       | 93,679                                |   |
| Decrease in prepaid assets                                                                                                                             |   | 77,355                                 |       | 119,480                               |   |
| Increase in accounts payable                                                                                                                           |   | 330,269                                |       | 160,524                               |   |
| Increase in investment balance due to payment in kind interest                                                                                         |   | (659,203                               | )          | (220,786                              | )      |
| Net Cash Provided by Operating Activities                                                                                                              |   | $                                      | 8,419,436  |                                  | $      | 4,185,169 |   |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                                                                              |   |                                   |       |                                  |   |
| Purchase of furniture and equipment                                                                                                                    |   | $                                      | (81,127    | )                                     | $      | — |   |
| Purchase of investments                                                                                                                                |   | (27,000,000                            | )          | (65,787,389                           | )      |
| Principal repayments on investments                                                                                                                    |   | 2,400,000                              |       | —                                |   |
| Proceeds from repurchase agreements                                                                                                                    |   | 166,621,973                            |       | 4,900,000                             |   |
| Repayment of repurchase agreements                                                                                                                     |   | (142,114,693                           | )          | —                                |   |
| Increase in other liabilities                                                                                                                          |   | —                                 |       | 98,596                                |   |
| Net Cash (Used in) Investing Activities                                                                                                                |   | $                                      | (173,847   | )                                     | $      | (60,788,793 | ) |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                                                              |   |                                   |       |                                  |   |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| Offering costs                                                                                                                                         |   | $                                      | —     |                                  | $      | (50,971 | ) |
| Prepaid financing fees                                                                                                                                 |   | (1,151,993                             | )          | —                                |   |
| Increase (decrease) in accrued offering costs                                                                                                          |   | —                                 |       | (590,382                              | )      |
| Repayment of principal on notes receivable --officers                                                                                                  |   | —                                 |       | 1,485                                 |   |
| Distributions paid                                                                                                                                     |   | (6,949,574                             | )          | (3,923,471                            | )      |
| Net Cash (Used in) Financing Activities                                                                                                                |   | $                                      | (8,101,567 | )                                     | $      | (4,563,339 | ) |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                                                                              |   | $                                      | 144,022    |                                  | $      | (61,166,963 | ) |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD (1)**                                                                                                |   | $                                      | 91,929,328 |                                  | $      | 131,824,080 |   |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD (Note 9)**                                                                                                 |   | $                                      | 92,073,350 |                                  | $      | 70,657,117 |   |
|                                                                                                                                                   |   |                                   |       |                                  |   |
| **NON-CASH  FINANCING ACTIVITIES**                                                                                                                     |   |                                   |       |                                  |   |
| Notes receivable issued in exchange for common stock associated  with the exercise of employee stock options                                           |   | $                                      | —     |                                  | $      | 185,890 |   |

 

----

(1)  Cash and cash equivalents consist of demanddeposits and highly liquid investments with original maturities of three monthsor less.

 

SEE ACCOMPANYINGNOTES.

 

10

----

 

**GLADSTONECAPITAL CORPORATION**

 

**FINANCIAL HIGHLIGHTS**

 

**(UNAUDITED)**

 
|                                                                    |   | **Three Months  Ended June 30, 2003** |        | **Three Months  Ended June 30, 2002** |   |
|-------------------------------------------------------------------------|--------|---------------------------------------|-------------|---------------------------------------|--------|
| Per Share  Data(1)                                                      |   |                                  |        |                                  |   |
| Net asset value  at beginning of period                                 |   | $                                     | 13.09       |                                  | $      | 12.91 |   |
| Net investment income                                                   |   | 0.31                                  |        | 0.22                                  |   |
| Net unrealized (loss)/gain on investments                               |   | (0.07                                 | )           | 0                                     |   |
| Distributions from net investment income                                |   | (0.29                                 | )           | (0.21                                 | )      |
| Net asset value at end of period                                        |   | $                                     | 13.04       |                                  | $      | 12.92 |   |
|                                                                    |   |                                  |        |                                  |   |
| Per share market value at beginning of period                           |   | $                                     | 16.18       |                                  | $      | 17.80 |   |
| Per share market value at end of period                                 |   | 20.48                                 |        | 18.05                                 |   |
| Total Return(2)(3)                                                      |   | 28.37                                 | %           | 2.58                                  | %      |
| Shares outstanding at end of period                                     |   | 10,071,844                            |        | 10,071,844                            |   |
|                                                                    |   |                                  |        |                                  |   |
| Ratios/Supplemental  Data                                               |   |                                  |        |                                  |   |
| Net assets at end of period                                             |   | $                                     | 131,353,022 |                                  | $      | 129,991,136 |   |
| Average net  assets                                                     |   | $                                     | 132,823,516 |                                  | $      | 130,560,626 |   |
| Ratio of  operating expenses to average net assets – annualized    |   | 2.86                                  | %           | 2.12                                  | %      |
| Ratio of net  investment income to average net assets – annualized |   | 7.18                                  | %           | 6.82                                  | %      |

 

 
|                                                                    |   | **Nine Months  Ended June 30, 2003** |        | **Nine Months  Ended June 30, 2002** |   |
|-------------------------------------------------------------------------|--------|--------------------------------------|-------------|--------------------------------------|--------|
| Per Share Data(1)                                                       |   |                                 |        |                                 |   |
| Net asset value  at beginning of period                                 |   | $                                    | 12.97       |                                 | $      | 13.05 |   |
| Net investment income                                                   |   | 0.84                                 |        | 0.48                                 |   |
| Net unrealized (loss)/gain on investments                               |   | 0                                    |        | 0                                    |   |
| Distributions from net investment income                                |   | (0.77                                | )           | (0.60                                | )      |
| Offering costs                                                          |   | 0                                    |        | (0.01                                | )      |
| Effect of anti-dilution                                                 |   | 0                                    |        | (0.01                                | )      |
| Net asset value at end of period                                        |   | $                                    | 13.04       |                                 | $      | 12.91 |   |
|                                                                    |   |                                 |        |                                 |   |
| Per share market value at beginning of period                           |   | $                                    | 16.88       |                                 | $      | 16.38 |   |
| Per share market value at end of period                                 |   | 20.48                                |        | 18.05                                |   |
| Total Return(2)(3)                                                      |   | 25.89                                | %           | 13.86                                | %      |
| Shares outstanding at end of period                                     |   | 10,071,844                           |        | 10,071,844                           |   |
|                                                                    |   |                                 |        |                                 |   |
| Ratios/Supplemental  Data                                               |   |                                 |        |                                 |   |
| Net assets at end of period                                             |   | $                                    | 131,353,022 |                                 | $      | 129,991,136 |   |
| Average net assets                                                      |   | $                                    | 132,170,641 |                                 | $      | 130,888,323 |   |
| Ratio of  operating expenses to average net assets – annualized    |   | 2.74                                 | %           | 1.96                                 | %      |
| Ratio of net  investment income to average net assets – annualized |   | 8.54                                 | %           | 4.92                                 | %      |

 

----

(1)   Basic per share data.

(2)   Amounts were notannualized for the results of the three and nine month periods ended June 30,2003 and June 30, 2002.

(3)   Total return equals thechange of the ending market value over the beginning market value plusdistributions divided by the beginning market value.

 

SEE ACCOMPANYINGNOTES**.**

 

11

----

 

**GLADSTONECAPITAL CORPORATION**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**JUNE30, 2003**

 

**(UNAUDITED)**

 

NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS

 

Interim financial statements of Gladstone CapitalCorporation (the “Company”) are prepared in accordance with generally acceptedaccounting principles (“GAAP”) for interim financial information and pursuantto the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain disclosuresaccompanying annual financial statements prepared in accordance with GAAP areomitted.  In the opinion of management,all adjustments, consisting solely of normal recurring accruals, necessary forthe fair statement of financial statements for the interim periods have beenincluded.  Certain prior period amountshave been reclassified to conform to current year presentation.  The current period’s results of operationsare not necessarily indicative of results that ultimately may be achieved forthe year.  The interim financialstatements and notes thereto should be read in conjunction with the financialstatements and notes thereto included in the Company’s Form 10-K for the fiscalyear ended September 30, 2002, as filed with the Securities and ExchangeCommission.

 

NOTE 2. ORGANIZATION

 

The Company was incorporated under the GeneralCorporation Laws of the State of Maryland on May 30, 2001 as a closed-endinvestment company.  The Company haselected to be treated as a business development company, or BDC, under theInvestment Company Act of 1940, as amended (the “1940 Act”).  In addition, the Company has elected to betreated for tax purposes as a regulated investment company, or RIC, under theInternal Revenue Code of 1986, as amended (the “Code”).  The Company’s investment objectives are toachieve a high level of current income by investing in debt and equitysecurities of established private businesses.

 

Gladstone Advisers, Inc., a wholly-owned subsidiary ofthe Company, conducts the daily administrative operations of the Company.  The financial statements of this subsidiaryare consolidated with those of the Company.

 

Gladstone Business Loan LLC, a wholly-owned subsidiaryof the Company, was established on February 3, 2003 for the purpose of owningthe Company’s portfolio of loan investments. The financial statements of the subsidiary are consolidated with thoseof the Company.

 

12

----

 

NOTE 3. STOCK OPTIONS

 

In December 2002, the Financial Accounting StandardsBoard (FASB) approved the issuance of Statement of Financial AccountingStandards (SFAS) Statement No. 148 “Accounting for Stock-Based Compensation –Transition and Disclosure”.  Thestatement amended SFAS Statement No. 123 “Accounting for Stock-BasedCompensation” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock based employeecompensation.  Furthermore, SFAS No. 148amended the disclosure requirements of SFAS No. 123 to require more prominentdisclosures in both annual and interim financial statements about the methodand related effect on results of accounting for stock-based employeecompensation, effective for fiscal year and interim periods beginning afterDecember 15, 2002.

 

The following tables set forth the pro-forma effect offair value option accounting for the three and nine months ended June 30, 2003and June 30, 2002:

 
|                                                                                                              |   | **Three  Months  Ended June 30,  2003** |      | **Three  Months  Ended June 30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|-----------------------------------------|--------|
|                                                                                                              |   |                                    |      |                                    |   |
| Increase in stockholders’ equity from operations, as reported                                                |   | $                                       | 2,370,899 |                                    | $      | 2,224,574 |   |
|                                                                                                              |   |                                    |      |                                    |   |
| Deduct:  total stock-based  employee compensation expense determined under fair value method for all  awards |   | (684,573                                | )         | (24,875                                 | )      |
|                                                                                                              |   |                                    |      |                                    |   |
| Pro-forma increase in stockholders’ equity from  operations                                                  |   | $                                       | 1,686,326 |                                    | $      | 2,199,699 |   |
|                                                                                                              |   |                                    |      |                                    |   |
| Increase in stockholders’ equity from operations per share                                                   |   |                                    |      |                                    |   |
| Basic, as reported                                                                                                |   | $                                       | 0.24      |                                    | $      | 0.22 |   |
| Basic, pro-forma                                                                                                  |   | $                                       | 0.17      |                                    | $      | 0.22 |   |
|                                                                                                              |   |                                    |      |                                    |   |
| Diluted, as reported                                                                                              |   | $                                       | 0.23      |                                    | $      | 0.22 |   |
| Diluted, pro-forma                                                                                                |   | $                                       | 0.16      |                                    | $      | 0.22 |   |
|                                                                                                                   |        |                                         |           |                                         |        |  |  |  |  |  |

 

 
|                                                                                                              |   | **Nine  Months  Ended June 30,  2003** |      | **Nine  Months  Ended June 30,  2002** |    |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|----------------------------------------|---------|
|                                                                                                              |   |                                   |      |                                   |    |
| Increase in stockholders’ equity from operations, as reported                                                |   | $                                      | 8,445,069 |                                   | $       | 4,830,036 |   |
|                                                                                                              |   |                                   |      |                                   |    |
| Deduct:  total stock-based  employee compensation expense determined under fair value method for all  awards |   | (2,053,718                             | )         | (8,292                                 | )  |
|                                                                                                              |   |                                   |      |                                   |    |
| Pro-forma increase in stockholders’ equity from  operations                                                  |   | $                                      | 6,391,351 |                                   | $       | 4,821,744 |   |
|                                                                                                              |   |                                   |      |                                   |    |
| Increase in stockholders’ equity from operations per share                                                   |   |                                   |      |                                   |    |
| Basic, as reported                                                                                                |   | $                                      | 0.84      |                                   | $       | 0.48 |   |
| Basic, pro-forma                                                                                                  |   | $                                      | 0.63      |                                   | $       | 0.48 |   |
|                                                                                                              |   |                                   |      |                                   |    |
| Diluted, as reported                                                                                              |   | $                                      | 0.83      |                                   | $       | 0.47 |   |
| Diluted, pro-forma                                                                                                |   | $                                      | 0.63      |                                   | $       | 0.48 |   |

 

13

----

 

NOTE 4. INCREASE IN STOCKHOLDERS’ EQUITY FROM OPERATIONS PER SHARE

 

The following tables set forth the computation ofbasic and diluted increasein stockholders’ equity from operations per share for the three and ninemonths ended June 30, 2003 and June 30, 2002:

 
|                                                                                             |   | **Three  Months  Ended June 30,  2003** |      | **Three  Months  Ended June 30,  2002** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|-----------------------------------------|--------|
|                                                                                             |   |                                    |      |                                    |   |
| Numerator for basic and diluted increase in stockholders’ equity from  operations per share |   | $                                       | 2,370,899 |                                    | $      | 2,224,574 |   |
|                                                                                             |   |                                    |      |                                    |   |
| Denominator for basic weighted average shares                                                    |   | 10,071,844                              |      | 10,071,844                              |   |
|                                                                                             |   |                                    |      |                                    |   |
| Dilutive potential shares                                                                        |   | 184,946                                 |      | 129,208                                 |   |
|                                                                                             |   |                                    |      |                                    |   |
| Denominator for diluted weighted average shares                                                  |   | 10,256,790                              |      | 10,201,052                              |   |
|                                                                                             |   |                                    |      |                                    |   |
| Employee stock options                                                                           |   | 931,664                                 |      | 711,664                                 |   |
|                                                                                             |   |                                    |      |                                    |   |
| Basic net increase in stockholders’ equity from operations per common  share                |   | 0.24                                    |      | 0.22                                    |   |
| Diluted net increase in stockholders’ equity from operations per  common share              |   | 0.23                                    |      | 0.22                                    |   |
|                                                                                                  |        |                                         |           |                                         |        |  |  |

 

 
|                                                                                             |   | **Nine  Months  Ended June 30,  2003** |      | **Nine  Months  Ended June 30,  2002** |   |
|--------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|----------------------------------------|--------|
|                                                                                             |   |                                   |      |                                   |   |
| Numerator for basic and diluted increase in stockholders’ equity from  operations per share |   | $                                      | 8,445,069 |                                   | $      | 4,830,036 |   |
|                                                                                             |   |                                   |      |                                   |   |
| Denominator for basic weighted average shares                                                    |   | 10,071,844                             |      | 10,071,844                             |   |
|                                                                                             |   |                                   |      |                                   |   |
| Dilutive potential shares                                                                        |   | 88,506                                 |      | 105,100                                |   |
|                                                                                             |   |                                   |      |                                   |   |
| Denominator for diluted weighted average shares                                                  |   | 10,160,350                             |      | 10,176,944                             |   |
|                                                                                             |   |                                   |      |                                   |   |
| Employee stock options                                                                           |   | 931,664                                |      | 711,664                                |   |
|                                                                                             |   |                                   |      |                                   |   |
| Basic net increase in stockholders’ equity from operations per common  share                |   | 0.84                                   |      | 0.48                                   |   |
| Diluted net increase in stockholders’ equity from operations per  common share              |   | 0.83                                   |      | 0.47                                   |   |
|                                                                                                  |        |                                        |           |                                        |        |  |  |

 

14

----

 

NOTE 5. DIVIDENDS

 

The Company is required to pay out as a dividend 90%of its ordinary income and short-term capital gains for each taxable year inorder to maintain its status as a RIC under Subtitle A, Chapter 1 of SubchapterM of the Code.  It is the policy of theCompany to pay out as a dividend up to 100% of those amounts.  The amount to be paid out as a dividend isdetermined by the Board of Directors each quarter and is based on the annualearnings estimated by the management of the Company.  Based on that estimate, a dividend is declared each quarter.  At year-end the Company may pay a bonusdividend, in addition to the quarterly dividends, to ensure that it has paidout at least 90% of its ordinary income and short-term capital gains for theyear.  The Company has a policy ofretaining long-term capital gains, if any, and not paying them out asdividends.

 

On July 7, 2003, The Company paid a dividend of $0.29per share on its common stock to stockholders of record as of June 30,2003.  On April 7, 2003, the Companypaid a dividend of $0.25 per share on its common stock to stockholders of recordas of March 31, 2003 and on January 7, 2003, the Company paid a dividend of$0.23 per share on its common stock to its stockholders of record as ofDecember 31, 2002.  On July 8, 2002, theCompany paid a dividend of $0.21 per share on its common stock to stockholdersof record as of June 28, 2002.  On April8, 2002, the Company paid a dividend of $0.21 per share on its common stock toits stockholders of record as of March 28, 2002 and on January 15, 2002, theCompany paid a dividend of $0.18 per share on its common stock to itsstockholders of record as of December 31, 2001.

 

NOTE 6. INVESTMENT VALUATION

 

The Company carries its investments at fair value, asdetermined by its Board of Directors. Securities that are publicly traded are valued at the closing price onthe valuation date.  Debt and equitysecurities that are not publicly traded are valued at fair value as determinedin good faith by the Board of Directors. Beginning in March 2003, the Companyengaged Standard & Poor’s Loan Evaluation Service (S&P) to performindependent valuations of its investments. The Board of Directors uses the recommended valuations as prepared byS&P as a component of the foundation for the final fair valuedetermination.  In making suchdetermination, the Board of Directors values non-convertible debt securities atcost plus amortized original issue discount plus PIK interest, if any, unlessadverse factors lead to a determination of a lesser valuation.  In valuing convertible debt, equity, successfees or other equity like securities, the Board of Directors determines thefair value based on the collateral, the issuer’s ability to make payments, theearnings of the issuer, sales to third parties of similar securities, thecomparison to publicly traded securities, discounted cash flow and otherpertinent factors.  Due to theuncertainty inherent in the valuation process, such estimates of fair value maydiffer significantly from the values that would have resulted had a readymarket for the securities existed, and the differences could be material.Additionally, changes in the market environment and other events that may occurover the life of the investments may cause the gains ultimately realized onthese investments to be different than the valuation currently assigned.

 

NOTE 7. LOAN AND MANAGERIAL ASSISTANCE FEES

 

The 1940 Act requires that a business developmentcompany make available managerial assistance to its portfolio companies.  The Company provides managerial assistanceto its portfolio companies through its wholly-owned subsidiary, GladstoneAdvisers, Inc.  The Company receives feeincome for managerial assistance it renders to portfolio companies inconnection with its investments.  Suchfees are normally paid at the closing of the Company’s investments and aregenerally non-recurring.  These managerialassistance services vary by investment, but generally consist of reviewingexisting credit facilities, arranging bank financing, arranging equityfinancing, structuring financing from multiple lenders, structuring financingfrom equity investors, restructuring existing loans, raising equity and debtcapital, and providing general financial advice.  These fees totaled $125,000 for the three months ended June 30,2003 and $483,000 for the nine months ended June 30, 2003, $645,898 for thethree months ended June 30, 2002 and $1,286,809 for the nine months ended June30, 2002.

 

From time to time, the Company will be invited toparticipate as a co-lender in a transaction. Where the Company does not provide significant managerial assistanceservices in connection with its investment, loan fees paid to the Company insuch situations will be deferred and amortized over the life of the loan.

 

15

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NOTE 8. PAYMENT IN KIND INTEREST

 

The Company has loans in its portfolio, which containa payment in kind (“PIK”) provision. The PIK interest is added to the principalbalance of the loan and recorded as income. To maintain the Company’s status as a RIC (as discussed in Note 5, above),this non-cash source of income must be paid out to stockholders in the form ofdividends, even though the Company has not yet collected the cash. For thethree months ended June 30, 2003 and June 30, 2002, the Company recorded PIKincome of $232,572 and $124,280 respectively and for the nine months ended June30, 2003 and June 30, 2002, PIK income of $667,648 and $254,738respectively.  At June 30, 2003 andSeptember 30, 2002 the Company had accrued on its balance sheet, a total in PIKincome of $1,052,084 and $400,490 respectively.  The Company does not have any original issue discount income.

 

 

NOTE 9. REPURCHASE AGREEMENT

 

A repurchase agreement involves the purchase by aninvestor, such as the Company, of a specified security and the simultaneousagreement by the seller to repurchase it at an agreed upon future date and at aprice which is greater than the purchase price by an amount that reflects anagreed-upon interest rate. Such interest rate is effective for the period oftime during which the investor’s money is invested in the arrangement and isrelated to current market interest rates rather than the coupon rate on thepurchased security. The Company requires the continual maintenance by itscustodian or the correspondent in its account with the Federal Reserve/TreasuryBook Entry System of underlying securities in an amount at least equal to therepurchase price. If the seller were to default on its repurchase obligation,the Company might suffer a loss to the extent that the proceeds from the saleof the underlying securities were less than the repurchase price. A seller’sbankruptcy could delay or prevent a sale of the underlying securities.

 

On June 30, 2003, the Company entered into aRepurchase Agreement with UBS Paine Webber for $63,706,000, which was settledon July 1, 2003.  The RepurchaseAgreement was recorded at cost and was fully collateralized by a United StatesTreasury Bill with a fair value of $65,080,000 and a carrying value of$65,006,677 that matures on August 21, 2003. The interest rate on the Repurchase Agreement was 0.82%.  On September 30, 2002, the Company enteredinto a Repurchase Agreement with UBS Paine Webber for $39,198,719, whichagreement was settled on October 1, 2002. The Repurchase Agreement was recorded at cost and was fullycollateralized by a United States Treasury Bill with a fair value of$40,004,000 and a carrying value of $39,998,799 that matured on October 1,2002.  The interest rate on theRepurchase Agreement was 1.85%.  In thefuture the Company plans to use a similar form of repurchase agreements as aninvestment option or in order to satisfy certain asset diversificationrequirements and maintain the Company’s status as a RIC.

 

 

NOTE 10. CONTRACTUAL OBLIGATIONS

 

The Company occupies its McLean, Virginia office spacepursuant to a license agreement scheduled to expire on October 31, 2003.  The Company’s New York City office facilityhas a service agreement scheduled to expire August 31, 2003 and the Company hasentered into a new service agreement through August 31, 2004.

 
|                         |   | **Payment  due by period** |    |
|------------------------------|--------|----------------------------|---------|
| **Contractual  Obligations** |   | **Total**                  |    | **Less than  1  year** |   | **1-3   years** |   | **3-5   years** |   | **More than  5  years** |   |
| Office Lease  Obligations    |   | $                          | 104,413 |   | $ | 66,673 |   | $ | 37,740 |   | — |   | — |   |
| **Total**                    |   | $                          | 104,413 |   | $ | 66,673 |   | $ | 37,740 |   | — |   | — |   |

 

 

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NOTE 11. DEFERRED COMPENSATION PLAN

 

The Company has adopted a deferred compensation plan(the “Plan”) effective January 1, 2002. The Plan permits an employee to defer the lesser of 75% of his or hertotal compensation or the applicable Internal Revenue Service (“IRS”)limit.  The employees are eligible toparticipate in the Plan upon completion of 1,000 hours of service within thefirst six months of employment or after one year of service.  The service requirement is waived for thoseemployees who were employed as of January 1, 2002.  The Company has funded $23,569 in contributions to the Plan thatwere recorded for the fiscal year ended September 30, 2002.  The Company has received a determinationletter from the IRS concurring that the deferred compensation plan satisfiesthe qualification requirements of the Code.

 

NOTE 12. POTENTIAL LOAN SALE

 

The Company during April 2003 agreed to sell its IncaMetal Products Corp., Kingway Acquisition Inc., Clymer Acquisitions, Inc. noteto American Capital Strategies and was expected to complete the sale in May2003.  However, the senior lender wouldonly approve the sale if a portion of its loan was also acquired.  The Company offered to buy a portion of thesenior lenders loan to satisfy the condition, but American Capital Strategiesthen declined to buy the Company’s loan. The Company is unsure the transaction will now occur.

 

NOTE 13. GLADSTONE BUSINESS LOAN LLC

 

On May 19, 2003, Gladstone Business Loan LLC enteredinto a credit agreement with CIBC World Markets Corp. to provide the Companywith a $100 million revolving credit facility. This will enable the Company to securitize existing loans in order to beable to obtain additional lending funds.

 

NOTE 14. SUBSEQUENT EVENT

 

In July 2003, ARI Holdings,Inc. repaid its entire loan of approximately $8.6 million which includedapproximately $600,000 of accrued PIK interest.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**All statements contained herein, other thanhistorical facts, may constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended. These statements mayrelate to, among other things, future events or our future performance orfinancial condition. In some cases, you can identify forward-looking statementsby terminology such as “may,” “might,” “believe,” “will,” “provided,”“anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,”“should,” “would,” “if,” “seek,” “possible,” “potential” or the negative ofsuch terms or comparable terminology. These forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, levels of activity, performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied by such forward-looking statements. Suchfactors include, among others: (1) adverse changes in interest rates; (2) ourfailure or inability to establish or maintain referral arrangements withleveraged buyout funds and venture capital funds to generate loan opportunities;(3) the loss of one or more of our executive officers, in particular DavidGladstone or Terry Lee Brubaker; (4) our inability to establish or maintain acredit facility on terms reasonably acceptable to us, if at all; (5) ourinability to successfully securitize our loan portfolio on terms reasonablyacceptable to us, if at all; (6) the decision of our competitors toaggressively seek to make senior and subordinated loans to small andmedium-sized businesses on terms more favorable than we intend to provide; and(7) those factors listed under the caption “Risk Factors” of the Annual Reporton Form 10-K as filed with the Securities and Exchange Commission on December11, 2002. We caution readers not to place undue reliance on any suchforward-looking statements, which are made pursuant to the Private SecuritiesLitigation Reform Act of 1995 and, as such, speak only as of the date made. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise,after the date of this Form 10-Q**.

 

*The following analysis of our financialcondition and results of operations should be read in conjunction with ourfinancial statements and the notes thereto contained elsewhere in this report.*

 

**OVERVIEW**

 

We wereincorporated under the General Corporation Laws of the State of Maryland on May30, 2001. Our investment objectives are to achieve a high level of currentincome by investing in debt securities, consisting primarily of senior term debts,senior subordinated term debts and junior subordinated term debts, ofestablished private businesses that are backed by leveraged buyout funds,venture capital funds or others. In some instances some of the senior termdebts may be “last out tranches” meaning our debt is part of the senior termdebt but is paid last from those payments coming to the senior term debtholders if the borrower is liquidated. We also provide first and secondmortgage debt secured by business real estate. We normally do not providerevolving lines of credit. In addition, we may acquire existing loans made byothers if those loans meet our profile. We also seek to provide ourstockholders with long-term capital growth through the appreciation in thevalue of warrants, success fees or other equity-type instruments that we mayreceive when we provide debt. We operate as a closed-end, non-diversifiedmanagement investment company, and have elected to be treated as a businessdevelopment company under the 1940 Act.

 

We seek out smalland medium-sized businesses that meet certain criteria, including (1) thepotential for growth in cash flow, (2) adequate assets for loan collateral, (3)experienced management teams with a significant ownership interest in theborrower, (4) profitable operations based on the borrower’s cash flow, (5)reasonable capitalization of the borrower (usually by leveraged buyout funds orventure capital funds) and (6) the potential to realize appreciation and gainliquidity in our equity position, if any. We anticipate that liquidity in ourequity position will be achieved through a merger or acquisition of theborrower, a public offering by the borrower or by exercise of our right torequire the borrower to buy back its warrants. We lend to borrowers that need fundsto finance growth, restructure their balance sheets or effect a change ofcontrol.

 

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Our loanstypically range from $5 million to $15 million, mature in no more than sevenyears and accrue interest at a fixed or variable rate that exceeds the primerate. A number of our loans have a provision that calls for some portion of theinterest payments to be deferred and added to the principal balance so that theinterest is paid, together with the principal, at maturity. This form ofdeferred interest is often called “paid-in-kind” or “PIK” interest, and, whenearned, we record PIK interest as interest income and add the PIK interest tothe principal balance of the loans. The amount of PIK interest accrued and onour books as of June 30, 2003 was approximately $1.1 million.

 

Because our loanswill generally be subordinated debt of private companies who typically cannotor will not expend the resources to have their debt securities rated by acredit rating agency, we expect that most, if not all, of the debt securitieswe acquire will be unrated. We cannot accurately predict what ratings theseloans might receive if they were in fact rated, and therefore we cannotdetermine whether or not they could be considered to be “investment grade”quality.

 

To the extentpossible, our loans generally are collateralized by a security interest in theborrower’s assets. Interest payments are generally made monthly or quarterly(except to the extent of any PIK interest) with amortization of principalgenerally being deferred for several years. The principal amount of the loansand any accrued but unpaid interest generally become due at maturity at five toseven years. When we receive a warrant to purchase stock in a borrower inconnection with a loan, the warrant will typically have an exercise price equalto the fair value of the portfolio company’s common stock at the time of theloan and entitle us to purchase a modest percentage of the borrower’s stock.

 

In addition, as abusiness development company under the 1940 Act, we are required to makeavailable significant managerial assistance to our portfolio companies. Weprovide these services, for which we receive fees, through our wholly ownedsubsidiary, Gladstone Advisers, Inc. Such fees are typically paid in part atthe time a prospective portfolio company signs a non-binding term sheet withus, with the remainder paid at the closing of the investments. These fees aregenerally non-recurring, however in some instances they may have a recurringcomponent. The specific services we provide vary by portfolio company, butgenerally consist of reviewing existing credit facilities, arranging bankfinancing, arranging equity financing, structuring financing from multiplelenders, structuring financing from equity investors, restructuring existingloans, raising equity and debt capital and providing general financial advice.We record these fees as managerial assistance fee revenue in the period inwhich the fees are earned.

 

Our business plancalls for managerial assistance fee revenue to equal or exceed our operatingexpenses (excluding interest expense). During the quarter and nine months endedJune 30, 2003, the Company recorded managerial assistance fee revenue of$125,000 and $483,000, respectively, stemming from a new investment during thequarter.  However, during the quarterand nine months ended June 30, 2003, operating expenses (excluding interestexpense) exceeded managerial assistance fee revenue by approximately $819,000and $2.2 million, respectively.  Becausewe typically generate managerial assistance fee revenue only when we make newloans, our relatively slow pace of loans during the quarter and nine monthsended June 30, 2003 led to this shortfall. In the future, we will need to makeloans at a faster pace in order to meet this objective. However, we believethat, as the economic environment improves, we will be able to make sufficientnew investments so that over time our managerial assistance fee revenue willequal or exceed our operating expenses (excluding interest expense), althoughthere can be no guarantee that we will be able to do so.

 

Prior to making aninvestment, we ordinarily enter into a non-binding term sheet with thepotential borrower. These non-binding term sheets are generally subject to anumber of conditions, including but not limited to the satisfactory completionof our due diligence investigations of the potential borrower’s business andreaching agreement on the legal documentation for the loan. Typically, uponexecution of the non-binding term sheet, the potential borrower pays us anon-refundable fee for our services rendered through the date of thenon-binding term sheet. Where the fee paid is non-refundable, we recognize thisas management fee revenue upon execution of the non-binding term sheet.

 

In the event thatwe expend significant effort in considering and negotiating a potentialinvestment that ultimately is not consummated, we generally will seekreimbursement from the proposed borrower for our reasonable expenses incurredin connection with the proposed transaction. Any amounts collected arerecognized as “other income” in the quarter in which such reimbursement isreceived. Also, in the event that we have incurred significant legal fees inconnection with the transaction, we will typically also seek reimbursement forthese expenses from the proposed borrower. However, there can be no guaranteethat we will be successful in collecting any such reimbursements.

 

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The onlysignificant continuing revenue associated with the investments we have alreadyclosed is interest paid and, potentially, capital gains received in connectionwith the liquidation of any associated equity interest (e.g., warrants). Whilein some instances we may also receive on-going managerial assistance feerevenue in connection with a consummated investment, any such amounts havebeen, and in the future are expected to be, insignificant.

 

The generaleconomic climate during the fiscal year ended September 30, 2002 and thequarter and nine months ended June 30, 2003****was unfavorable. Many businesses saw their sales and businessprospects decline during this time. Consequently, many of these companies wereforced to lay off employees and engage in other cost cutting measures. As aresult of the difficult business climate, we determined it prudent to proceedcautiously in making loans during the 2002 fiscal year and in the quarter andnine months ended June 30, 2003. Since our initial public offering in August2001, we have made 15****differentloans to, or investments in, 11****companiesfor a total of approximately $115.5****million(including the maximum aggregate amount outstanding under an $8 million line ofcredit in favor of one of our portfolio companies, that has subsequently beenretired). This was below our objective set at the beginning of the 2002 fiscalyear.

 

In spite of theeconomic environment, we are earnestly working toward the consummation of moreinvestments. These prospective loans are subject to, among other things, thesatisfactory completion of our due diligence investigation of each borrower,acceptance of terms and structure and necessary consents. With respect to eachprospective loan, we will only agree to provide the loan if, among otherthings, the results of our due diligence investigations are satisfactory, theterms and conditions of the loan are acceptable and all necessary consents arereceived. Our management has initiated its due diligence investigations of thepotential borrowers, however we can not assure you that we will not discoverfacts in the course of completing our due diligence that would render aparticular investment imprudent or that any of these loans will actually bemade.

 

The Company is makingstrides to be able to continue funding new investments once the initial fundsare placed.  The Company through itswholly-owned subsidiary entered into a credit agreement with CIBC World MarketsCorp to provide the Company with a $100 million revolving credit linefacility.  This is the first step towardsecuritizing the Company’s loans for long-term funding.

 

**DividendHistory**

 

The Company isclassified as a registered investment company (RIC), and in order to qualify asa RIC and to avoid corporate level tax on the income distributed tostockholders, we are required, in accordance with Subchapter M of the Code, todistribute at least 90% of our ordinary income and short-term capital gains toour stockholders on an annual basis.  Incompliance with these requirements, we declared and paid quarterly cashdividends as follows:

 
| **Quarter Ended**  |   | **Date Paid**   |   | **Dividend  Per Share** |   | **Type of  Income** |      |
|--------------------|--------|-----------------|--------|-------------------------|--------|---------------------|-----------|
| June 30, 2003      |   | July 7, 2003    |   | $                       | 0.29   |                | Ordinary* |   |
| March 31, 2003     |   | April 7, 2003   |   | $                       | 0.25   |                | Ordinary* |   |
| December 31, 2002  |   | January 1, 2003 |   | $                       | 0.23   |                | Ordinary* |   |
| September 30, 2002 |   | October 7, 2002 |   | $                       | 0.21   |                | Ordinary  |   |
| June 30, 2002      |   | July 8, 2003    |   | $                       | 0.21   |                | Ordinary  |   |
| March 31, 2002     |   | April 8, 2003   |   | $                       | 0.21   |                | Ordinary  |   |

 

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*Estimated and may beredefined at year end

 

**CriticalAccounting Policies**

 

Our accountingpolicies are more fully described in the “Notes to Financial Statements”contained elsewhere in this report. As disclosed in the “Notes to FinancialStatements”, the preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and disclosure of contingent assets and liabilities at the date ofthe financial statements, and revenues and expenses during the period reported.Actual results could differ from those estimates.

 

The most criticalaccounting policy is that of the valuation of the investment portfolios.   Please refer to the “Investment Valuation”section below for a discussion of the investment valuation process.

 

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**InvestmentValuation**

 

The mostsignificant estimate inherent in the preparation of our consolidated financialstatements is the valuation of investments and the related amounts ofunrealized appreciation and depreciation of investments recorded.

 

We value ourinvestment portfolio each quarter. Members of our portfolio management teamprepare the portfolio company valuations using the most recent portfoliocompany financial statements and forecasts. These individuals also consult with the respective principal whooriginated the portfolio investment to obtain further updates on the portfoliocompany’s performance, including information such as industry trends, newproduct development, and other operational issues.  As of March 31, 2003, the Company engaged Standard & Poor’sLoan Evaluation Service (S&P) to help evaluate the value of the majority ofits loan securities.  This quarter, theCompany expanded the S&P engagement to include evaluations on success fees(conditional interest included in some loan securities).  The Company and S&P will only evaluatethe value of a success fee if the probability of receiving the success fee on agiven loan was above 6-8%, a threshold of significance, in which case a valuewould be assigned.  Upon completing thedata collection, the valuation data is presented to S&P.  S&P makes its independent assessment ofthe data and assesses its own data to determine market values for thesecurities.  With regard to its work,S&P has issued the following paragraph:

 

S&P providesevaluated price opinions which are reflective of what S&P believes the bidside of the market would be for each loan after careful review and analysis ofdescriptive, market and credit information. Each price reflects S&P’s best judgment based upon carefulexamination of a variety of market factors. Because of fluctuation in the market and in other factors beyond itscontrol, S&P cannot guarantee these evaluations.  The evaluations reflect the market prices, or estimate thereof,on the date specified.  The prices arebased on comparable market prices for similar securities.  Market information has been obtained fromreputable secondary market sources. Although these sources are considered reliable, S&P cannot guaranteetheir accuracy.

 

With the Companyassessment and S&P value estimates as a backdrop, the Company’s Board votesto accept or not accept the analyses and values recommended presented by theCompany and S&P.  At June 30, 2003,the board elected to accept the valuations recommended by S&P on thoseloans as denoted on the Schedule of Investments in the Consolidated FinancialStatements.  Because there is a lagbetween when we close a loan and when we can get the loan evaluated by S&P,new loans are not valued immediately by S&P; rather, the board makes itsown determination about the value of the loan in accordance with the Company’svaluation policy.  Since S&P doesnot provide values for mortgage loans or equity securities, the directorsdetermine fair value of these using the following policy:

 

General Valuation Policy: We carry our investments atfair value, as determined by our Board of Directors.  Securities that are publicly traded, if any, are valued at theclosing price on the valuation date. Debt and equity securities that are notpublicly traded or for which we have various degrees of trading restrictions,are valued at fair value as determined in good faith by our Board of Directors.  In making the good faith determination ofthe securities, we start with the cost basis of the security, which includesthe amortized original issue discount, success fee (defined interest) and PIKinterest, if any.  We then apply themethods set out below in Valuation Methods. Due to the uncertainty inherent in the valuation process, such estimatesof fair value may differ significantly from the values that would have beenobtained had a ready market for the securities existed, and the differencescould be material.  Additionally,changes in the market environment and other events that may occur over the lifeof the investments may cause the gains or losses ultimately realized on theseinvestments to be different than the valuations currently assigned.  No single standard for determining fairvalue in good faith exists since fair value depends upon circumstances of eachindividual case.  In general, fair valueis the amount that the company might reasonably expect to receive upon thecurrent sale of the security.

 

CreditInformation:****We monitor a widevariety of key credit statistics that provide information regarding ourportfolio companies to help us assess credit quality and portfolioperformance.  We require our portfoliocompanies to provide annual audited and monthly, unaudited financialstatements.  Using these statements, wecalculate and evaluate the credit statistics. For purposes of analyzing the financial performance of our portfoliocompanies, we may make certain adjustments to their cash flow statements toreflect the pro forma results of a company consistent with a change of controltransaction, to reflect anticipated cost savings resulting from a merger orrestructuring, costs related to new product development, compensation toprevious owners, and other acquisition or restructuring related items.

 

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Loan Grading andRisk Rating:****As of December 31,2002 we expanded the scale of our loan grading system from one that had a scaleof 1 to 4, to a scale that uses 0 to 10. This system is used to estimate the probability of default on our debtsecurities and the probability of loss if there is a default.  These types of systems are referred to asrisk rating systems and are used by banks and rating agencies.  We risk rate each of our debtsecurities.  The risk rating systemcovers both qualitative and quantitative aspects of the business and thesecurities we hold.

 

We seek to haveour risk rating system mirror the risk rating systems of major risk ratingorganizations such as those provided by nationally recognized statisticalrating organizations (“NRSRO”) as defined in Rule 2a-7 under the 1940 Act.  While we seek to mirror the NRSRO systems,we cannot provide any assurance that our risk rating system provides the samerisk rating as a NRSRO.  The followingchart is an estimate of the relationship of our risk rating system to thedesignations used by two NRSROs as they risk rate debt securities of majorcompanies.  Because we have establishedour system to rate debt securities of companies that are unrated by any NRSROthere can be no assurance that the correlation to the NRSRO set out below isaccurate.  It is our understanding thatmost debt securities of middle market companies do not exceed the grade of BBBon a NRSRO scale; so there would be no debt securities in the middle marketthat would meet the definition of AAA, AA or A.  Therefore, our scale begins with the designation BBB as the bestrisk rating.

 
| **Company’s  System** |   | **First  NRSRO** |   | **Second  NRSRO** |   | **Gladstone  Capital’s Description(a)**                                                          |   |
|----------------------------|--------|------------------|--------|-------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
| **>10**                 |   | Baa2             |   | BBB               |   | Probability of Default  (PD) during the next ten years is 4% and the Expected Loss (EL) is 1% or less |   |
| **10**                     |   | Ba3              |   | BBB-              |   | PD is 5% and the EL is  1% to 2%                                                                      |   |
| **9**                      |   | Ba1              |   | BB+               |   | PD is 10% and the EL is  2% to 3%                                                                     |   |
| **8**                      |   | Ba2              |   | BB                |   | PD is 16% and the EL is  3% to 4%                                                                     |   |
| **7**                      |   | Ba3              |   | BB-               |   | PD is 17.8% and the EL  is 4% to 5%                                                                   |   |
| **6**                      |   | B1               |   | B+                |   | PD is 22.0% and the EL  is 5% to 6.5%                                                                 |   |
| **5**                      |   | B2               |   | B                 |   | PD is 25% and the EL is  6.5% to 8%                                                                   |   |
| **4**                      |   | B3               |   | B-                |   | PD is 27% and the EL is  8% to 10%                                                                    |   |
| **3**                      |   | Caa1             |   | CCC+              |   | PD is 30% and the EL is  10.0% to 13.3%                                                               |   |
| **2**                      |   | Caa2             |   | CCC               |   | PD is 35% and the EL is  13.3% to 16.7%                                                               |   |
| **1**                      |   | Caa3             |   | CC                |   | PD is 65% and the EL is  16.7% to 20%                                                                 |   |
| **0**                      |   | N/a              |   | D                 |   | PD is 85% or there is a  Payment Default: and the EL is greater than 20%                              |   |

 

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*(a)the default rates set here are for a ten year term debt, if the company’s debtsecurity is less than ten years then the probability of default is adjusted toa lower percentage for the shorter period which may move the security higher onthe company’s risk rating scale.*

 

At September 30,2002, all debt investments were grade 3 under the 1-to-4 loan grading system.The rating of 3 on the 1-4 system means that the portfolio companies wereperforming as agreed and they have paid on time.  Using the expanded scale, at December 31, 2002, March 31, 2003,and June 30, 2003 the average, weighted average and highest rated loan andlowest rated loan were as follows:

 
| **Rating**       |   | **December  31, 2002** |   | **March 31,  2003** |   | **June 30,  2003** |   |
|------------------|--------|------------------------|--------|---------------------|--------|--------------------|--------|
| Average          |   | 7.5                    |   | 7.7                 |   | 7.7                |   |
| Weighted Average |   | 7.5                    |   | 7.7                 |   | 7.6                |   |
| Highest          |   | 9.0                    |   | 9.0                 |   | 9.0                |   |
| Lowest           |   | 6.0                    |   | 6.0                 |   | 6.0                |   |

 

The above scale gives anindication of the probability of default and the magnitude of the loss if thereis a default using the expanded risk rating scale.

 

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Our policy is tostop accruing interest on an investment if we determine that interest is nolonger collectible. To date we have not placed any investments onnon-accrual.  At June 30, 2003 andSeptember 30, 2002, no payments were past due on any of our debtsecurities.  We do not risk rate ourequity securities.

 

Valuation Methods:**** For debt securities, we first determine ifthere is a market for the debt security. If there is a market, then we will determine the value based on themarket prices for the security, even if that market is not robust.  At June 30, 2003 and September 30, 2002there was no market for any of the debt securities in our portfolio.  If there is no market for the debtsecurities, then we begin with the risk rating designation of the securitydescribed above.  Using the risk ratingdesignation above, we seek to determine the value of the security as if weintended to sell the security in a current sale.  To determine the current sale price of the security, we may usesome or all of the following items: financial standing of the issuer of thesecurity, comparison of the business and financial plan of the issuer withactual results, the cost of the security, the size of the security held as itrelates to the liquidity of the market for such securities, contractualrestrictions on the disposition of the security, pending public offering of theissuer of the security, pending reorganization activity affecting the issuersuch as mergers or debt restructuring, reported prices of similar securities ofthe issuer or comparable issuers, ability of the issuer to obtain neededfinancing, changes in the economy affecting the issuer, recent purchases orsale of a security of the issuer, pricing by other buyers or sellers of similarsecurities, financial statements of the borrower, the type of security, cost atdate of purchase, size of holding, discount from market value of unrestrictedsecurities of the same class at the time of purchase, special reports preparedby analysts, information as to any transactions or offers with respect to thesecurity, existence of merger proposals or tender offers affecting thesecurities, the collateral, the issuer’s ability to make payments, the currentand forecasted earnings of the issuer, sales to third parties of similarsecurities, statistical ratios compared to lending standards, statisticalratios compared to other similar securities and other pertinent factors.

 

For equity securities, we first determine if there isany market for the equity security.  Ifthere is a market, then we determine the value based on the market prices forthe security, even if that market is not robust.  At June 30, 2003 and September 30, 2002 there was no market forany of the equity securities we owned. If there is no market for the equity securities, then we use the sameinformation we would use for a debt security valuation described above, as wellas standard valuation techniques used by major valuation firms to value theequity securities of private companies. These valuation techniques consist of: discounted cash flow of theexpected sales price in the future, the value of the securities based on therecent sale of comparable transactions and a review of similar companies thatare publicly traded and the market multiple of their equity securities.  At June 30, 2003 we had $37,000 invested, atcost, in equity securities compared to our debt portfolio with a cost basis of$104,940,557.

 

At June 30, 2003 we determined that the probability ofour receiving the success fee on one of our loans was at a point that anappreciated value should be used.  Todetermine this value S&P estimated the probability of the payment anddiscounted the value over time.  TheHome Care Supply, Inc. senior loan has an appreciation of $473,400 in its valueas a result of the value applied to the success fee.  Further, the value of our warrants in Finn Corporation has anappreciation of $394,111 for the quarter ended June 30, 2003.  This appreciation totaling $867,511 offsetdepreciation of $869,924.

 

Our new riskrating system is more detailed than our prior system. Due to the more detailednature of the risk rating system there is the likelihood that future valuationswill change more frequently.  S&Pdetermines what a loan might trade at if it was publicly traded, which alsoadds volatility to our valuations.

 

**ManagerialAssistance Fees**

 

The 1940 Actrequires that a business development company make available managerialassistance to its portfolio companies. We provide managerial assistance to ourportfolio companies in connection with our investments through our wholly ownedsubsidiary, Gladstone Advisers, Inc. and receive fees for our managerialassistance services. These fees are normally paid at the closing of our investmentsin our portfolio companies, are generally non-recurring and are recognized asrevenue when earned. The managerial assistance services we provide vary byinvestment, but generally consist of reviewing existing credit facilities,arranging bank financing, arranging equity financing, structuring financingfrom multiple lenders, structuring financing from equity investors,restructuring existing loans, raising equity and debt capital, and providinggeneral financial advice. From time to time, we are invited to participate as aco-lender in a transaction. In the event that we do not provide significantmanagerial assistance services in connection with our investment, loan feespaid to us in such situations are deferred and amortized over the life of theloan.

 

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**RESULTS OF OPERATIONS**

 

*Comparison of the three months ended June 30, 2003 tothe three months ended June 30, 2002*

 

**Investment Income**

 

Investment incomefor the three months ended June 30, 2003 was approximately $4.1 million ascompared to $2.9 million for the three months ended June 30, 2002. Thisincrease was primarily a result of increased interest income from newinvestments.

 

Interest incomefrom our investments in debt securities of private companies was approximately$3.7 million for the three months ended June 30, 2003 as compared to $1.8million for the three months ended June 30, 2002. This increase****wasprimarily a result of the increase in new investments of $49.0 million.

 

The weighted averageyield on our portfolio for the three months ended June 30, 2003 was 13.24%(without giving effect to PIK interest) and 14.0% (after giving effect to PIKinterest). The weighted average yield for the three months ended June 30, 2002was 14.26% (without giving effect to PIK interest) and 15.25% (after givingeffect to PIK interest).  The yieldswere computed based on the cost value of the portfolio.

 

Interest incomefrom invested cash and cash equivalents for the three months ended June 30,2003 was approximately $79,000, as compared to $352,000 for the three monthsended June 30, 2002. This decrease****wasprimarily a result of the $49.0 million of new investments made between June30, 2002 and June 30, 2003.

 

For the threemonths ended June 30, 2003, we recorded approximately $110,000 in interestincome from loans to our employees in connection with the exercise of employeestock options, which was consistent with approximately $109,000 in interestincome from such loans for the three months ended June 30, 2002.

 

Managerialassistance fees were $125,000 for the three months ended June 30, 2003, ascompared to $646,000 for the three months ended June 30, 2002. This decrease****wasthe result of new investments of $5.5 million closing during the quarter as comparedto new investments of $24.5 million with related fees during the three monthsended June 30, 2002.

 

 

**Operating Expenses**

 

Operating expensesfor the three months ended June 30, 2003 were approximately $944,000, ascompared to approximately $691,000 for the three months ended June 30, 2002.This increase****was primarily aresult of additional employees, new office space and operating expenses relatedto the increase in staff and overall operations.

 

Salaries andbenefits for the three months ended June 30, 2003 were approximately $494,000,as compared to approximately $364,000 for the three months ended June 30, 2002.This increase****was a result of anincrease in employees in the current quarter as compared to the prior yearquarter.

 

Rent expense forthe three months ended June 30, 2003 was approximately $55,000, as compared toapproximately $36,000 for the three months ended June 30, 2002. This increase****was primarily a result of new office spaceacquired in September 2002.

 

Professional fees,consisting primarily of legal and audit fees, for the three months ended June30, 2003 were approximately $101,000, as compared to approximately $119,000 forthe three months ended June 30, 2002. This decrease****was primarilya result of a decline in legal fees which were slightly tempered by duediligence fees associated with the line of credit.

 

Directors’ feesfor the three months ended June 30, 2003 were approximately $20,000, ascompared to approximately $7,000 for the three months ended June 30, 2002. Thisincrease****was primarily a result ofthe accounting for the annual directors fee pro rated over the 2003 fiscalyear.

 

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Insurance expensefor the three months ended June 30, 2002 was approximately $72,000, as comparedto approximately $50,000 for the three months ended June 30, 2002.  The majority of this increase is due to anincrease in directors’ and officers’ insurance premiums.

 

Stockholderrelated costs for the three months ended June 30, 2003 were approximately$12,000, as compared to approximately $7,000 for the three months ended June30, 2002.  The increase was attributableto increased filing fees.

 

Financing feeswere incurred for the first time during the three months ended June 30,2003.  These fees of approximately$62,000 represent the related service fees associated with the warehouse lineof credit, backup service and the amortization of deferred financing costs.

 

General andadministrative expenses, consisting primarily of office operations, travel anddata communications expenses for the three months ended June 30, 2003 wereapproximately $127,000, as compared to approximately $107,000 for the threemonths ended June 30, 2002. This increase****wasprimarily a result of the related expenses of new employees and increasedoperations.

 

We believe thatour current level of operating expenses is not necessarily indicative of ourfuture operating expenses. We estimate that over time, as we continue to morefully deploy the proceeds of our initial public offering, our operatingexpenses will be approximately two percent of our net assets.

 

**Net Increase in Stockholders’ Equity fromOperations**

 

As a result of the investment income and operating expensesdescribed above, we had net increase in stockholders’ equity from operations ofapproximately $2.4 million for the three months ended June 30, 2003.  Based on a weighted-average of 10,071,844(basic) and 10,256,790 (diluted) shares outstanding, our net increase instockholders’ equity from operations per common share for the three monthsended June 30, 2003 was $0.24 (basic) and $0.23 (diluted).

 

For the three months ended June 30,2002, we hadnet increase in stockholders’ equity from operations of approximately $2.2million.  Based on a weighted-average of10,071,844 (basic) and 10,201,052 (diluted) shares outstanding, our netincrease in stockholders’ equity from operations per common share for the threemonths ended June 30, 2002 was $0.22 (basic) and $0.22 (diluted).

 

Net increase in stockholders’ equity from operations includesapproximately $745,000 of net unrealized depreciation for the quarter endedJune 30, 2003 due to the fair values of the investment portfolios based onrecommendations prepared by Standard & Poor’s.  Majority of the depreciation occurred from depreciation of$658,000 associated with the loan we hold in the Inca/Kingway/ClymerCompany.  We would have depreciated thatnote in the quarter ending March 31, 2003 except we had an agreement fromAmerican Capital Strategies to purchase the note. Since then American CapitalStrategies has declined to purchase the note and we have depreciated the notethis quarter even though the note is paying as agreed.  There was no unrealized appreciation ordepreciation for the quarter ended June 30, 2002.

 

*Comparison of the nine months ended June 30, 2003 tothe nine months ended June 30, 2002*

 

**Investment Income**

 

Investment incomefor the nine months ended June 30, 2003 was approximately $11.1 million ascompared to $6.8 million for the nine months ended June 30, 2002. This increasewas primarily a result of increased interest income from investments.

 

Interest incomefrom our investments in debt securities of private companies was approximately$9.9 million for the nine months ended June 30, 2003 as compared to $3.7million for the nine months ended June 30, 2002. This increase****wasprimarily a result of the increase in new investments of $49.0 million.

 

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The weightedaverage yield on our portfolio for the nine months ended June 30, 2003 was13.48% (without giving effect to PIK interest) and 14.34% (after giving effectto PIK interest). The weighted average yield for the nine months ended June 30,2002 was 15.42% (without giving effect to PIK interest) and 15.18% (aftergiving effect to PIK interest).   Theweighted average yield is computed based on the cost basis of the investmentportfolio.

 

Interest incomefrom invested cash and cash equivalents for the nine months ended June 30, 2003was approximately $391,000, as compared to $1.4 million for the nine monthsended June 30, 2002. This decrease****wasprimarily a result of the $49.0 million of new investments made between June30, 2002 and June 30, 2003.

 

For the ninemonths ended June 30, 2003, we recorded approximately $329,000 in interestincome from loans to our employees in connection with the exercise of employeestock options, which was consistent with approximately $324,000 in interestincome from such loans for the nine months ended June 30, 2002.

 

Managerial assistancefees were $483,000 for the nine months ended June 30, 2003, as compared to $1.3million for the nine months ended June 30, 2002. This decrease****was theresult of three new investment closings during the nine months ended June 30,2003 as compared to five new investment closings during the nine months endedJune 30, 2002 with related fees.

 

**Operating Expenses**

 

Operating expensesfor the nine months ended June 30, 2003 were approximately $2.7 million, ascompared to approximately $1.9 million for the nine months ended June 30, 2002.This increase****was primarily aresult of new employees, new office space and operating expenses related to theincrease in staff and overall operations.

 

Salaries andbenefits for the nine months ended June 30, 2003 were approximately $1.4million, as compared to approximately $969,000 for the nine months ended June30, 2002. This increase****was aresult of the hiring of new employees.

 

Rent expense forthe nine months ended June 30, 2003 was approximately $164,000, as compared toapproximately $83,000 for the nine months ended June 30, 2002. This increase****was primarily a result of new office spaceacquired in September 2002.

 

Professional fees,consisting primarily of legal and audit fees, for the nine months ended June30, 2003 were approximately $302,000, as compared to approximately $335,000 forthe nine months ended June 30, 2002. This decrease****was primarilya result of a decrease in legal fees.

 

Directors’ feesfor the nine months ended June 30, 2003 were approximately $55,000, as comparedto approximately $14,000 for the nine months ended June 30, 2002. This increase****was primarily a result of the accountingfor the annual directors fee pro rated over the 2003 fiscal year.

 

Insurance expensefor the nine months ended June 30, 2003 was approximately $217,000, as comparedto approximately $147,000 for the nine months ended June 30, 2002.  This increase was mainly attributable to anincrease in directors’ and officers’ insurance premiums.

 

Stockholderrelated costs for the nine months ended June 30, 2003 were approximately$124,000, as compared to $78,000 for the nine months ended June 30, 2002.  This increase is due to costs associatedwith the printing of the annual report, the annual stockholders’ meeting, andan increase in filing fees.

 

Financing feeswere incurred for the first time during the nine months ended June 30,2003.  These fees of approximately$62,000 represent the related service fees associated with the warehouse lineof credit, backup service, and the amortization of deferred financing charges.

 

General andadministrative expenses, consisting primarily of office operations, travel anddata communications related expenses for the nine months ended June 30, 2003were approximately $378,000, as compared to approximately $297,000 for the ninemonths ended June 30, 2002. This increase****wasprimarily a result of the related expenses to new employees and increasedoperations.

 

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We believe thatour current level of operating expenses is not necessarily indicative of ourfuture operating expenses. We estimate that over time, as we continue to morefully deploy the proceeds of our initial public offering, our operatingexpenses will be approximately two percent of our net assets.

 

**Net Increase in Stockholders’ Equity fromOperations**

 

As a result of the investment income and operating expensesdescribed above, we had net increase in stockholders’ equity from operations ofapproximately $8.4 million for the nine months ended June 30, 2003.  Based on a weighted-average of 10,071,844(basic) and 10,160,350 (diluted) shares outstanding, our net increase instockholders’ equity from operations per common share for the nine months endedJune 30, 2003 was $0.84 (basic) and $0.83 (diluted).

 

For the nine months ended June 30, 2002,we had netincrease in stockholders’ equity from operations of approximately $4.8million.  Based on a weighted-average of10,071,844 (basic) and 10,176,944 (diluted) shares outstanding, our netincrease in stockholders’ equity from operations per common share for the ninemonths ended June 30, 2002 was $0.48 (basic) and $0.47 (diluted).

 

Net increase in stockholders’ equity from operations includesapproximately $2,000 of net unrealized depreciation for the nine months endedJune 30, 2003 due to the fair values of the investment portfolios based onrecommendations prepared by Standard & Poor’s.  There was no unrealized appreciation or depreciation for the ninemonths ended June 30, 2002.

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At June 30, 2003,we had investments in debt securities of, or loans to, 10 private companies,totaling approximately $105.0 million of total investment assets. This numberincludes approximately $1.1 million in accrued PIK interest, which as describedin “Overview,” is added to the carrying value of our investments.

 

In January 2003, we closed a $5.5 million investment in Wing StopRestaurants International, Inc., a franchiser of fast food chicken restaurants.The investment consisted of a loan with added income from a success fee if thebusiness is successful.  In February2003 we closed and funded a loan for $12 million to America’s Water HeaterRentals, LLC.

 

In April 2003, we closed a $5.5 million investment in Fugate andAssociates, Inc., an imaging supply company. The investment consisted of a loan with added income from a success feeif the business is successful.

 

The followingtable summarizes the contractual principal amortization and maturity of ourinvestment portfolio by fiscal year:

 
| **Fiscal Year** |   | **Amount** |        |
|-----------------|--------|------------|-------------|
| 2003            |   | $          | 704,167     |   |
| 2004            |   | $          | 11,232,084  |   |
| 2005            |   | $          | 12,056,943  |   |
| 2006            |   | $          | 13,586,997  |   |
| 2007            |   | $          | 33,647,366  |   |
| Thereafter      |   | $          | 33,750,000  |   |
| Total           |   | $          | 104,977,557 |   |

 

In July 2003, ARIHoldings, Inc. repaid its entire outstanding balance of approximately $8.6million plus accrued interest and PIK for the outstanding days in July.

 

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Cash provided byoperating activities for the nine months ended June 30, 2003, consistingprimarily of the items described in “Results of Operations,” was approximately$8.4 million. Net cash used in investing activities was approximately $174,000during the nine months ended June 30, 2003. The net cash used in investingactivities consisted of net proceeds of $24.5 million from the repurchaseagreement and repayment of $2.4 million investment principal from our portfoliocompanies.  Partially offsetting thecash provided by investing activities was the $27.0 million of newinvestments.  Net cash used in financingactivities was approximately $8.1 million for the nine months ended June 30,2003 and consisted of the payment of dividends and charges incurred toestablish the warehouse line of credit.

 

During the ninemonths ended June 30, 2003, cash and cash equivalents increased fromapproximately $91.9 million at the beginning of the period to approximately$92.1 million at the end of the period. The increase of approximately $0.2million was mainly the result of the net proceeds from the repurchaseagreement.

 

On June 30, 2003,we entered into a repurchase agreement with UBS Paine Webber for approximately$63.7 million. The repurchase agreement was fully collateralized by a UnitedStates treasury bill with a fair value of approximately $65.0 million thatmatured on August 21, 2003. The interest rate on the repurchase agreement was0.82%. This repurchase agreement was reflected on our balance sheet as of June30, 2003 as an increase in cash and cash equivalents pledged to creditors of$65.0 million, along with a corresponding liability for approximately the sameamount. The repurchase agreement was settled on July 1, 2003. In the future, weplan to use a similar form of repurchase agreement as an investment option orin order to satisfy certain asset diversification requirements and maintain ourstatus as a RIC.

 

In order toqualify as a regulated investment company and to avoid corporate level tax onthe income we distribute to our stockholders, we are required, under SubchapterM of the Code, to distribute at least 90% of our ordinary income and short-termcapital gains to our stockholders on an annual basis. In accordance with theserequirements, we declared and paid quarterly cash dividends of $0.29 for thequarter ended June 30, 2003, $0.25 for the quarter ended March 31, 2003 and$0.23 for the quarter ended December 31, 2002.

 

We anticipateborrowing funds and issuing additional equity securities to obtain additionalcapital once the proceeds of our initial public offering have been fullyinvested. To this end, we have filed with the Securities and ExchangeCommission (“SEC”) a registration statement that would permit us to issue,through one or more transactions, up to an aggregate of $75 million in oursecurities, which may consist of shares of our common stock, preferred stock,or debt securities.   On March 19, 2003,the SEC declared the registration statement effective, and we currently have noimmediate plans to issue any securities under the registration statement.

 

On May 19, 2003,the Company, through its wholly-owned subsidiary, entered into a creditagreement with CIBC World Markets Corp. to provide the Company with a $100million revolving credit line facility. To date, the Company has not drawn down on the credit facility.

 

In addition toborrowing funds and issuing additional securities, we also intend to pursue astrategy of securitizing our loan portfolio in approximately one to two years.We may use the cash we receive upon the sale of interests in our loans to repaybank borrowings and make additional loans. We can not provide assurance thatthis securitization strategy will be successful.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

We are subject to financial market risks, including changes ininterest rates.  We expect thatultimately approximately 50% of the loans in our portfolio will be made atfixed rates, with approximately 50% made at variable rates; however, to dateall of our loans have been made at fixed rates.

 

We expect to borrow funds to finance future lending activitiesafter we have substantially fully invested the proceeds of our initial publicoffering.  These future borrowings maybe at fixed rates or variable rates. To date, we have not borrowed any funds.

 

We expect to hedge against interest rate fluctuations in thefuture by using standard hedging instruments such as futures, options andforward contracts.  While hedgingactivities may insulate us against adverse fluctuations in interest rates, theymay also limit our ability to participate in the benefits of lower interestrates with respect to our portfolio of investments.

 

**ITEM4. CONTROLS AND PROCEDURES.**

 

As of June 30, 2003, the Company, including our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures.  Based on that evaluation, our management,including the Chief Executive Officer and Chief Financial Officer, concludedthat our disclosure controls and procedures were effective in timely alertingmanagement, including the Chief Executive Officer and Chief Financial Officer,of material information about the Company required to be included in periodicSecurities and Exchange Commission filings. However, in evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

There have been no changes in our internal control over financialreporting that occurred during the quarter ended June 30, 2003, that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PARTII–OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS.**

 

Neither the Company nor its subsidiaries are currently subject toany material legal proceeding, nor, to the Company’s knowledge, is any materiallegal proceeding threatened against the Company or its subsidiaries.

 

**ITEM 2. CHANGES IN SECURITIES AND USE OFPROCEEDS.**

 

Not applicable.

 

**ITEM 3. DEFAULTSUPON SENIOR SECURITIES.**

 

Not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

Not applicable.

 

**ITEM 5. OTHERINFORMATION.**

 

Not applicable.

 

**ITEM 6.  EXHIBITSAND REPORTS ON FORM 8-K**

 

**(a)****                                 ****EXHIBITS**

 

See the exhibit index.

 

**(b)****                                 ****REPORTS ON FORM 8-K**

 

On May 12, 2003, the Company filed a Current Report on Form 8-K toindicate it had issued a press release announcing its financial results for thequarter ended March 31, 2003.

 

On June 12, 2003, the Company filed a Current Report on Form 8-Kto indicate it had issued a press release announcing the declaration of thethird quarter of fiscal year 2003 dividend.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|   | **GLADSTONE CAPITAL CORPORATION**      |
|--------|----------------------------------------|
|   |                                   |
|   | By:                                    | /s/ HARRY BRILL |   |
|   |                                   |
|   | Harry Brill                            |
|   | Chief Financial  Officer and Treasurer |

 

Date: August 14,2003

 

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**EXHIBITINDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                                           |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                      |
| 3.1         |   | Articles of  Amendment and Restatement of the Articles of Incorporation, incorporated by  reference to Exhibit a.2 to Pre-Effective Amendment No. 1 to the Registration  Statement on Form N-2 (File No. 333-63700), filed July 27, 2001. |
|        |   |                                                                                                                                                                                                                                      |
| 3.2         |   | By-laws,  incorporated by reference to Exhibit b to Pre-Effective Amendment No. 1 to  the Registration Statement on Form N-2 (File No. 333-63700), filed July 27,  2001.                                                                  |
|        |   |                                                                                                                                                                                                                                      |
| 10.1        |   | Credit Agreement  dated as of May 19, 2003 between Gladstone Business Loan, LLC and CIBC World  Markets Corporation.                                                                                                                      |
|        |   |                                                                                                                                                                                                                                      |
| 11          |   | Computation of  Per Share Increase in  Stockholders’ Equity from Operations (included in the notes to the unaudited financial statements  contained in this report).                                                                 |
|        |   |                                                                                                                                                                                                                                      |
| 31.1        |   | Certification of  Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of  2002.                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                      |
| 31.2        |   | Certification of  Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of  2002.                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                      |
| 32.1        |   | Certification of  Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of  2002.                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                      |
| 32.2        |   | Certification of  Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of  2002.                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                      |

 

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