** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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, 2002.**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**COMMISSION FILE NUMBER:  814-00237**

 

**GLADSTONE CAPITALCORPORATION**

 

(Exact name of registrant as specified inits charter)

 

| **MARYLAND**                                                    |   | **54-2040781**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |
| **1616 ANDERSON ROAD,  SUITE 208  MCLEAN, VIRGINIA 22102**      |
| (Address of principal executive office)                         |
|                                                            |
| **(703) 286-7000**                                              |
| (Registrant’s telephone number,  including area code)      |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý No o.

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.  The number of shares of the issuer’s CommonStock, $0.001 par value, outstanding as of August 13, 2002 was 10,071,844.

 

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**GLADSTONE CAPITAL CORPORATION**

**TABLE OF CONTENTS**

 
| PART I.    | FINANCIAL INFORMATION                                                                         |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
| Item 1.    | Financial Statements  (Unaudited)                                                             |
|       |                                                                                          |
|       | Consolidated Balance  Sheets as of June 30, 2002 and September 30, 2001                       |
|       | Schedule  of Investments as of June 30, 2002                                                  |
|       | Consolidated  Statement of Operations for the three and nine months ended June 30, 2002       |
|       | Consolidated  Statements of Stockholders’ Equity for the nine months ended June 30, 2002 |
|       | Consolidated  Statement of Cash Flows for the nine months ended June 30, 2002                 |
|       | Financial Highlights for the nine  months ended June 30, 2002                                 |
|       | Notes to 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                                    |
|       |                                                                                          |
| PART II.   | OTHER INFORMATION                                                                             |
|       |                                                                                          |
| Item 1.    | Legal Proceedings                                                                             |
|       |                                                                                          |
| Item 5.    | Other Information                                                                             |
|       |                                                                                          |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                             |
|       |                                                                                          |
| SIGNATURES |

 

2

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**PART I — FINANCIALINFORMATION**

 

**Gladstone Capital Corporation**

 

**Consolidated FinancialStatements**

 

**June 30, 2002**

 

**CONTENTS**

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

 

3

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**GLADSTONE CAPITAL CORPORATION**

 

**CONSOLIDATED BALANCESHEETS**

 
|                                                                                                                                     |   | **(Unaudited)  June 30,  2002** |        | **September 30,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|-------------|-------------------------|--------|
| **ASSETS**                                                                                                                               |   |                            |        |                    |   |
| Investments at fair value (Cost of  $66,008,175 and $0, respectively)                                                                    |   | $                               | 66,008,175  |                    | $      | — |   |
| Cash and cash equivalents                                                                                                                |   | 70,657,117                      |        | 131,824,080             |   |
| Interest receivable - debt securities                                                                                                    |   | 551,881                         |        | —                  |   |
| Interest receivable                                                                                                                      |   | 10,362                          |        | 34,544                  |   |
| Interest receivable - officers                                                                                                           |   | 108,690                         |        | 45,355                  |   |
| Prepaid assets                                                                                                                           |   | 46,770                          |        | 166,250                 |   |
| Other assets                                                                                                                             |   | 341,987                         |        | 135,257                 |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **TOTAL ASSETS**                                                                                                                         |   | $                               | 137,724,982 |                    | $      | 132,205,486 |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                           |   |                            |        |                    |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **LIABILITIES**                                                                                                                          |   |                            |        |                    |   |
| Dividends Payable                                                                                                                        |   | $                               | 2,115,087   |                    | $      | — |   |
| Accounts Payable                                                                                                                         |   | 160,524                         |        | —                  |   |
| Interest Payable                                                                                                                         |   | 103                             |        | —                  |   |
| Accrued offering costs                                                                                                                   |   | —                          |        | 590,382                 |   |
| Accrued expenses and deferred  liabilities                                                                                               |   | 558,132                         |        | 365,960                 |   |
| Repurchase agreement                                                                                                                     |   | 4,900,000                       |        | —                  |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **Total Liabilities**                                                                                                                    |   | $                               | 7,733,846   |                    | $      | 956,342 |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                            |   |                            |        |                    |   |
| Common stock, $0.001 par value,  50,000,000 shares authorized and 10,071,844 and 10,060,178 shares issued and  outstanding, respectively |   | $                               | 10,072      |                    | $      | 10,060 |   |
| Capital in excess of par value                                                                                                           |   | 140,266,684                     |        | 140,131,778             |   |
| Notes receivable - officers                                                                                                              |   | (8,984,455                      | )           | (8,800,050              | )      |
| Net realized loss                                                                                                                        |   | —                          |        | (92,644                 | )      |
| Distributions in excess of undistributed  net realized earnings                                                                          |   | (1,301,165                      | )           | —                  |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **Total Stockholders’  Equity**                                                                                                     |   | $                               | 129,991,136 |                    | $      | 131,249,144 |   |
|                                                                                                                                     |   |                            |        |                    |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                      |   | $                               | 137,724,982 |                    | $      | 132,205,486 |   |

 

SEE ACCOMPANYING NOTES.

 

4

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**GLADSTONE CAPITAL CORPORATION**

 

**SCHEDULE OF INVESTMENTS**

 

**AS OF JUNE 30, 2002**

**(UNAUDITED)**

 
| **COMPANY(1)**               |   | **INDUSTRY**                      |       | **INVESTMENT**                            |   | **COST**   |       | **FAIR  VALUE** |   |
|------------------------------|--------|-----------------------------------|------------|-------------------------------------------|--------|------------|------------|-----------------|--------|
|                         |   |                              |       |                                      |   |       |       |            |   |
| ARI Holdings, Inc.           |   | Manufacturing auto parts          |       | Sr. Subordinated Debt                     |   | $          | 8,148,521  |            | $      | 8,148,521 |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Finn Corporation             |   | Manufacturing landscape equipment |       | Sr. Subordinated Debt                     |   | 10,500,000 |       | 10,500,000      |   |
|                         |   |                              |       | Common Stock Warrants for 2% ownership(2) |   | 37,000     |       | 37,000          |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Home Care Supply, Inc.       |   | Medical equipment rental          |       | Sr. Subordinated Debt                     |   | 20,000,000 |       | 20,000,000      |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Kozy Shack Enterprises, Inc. |   | Food preparations                 |       | Sr. Subordinated Debt                     |   | 4,500,000  |       | 4,500,000       |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Marcal Paper Mills, Inc.     |   | Manufacturing paper products      |       | Sr. Subordinated Debt                     |   | 7,500,000  |       | 7,500,000       |   |
|                         |   |                              |       | First Mortgage Facility                   |   | 9,053,127  |       | 9,053,127       |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Nextira, LLC                 |   | Network-related services          |       | Term Loan                                 |   | 5,498,780  |       | 5,498,780       |   |
|                         |   |                              |       | Line of Credit(3)                         |   | 770,747    |       | 770,747         |   |
|                         |   |                              |       |                                      |   |       |       |            |   |
| Totals                       |   |                              | ** ** |                                      |   | **$**      | 66,008,175 |            | **$**  | 66,008,175 |   |

 

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

(2)  This is a non-incomeproducing investment.

(3)  This is theoutstanding amount on an $8 million line of credit.

 

SEE ACCOMPANYING NOTES.

 

5

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**GLADSTONE CAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENT OF OPERATIONS**

 

**(UNAUDITED)**

 
|                                                                     |   | **Three Months  Ended June 30,  2002** |      | **Nine Months  Ended June 30,  2002** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
| **OPERATING INCOME**                                                     |   |                                   |      |                                  |   |
| Interest income - debt                                                   |   | $                                      | 1,808,834 |                                  | $      | 3,735,461 |   |
| Interest income - cash and cash  equivalents                             |   | 351,726                                |      | 1,360,811                             |   |
| Interest income - officer loans                                          |   | 108,691                                |      | 323,518                               |   |
| Loan and managerial assistance fees                                      |   | 645,898                                |      | 1,286,809                             |   |
| Other income                                                             |   | —                                 |      | 47,500                                |   |
| Total Operating Income                                                   |   | $                                      | 2,915,149 |                                  | $      | 6,754,099 |   |
|                                                                     |   |                                   |      |                                  |   |
| **OPERATING EXPENSES**                                                   |   |                                   |      |                                  |   |
| Salaries and benefits                                                    |   | $                                      | 364,253   |                                  | $      | 968,595 |   |
| Interest                                                                 |   | 103                                    |      | 103                                   |   |
| Rent                                                                     |   | 36,095                                 |      | 83,375                                |   |
| Professional fees                                                        |   | 119,322                                |      | 334,804                               |   |
| Directors’ fees                                                     |   | 7,000                                  |      | 14,000                                |   |
| General and administrative                                               |   | 163,802                                |      | 523,186                               |   |
| Total Operating Expenses                                                 |   | $                                      | 690,575   |                                  | $      | 1,924,063 |   |
|                                                                     |   |                                   |      |                                  |   |
| **NET OPERATING INCOME**                                                 |   | $                                      | 2,224,574 |                                  | $      | 4,830,036 |   |
|                                                                     |   |                                   |      |                                  |   |
| **NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING  FROM OPERATIONS** |   | $                                      | 2,224,574 |                                  | $      | 4,830,036 |   |
|                                                                     |   |                                   |      |                                  |   |
| **NET OPERATING INCOME PER COMMON SHARE:**                               |   |                                   |      |                                  |   |
| Basic                                                                    |   | $                                      | 0.22      |                                  | $      | 0.48 |   |
| Diluted                                                                  |   | $                                      | 0.22      |                                  | $      | 0.47 |   |
|                                                                     |   |                                   |      |                                  |   |
| **WEIGHTED AVERAGE SHARES OF COMMON STOCK  OUTSTANDING:**                |   |                                   |      |                                  |   |
| Basic                                                                    |   | 10,071,844                             |      | 10,071,844                            |   |
| Diluted                                                                  |   | 10,201,052                             |      | 10,176,944                            |   |

 

SEE ACCOMPANYING NOTES.

 

6

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**GLADSTONE CAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**(UNAUDITED)**

 
|                                                                 |   |       |   | **Capital in  Excess of  Par Value** |   | **Notes  Receivable  From Sale of  Common  Stock** |   | **(Distributions  in Excess of)  Undistributed  Net Realized  Earnings** |   | **Total  Stockholders’  Equity** |       |
|----------------------------------------------------------------------|--------|------------|--------|--------------------------------------|--------|----------------------------------------------------|--------|--------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                 |   |       |
| **Common Stock**                                                     |
| **Shares**                                                           |   | **Amount** |
| Balance at September 30, 2001                                        |   | 10,060,178 |   | $                                    | 10,060 |                                               | $      | 140,131,778                                                              |   | $                                     | (8,800,050 | ) | $ | (92,644 | ) | $ | 131,249,144 |   |
|                                                                 |   |       |   |                                 |   |                                               |   |                                                                     |   |                                  |       |   |   |
| Employee Stock Option Exercises                                      |   | 11,666     |   | 12                                   |   | 185,878                                            |   | (185,890                                                                 | )      |                                  |       | — |   |
|                                                                 |   |       |   |                                 |   |                                               |   |                                                                     |   |                                  |       |   |   |
| Offering Costs                                                       |   |       |   |                                 |   | (50,972                                            | )      |                                                                     |   |                                  |       | (50,972 | ) |
|                                                                 |   |       |   |                                 |   |                                               |   |                                                                     |   |                                  |       |   |   |
| Repayment of Principal on Notes  Receivable                          |   |       |   |                                 |   |                                               |   | 1,485                                                                    |   |                                  |       | 1,485 |   |
|                                                                 |   |       |   |                                 |   |                                               |   |                                                                     |   |                                  |       |   |   |
| Net Increase in Stockholders’ Equity  Resulting from Operations |   |       |   |                                 |   |                                               |   |                                                                     |   | 4,830,036                             |       | 4,830,036 |   |
|                                                                 |   |       |   |                                 |   |                                               |   |                                                                     |   |                                  |       |   |   |
| Distributions                                                        |   | —     |   | —                               |   | —                                             |   | —                                                                   |   | (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 |   |

 

SEE ACCOMPANYING NOTES.

 

7

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**GLADSTONE CAPITAL CORPORATION**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS AND CASH EQUIVALENTS**

 

**(UNAUDITED)**

 
|                                                                                                                                         |   | **Nine Months Ended  June 30, 2002** |        |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                                                     |   |                                 | ** **  |
| Net increase in stockholders’ equity  resulting from operations                                                                         |   | $                                    | 4,830,036   |   |
| Adjustments to reconcile net increase in  stockholders’ equity resulting from operations to net cash provided by  operating activities: |   |                                 |        |
| Increase in interest receivable                                                                                                              |   | (591,034                             | )           |
| Increase in other assets                                                                                                                     |   | (206,730                             | )           |
| Increase in accrued expenses and  deferred liabilities                                                                                       |   | 93,679                               |        |
| Decrease in prepaid assets                                                                                                                   |   | 119,480                              |        |
| Increase in accounts payable                                                                                                                 |   | 160,524                              |        |
| Increase in payment in kind interest                                                                                                         |   | (220,786                             | )           |
| Net Cash Provided by Operating  Activities                                                                                                   |   | $                                    | 4,185,169   |   |
|                                                                                                                                         |   |                                 |        |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                                                                     |   |                                 | ** **  |
| Purchase of investments                                                                                                                      |   | $                                    | (65,787,389 | ) |
| Increase in interest payable                                                                                                                 |   | 103                                  |        |
| Increase in other liabilities                                                                                                                |   | 98,493                               |        |
| Increase in repurchase agreement                                                                                                             |   | 4,900,000                            |        |
| Receipt of principal on notes receivable  – officers                                                                                    |   | 1,485                                |        |
| Net Cash Used in Investing Activities                                                                                                        |   | $                                    | (60,787,308 | ) |
|                                                                                                                                         |   |                                 |        |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                                                                     |   |                                 | ** **  |
| Offering costs                                                                                                                               |   | $                                    | (50,971     | ) |
| Payment of accrued offering costs                                                                                                            |   | (590,382                             | )           |
| Distributions paid                                                                                                                           |   | (3,923,471                           | )           |
| Net Cash Used in Financing Activities                                                                                                        |   | $                                    | (4,564,824  | ) |
|                                                                                                                                         |   |                                 |        |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                                                                                |   | $                                    | (61,166,963 | ) |
|                                                                                                                                         |   |                                 |        |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                                                           |   | $                                    | 131,824,080 |   |
|                                                                                                                                         |   |                                 |        |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                                                                 |   | $                                    | 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     |   |

 

SEE ACCOMPANYING NOTES.

 

8

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**Gladstone Capital Corporation**

**Financial Highlights**

**(Unaudited)**

 
|                                                |   | **Nine Months Ended** |        |
|-----------------------------------------------------|--------|-----------------------|-------------|
|                                                |   | **June 30, 2002**     | ** **  |
| **Per Share Data (1)**                              |   |                  | ** **  |
| Net asset value at beginning of period              |   | $                     | 13.05       |   |
| Net operating income                                |   | 0.48                  |        |
|                                                |   |                  |        |
| Issuance of common stock                            |   | (0.01                 | )           |
| Distributions from net investment income            |   | (0.60                 | )           |
| Effect of antidilution                              |   | (0.01                 | )           |
| Net asset value at end of period                    |   | $                     | 12.91       |   |
|                                                |   |                  |        |
| Per share market value at beginning of period       |   | $                     | 16.38       |   |
| Per share market value at end of period             |   | 18.05                 |        |
| Total Return (2) (3)                                |   | 13.86                 | %           |
| Shares outstanding at end of period                 |   | 10,071,844            |        |
|                                                |   |                  |        |
| **Ratios/Supplemental Data**                        |   |                  | ** **  |
| Net assets at end of period                         |   | $                     | 129,991,136 |   |
| Average net assets                                  |   | 130,888,323           |        |
| Ratio of operating expenses to average net assets   |   | 1.47                  | %           |
| Ratio of net operating income to average net assets |   | 3.69                  | %           |

 

----

(1)  Basic per share data.

(2)  Amounts were not annualized for the resultsof the nine-month periods ended June 30, 2002.

(3)  Total return equals theincrease of the ending market value over the beginning market value, plusdividends, divided by the beginning market value.

 

See accompanying notes.

 

9

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**GLADSTONE CAPITAL CORPORATION**

**NOTES TO FINANCIALSTATEMENTS**

**(UNAUDITED)**

**JUNE 30, 2002**

 

**NOTE 1. UNAUDITED INTERIMFINANCIAL STATEMENTS**

 

Interim financial statements of GladstoneCapital Corporation (the “Company”) are prepared in accordance with generallyaccepted accounting principles (“GAAP”) for interim financial information andpursuant to the requirements for reporting on Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, certaindisclosures accompanying annual financial statements prepared in accordancewith GAAP are omitted.  In the opinionof management, all adjustments, consisting solely of normal recurring accruals,necessary for the fair presentation of financial statements for the interimperiods have been included.  The currentperiod’s results of operations are not necessarily indicative of results thatultimately may be achieved for the year. The interim financial statements and notes thereto should be read inconjunction with the financial statements and notes thereto included in theCompany’s Form 10-K for the fiscal year ended September 30, 2001, as filed withthe Securities and Exchange Commission.

 

The Company did not include thecomparative interim financial information due to the limited nature of theCompany’s activities during the prior period, which represents the period fromMay 30, 2001 through June 30, 2001.  TheCompany believes the comparative financial information will not provide usefulinformation to the readers of the Company’s financial statements.

 

**NOTE 2. ORGANIZATION**

 

The Company was incorporated under theGeneral Corporation Laws of the State of Maryland on May 30, 2001 as aclosed-end investment company.  TheCompany has elected to be treated as a business development company 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-ownedsubsidiary of the Company, conducts the daily administrative operations of theCompany.  The financial statements ofthis subsidiary are consolidated with those of the Company.

 

**NOTE 3. EARNINGS PERSHARE**

 

The following table sets forth thecomputation of basic and diluted earnings per share for the nine months andthree months ended June 30, 2002:

 
|                                                |   | **Three Months  Ended June 30,  2002** |      | **Nine Months  Ended June 30,  2002** |   |
|-----------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
| Numerator for basic and diluted earnings  per share |   | $                                      | 2,224,574 |                                  | $      | 4,830,036 |   |
| Denominator for basic weighted average  shares      |   | 10,071,844                             |      | 10,071,844                            |   |
| Employee stock options                              |   | 711,664                                |      | 711,664                               |   |
| Dilutive potential shares                           |   | 129,208                                |      | 105,100                               |   |
| Denominator for diluted weighted average  shares    |   | 10,201,052                             |      | 10,176,944                            |   |
| Basic earnings per common share                     |   | 0.22                                   |      | 0.48                                  |   |
| Diluted earnings per common share                   |   | 0.22                                   |      | 0.47                                  |   |
|                                                     |        |                                        |           |                                       |        |  |  |

 

10

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**NOTE 4. DIVIDENDS**

 

The Company is required to pay out as adividend 90% of its ordinary income and short-term capital gains for eachtaxable year in order to maintain its status as a RIC under Subtitle A, Chapter1 of Subchapter M of the Code.  It isthe policy of the Company to pay out as a dividend up to 100% of thoseamounts.  The amount to be paid out as adividend is determined by the Board of Directors each quarter and is based onthe annual earnings estimated by the management of the Company.  Based on that estimate, a dividend isdeclared each quarter.  At year-end theCompany may pay a bonus dividend, in addition to the quarterly dividends, toensure that it has paid out at least 90% of its ordinary income and short-termcapital gains for the year.  The Companyhas a policy of retaining long-term capital gains, if any, and not paying themout as dividends.

 

On January 15, 2002, the Company paid adividend of $0.18 per share on its common stock to its stockholders of recordas of December 31, 2001.  On April 8,2002, the Company paid a dividend of $0.21 per share on its common stock to itsstockholders of record as of March 28, 2002. On July 8, 2002, the Company paid a dividend of $0.21 per share on itscommon stock to its stockholders of record as of June 28, 2002.

 

**NOTE 5. INVESTMENTVALUATION**

 

The Company carries its investments atfair value, as determined by its Board of Directors.  Securities that are publicly traded are valued at the closingprice on the valuation date.  Debt andequity securities that are not publicly traded are valued at fair value asdetermined in good faith by the Board of Directors.  In making such determination, the Board of Directors valuesnon-convertible debt securities at cost plus amortized original issue discount,if any, unless adverse factors lead to a determination of a lesservaluation.  In valuing convertible debt,equity or other securities, the Board of Directors determines the fair valuebased on the collateral, the issuer’s ability to make payments, the earnings ofthe issuer, sales to third parties of similar securities, the comparison topublicly traded securities, and other pertinent factors.  Due to the uncertainty inherent in thevaluation process, such estimates of fair value may differ significantly fromthe values that would have resulted had a ready market for the securitiesexisted, and the differences could be material.  Additionally, changes in the market environment and other eventsthat may occur over the life of the investments may cause the gains ultimatelyrealized on these investments to be different than the valuation currentlyassigned.

 

**NOTE 6. LOAN ANDMANAGERIAL ASSISTANCE FEES**

 

The 1940 Act requires that a businessdevelopment company 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.  Thesemanagerial assistance services vary by investment, but generally consist ofreviewing existing credit facilities, arranging bank financing, arrangingequity financing, structuring financing from multiple lenders, structuringfinancing from equity investors, restructuring existing loans, raising equityand debt capital, and providing general financial advice.  For the three and nine months ended June 30,2002, these fees totaled $645,898 and $1,286,809, respectively.

 

From time to time, the Company will beinvited to participate as a co-lender in a transaction.  Where the Company does not providesignificant managerial assistance services in connection with its investment,loan fees paid to the Company in such situations will be deferred and amortizedover the life of the loan.

 

**NOTE 7. PAYMENT IN KIND INTEREST**

 

The Company has loans in its portfoliowhich contain a payment in kind (“PIK”) provision. The PIK interest is added tothe principal balance 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 paidout to stockholders in the form of dividends, even though the Company has notyet collected the cash. For the three and nine months ended June 30, 2002, theCompany recorded PIK income of $124,280 and $254,738, respectively.

 

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**NOTE 8. 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 date. 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 28,2002, the Company entered into a Repurchase Agreement with UBS Paine Webber for$4,900,000.  The  Repurchase Agreement was fully collateralized by aUnited States Treasury Bill with a fair value of $4,998,493 that matured onJuly 5, 2002.  The interest rate on the Repurchase Agreement was 1.96%. The Repurchase Agreement was settled on July 1, 2002.  In the futurethe 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 regulated investmentcompany ("RIC") under Subchapter M of the Internal Revenue Code. 

 

**NOTE 9. DEFERRED COMPENSATION PLAN**

 

The company has adopted a deferredcompensation plan (the “Plan”) effective January 1, 2002.  The Plan permits an employee to defer thelesser of 75% of his or her total compensation or the applicable InternalRevenue Service (“IRS”) limit.  Theemployees are eligible to participate in the Plan upon completion of 1,000hours of service within the first six months of employment or after one year ofservice.  The service requirement iswaived for those employees who were employed as of January 1, 2002.    As of June 30, 2002, the Company had notfunded any contributions to the Plan. As of June 30, 2002, the Company had not received a determination letterfrom the IRS concurring that the deferred compensation plan satisfies thequalification requirements of the Internal Revenue Code.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**All statements containedherein, other than historical facts, may constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Thesestatements may relate to, among other things, future events or our futureperformance or financial condition. In some cases, you can identifyforward-looking statements by terminology such as “may,” “might,” “believe,”“will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,”“intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential” orthe negative of such terms or comparable terminology. These forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, levels of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by suchforward-looking statements. Such factors include, among others: (1) adversechanges in interest rates; (2) our failure or inability to establish ormaintain referral arrangements with leveraged buyout funds and venture capitalfunds to generate loan opportunities; (3) the loss of one or more of ourexecutive officers, in particular David Gladstone or Terry Lee Brubaker; (4)our inability to establish or maintain a credit facility on terms reasonablyacceptable to us, if at all; (5) our inability to successfully securitize ourloan portfolio on terms reasonably acceptable to us, if at all; (6) thedecision of our competitors to aggressively seek to make senior andsubordinated loans to small and medium-sized businesses on terms more favorablethan we intend to provide; and (7) those factors listed under the caption “RiskFactors” of the Annual Report on Form 10-K as filed with the Securities andExchange Commission on December 21, 2001. We caution readers not to place unduereliance on any such forward-looking statements, which are made pursuant to thePrivate Securities Litigation Reform Act of 1995 and, as such, speak only as ofthe date made. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of this Form 10-Q**.

 

*The following analysisof our financial condition and results of operations should be read inconjunction with our financial statements and the notes thereto containedelsewhere in this report.*

 

**OVERVIEW**

 

We were incorporated under the GeneralCorporation Laws of the State of Maryland on May 30, 2001.  Our investment objectives are to achieve ahigh level of current income by investing in debt securities, consistingprimarily of senior notes, senior subordinated notes and junior subordinatednotes, of established private businesses that are backed by leveraged buyout funds,venture capital funds or others, with a particular emphasis on seniorsubordinated notes.  In addition, we mayacquire existing loans that meet this profile from leveraged buyout funds,venture capital funds and others.  Wewill also seek to provide our stockholders with long-term capital growththrough the appreciation in the value of warrants or other equity instrumentsthat we may receive when we make loans. We operate as a closed-end, non-diversified management investmentcompany, and have elected to be treated as a business development company underthe Investment Company Act of 1940, as amended (the “1940 Act”).

 

We seek out small and medium-sizedbusinesses that meet certain criteria, including (1) the potential for growthin cash flow, (2) adequate assets for loan collateral, (3) experiencedmanagement teams with significant ownership interest in the borrower, (4)profitable operations based on the borrower’s cash flow, (5) reasonablecapitalization of the borrower (usually by leveraged buyout funds or venturecapital funds) and (6) the potential to realize appreciation and gain liquidityin our equity position.  We anticipatethat this liquidity will be achieved through a merger or acquisition of the borrower,a public offering by the borrower or by exercise of our right to require theborrower to buy back its warrants.  Welend to borrowers that need funds to finance growth, restructure their balancesheets or effect a change of control.

 

Our loans typically range from $5 millionto $15 million, mature in no more than seven years and accrue interest at afixed rate or an annualized variable rate that exceeds the prime rate.  Most, if not all, of the debt securities weacquire are unrated by credit rating agencies. To the extent possible, our loans generally are

 

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collateralized by a security interest in the borrower’sassets.  Interest payments are generallymade monthly or quarterly with amortization of principal generally beingdeferred for several years.  Theprincipal amount of the loans and any accrued but unpaid interest generallybecome due at maturity at five to seven years. When we receive a warrant to purchase stock in a borrower in connectionwith a loan, the warrant will typically have a nominal exercise price andentitle us to purchase a modest percentage of the borrower’s stock.

 

In addition, as a business developmentcompany under the 1940 Act, we are required to make available significantmanagerial assistance to our portfolio companies.  We provide these services, for which we receive fees, through ourwholly-owned subsidiary, Gladstone Advisers, Inc.  Such fees are typically paid in part at the time a prospectiveportfolio company signs a non-binding term sheet with us, with the remainderpaid at the closing of the investments and are generally non-recurring, howeverin some instances they may have a recurring component.  The specific services we provide vary byportfolio company, but generally consist of reviewing existing creditfacilities, arranging bank financing, arranging equity financing, structuringfinancing from multiple lenders, structuring financing from equity investors,restructuring existing loans, raising equity and debt capital and providinggeneral financial advice. We record these fees as managerial assistance feerevenue in the period in which the fees are paid.

 

Prior to making an investment, weordinarily enter into a non-binding term sheet with the potentialborrower.  These non-binding term sheetsare generally subject to a number of conditions, including but not limited tothe satisfactory completion of our due diligence investigations of thepotential borrower’s business and reaching agreement on the legal documentationfor the loan.  Typically, upon executionof the non-binding term sheet, the potential borrower pays us a non-refundablefee for our services rendered through the date of the non-binding termsheet.  We recognize this fee as revenueupon execution of the non-binding term sheet.

 

In the event that we expend significanteffort in considering and negotiating a potential investment that ultimately isnot consummated, we generally will seek reimbursement from the proposedborrower for our reasonable expenses incurred in connection with the proposedtransaction.  Any amounts collected arerecognized as “other income” in the quarter in which such reimbursement isreceived.  Also, in the event that wehave incurred significant legal fees in connection with the transaction, wewill typically also seek reimbursement for these expenses from the proposedborrower.  However, there can be noguarantee that we will be successful in collecting any such reimbursements.

 

To date, we have made eight differentloans to, or investments in, seven companies for a total of approximately $82million, including one investment that we closed after the end of the thirdfiscal quarter. We have further commitments to lend up to, approximately, anadditional $7 million to one of our portfolio companies under a line of credit. In addition, we are earnestly workingtoward the consummation of more investments. 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 each prospective loan, wewill only agree to provide the loan if, among other things, the results of ourdue diligence investigations are satisfactory, the terms and conditions of theloan are acceptable and all necessary consents are received.  Our management has initiated its duediligence investigations of the potential borrowers, however we can not assureyou that we will not discover facts in the course of completing our duediligence that would render a particular investment imprudent or that any ofthese loans will actually be made.

 

We carry our investments on our balancesheet at fair value, as determined by our board of directors.  Securities that are publicly traded will bevalued at their respective closing price prices on the valuation date.  Debt and equity securities that are notpublicly traded are valued at fair value as determined in good faith by ourboard of directors.  In making suchdetermination, our board of directors values non-convertible debt securities atcost plus amortized original issue discount, if any, unless adverse factorslead to a determination of a lesser valuation. In valuing convertible debt, equity or other securities, our board of directorsdetermines the fair value based on the collateral, the issuer’s ability to makepayments, the earnings of the issuer, sales to third parties of similarsecurities, the comparison to publicly traded securities and other pertinentfactors.  Due to the uncertaintyinherent in the valuation process, such estimates of fair value may differsignificantly from the values that would have resulted had a ready market forthe securities existed, and the differences could be material.  Additionally, changes in the marketenvironment and other events that may occur over the life of the investmentsmay cause the gains ultimately realized on these investments to be differentthan the valuation currently assigned.

 

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**RESULTS OF OPERATIONS**

 

***For theNine Months Ended June 30, 2002***

 

**Operating Income**

 

Operating income for the nine months endedJune 30, 2002 was approximately $6.8 million. This amount consisted of approximately $1.4 million in interest incomefrom our invested cash and cash equivalents, approximately $3.7 million ininterest income from our investments in debt securities of private companies,approximately $1.3 million in fee income, approximately $323,000 in interestincome from loans to our employees in connection with the exercise of employeestock options and approximately $47,000 of other income related to feescollected from companies with whom investment negotiations have beenterminated.

 

The interest on invested cash and cashequivalents primarily reflects the interest we received on the investment ofthe proceeds of our initial public offering in short-term investment gradesecurities during the nine months.  Aswe acquire debt securities, we expect that income from invested cash and cashequivalents will decline as a percentage of total revenue and that interestincome from debt securities will increase and become our predominant source ofrevenue.

 

Income from investments in debt securitiesof private companies was modest for the nine months ended June 30, 2002 sincewe did not close our first investment until November 6, 2001 and made no newinvestments in the second quarter.  Aswe continue to invest the proceeds of our initial public offering in debtsecurities of private companies, we expect that we will generate additionalincome from these debt securities, which we anticipate will be at interestrates significantly greater than the rates that we are currently receiving onour deposited cash and cash equivalents.

 

Fee income for the nine months ended June30, 2002 consisted primarily of managerial assistance fees received in thefirst and third fiscal quarters in connection with investments we closed inthose quarters. It also includes approximately $150,000 in fees associated withour outstanding line of credit with Nextira, LLC.

 

For the nine months ended June 30, 2002,other income was comprised of $47,000 in up-front fees for two proposedinvestments that were ultimately terminated and approximately $6,000 inreimbursed expenses incurred in connection with one of those investments.

 

The only significant continuing revenueassociated with the investments we have already closed is interest paid and,potentially, capital gains received in connection with the liquidation of anyassociated equity interest (e.g., warrants). While in some instances we mayalso receive on-going managerial fee revenue in connection with a consummatedinvestment, any such amounts are insignificant.

 

**Operating Expenses**

 

Operating expenses for the nine monthsended June 30, 2002 were approximately $1.9 million.  This amount consisted primarily of salaries and benefits,professional fees, rent and general and administrative expenses.

 

Salaries and benefits consisted ofapproximately $969,000 for the nine months ended June 30, 2002; we expect thisexpense to increase as we hire additional loan officers.  The remainder of the operating expensesincurred for the nine months ended June 30, 2002 consisted of approximately$335,000 in professional fees, $83,000 in rent and $523,000 in general andadministrative expenses.

 

We believe that this level of operatingexpenses is not necessarily indicative of our future operating expenses.  We estimate that over time, as we begin tomore fully deploy the proceeds of our initial public offering, our operatingexpenses will be approximately two percent of our net assets.

 

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**Net Operating Income**

 

As a result of the operating income andoperating expenses described above, we had net operating income ofapproximately $4.8 million for the nine months ended June 30, 2002.  Based on a weighted-average of 10,071,844(basic) and 10,176,944 (fully diluted) shares outstanding, our net operatingincome per common share for the nine months ended June 30, 2002 was $0.48(basic) and $0.47 (fully diluted).

 

***For theThree Months Ended June 30, 2002***

 

**Operating Income**

 

Operating income for the quarter endedJune 30, 2002 was approximately $2.9 million. This amount consisted of approximately $352,000 in interest income fromour invested cash and cash equivalents, approximately $1.8 million in interestincome from our investments in debt securities of private companies,approximately $646,000 in fee income, approximately $109,000 in interest incomefrom loans to our employees in connection with the exercise of employee stockoptions.

 

The interest on invested cash and cashequivalents primarily reflects the interest we received on the investment ofthe proceeds of our initial public offering in short-term investment gradesecurities during the quarter.  As weacquire debt securities, we expect that income from invested cash and cashequivalents will decline as a percentage of total revenue and that interestincome from debt securities will increase and become our predominant source ofrevenue.

 

Income from investments in debt securitiesof private companies increased during the quarter ended June 30, 2002 ascompared to the quarter ended March 31, 2002 as we realized interest income onthe five prior investments for the entire quarter as well as interest income onour two investments that closed in the third quarter.

 

Fee income for the quarter ended June 30,2002 consisted of approximately $628,000 in managerial assistance fees andapproximately $18,000 in fees associated with our outstanding line of creditwith one of our portfolio companies. The managerial assistance fees werereceived from the two portfolio companies with which we consummated investmentsduring the quarter and from the one company with which we consummated aninvestment after the end of the quarter, but prior to the filing of this Form10-Q, of which we recognized $150,000 in income in the quarter ended June 30,2002. The remaining $250,000 in managerial assistance fees associated with thisinvestment will be recognized in the quarter ending September 30, 2002.

 

The only significant continuing revenueassociated with the investments we have already closed is interest paid and,potentially, capital gains received in connection with the liquidation of anyassociated equity interest (e.g., warrants). While in some instances we mayalso receive on-going managerial fee revenue in connection with a consummatedinvestment, any such amounts are insignificant.

 

**Operating Expenses**

 

Operating expenses for the quarter endedJune 30, 2002 were approximately $690,000. This amount consisted primarily of salaries and benefits, professionalfees, rent and general and administrative expenses.

 

Salaries and benefits consisted ofapproximately $364,000 for the quarter ended June 30, 2002; we expect thisexpense to increase as we hire additional loan officers.  The remainder of the operating expensesincurred for the quarter ended June 30, 2002 consisted of approximately$119,000 in professional fees, $36,000 in rent and $164,000 in general andadministrative expenses.

 

We believe that this level of operatingexpenses is not necessarily indicative of our future operating expenses.  We estimate that over time, as we begin tomore fully deploy the proceeds of our initial public offering, our operatingexpenses will be approximately two percent of our net assets.

 

**Net Operating Income**

 

As a result of the operating income andoperating expenses described above, we had net operating income ofapproximately $2.2 million for the quarter ended June 30, 2002.  Based on a weighted-average of 10,071,844

 

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(basic) and 10,201,052 (fully diluted) shares outstanding, our netoperating income per common share for the quarter ended June 30, 2002 was $0.22(basic and fully diluted).

 

**LIQUIDITY AND CAPITALRESOURCES**

 

At June 30, 2002, we had investments indebt securities of, or loans to, six private companies, totaling approximately$66 million of total investment assets. We have also loaned approximately$770,000 to one portfolio company under an $8 million line of credit. On July2, 2002, we closed an investment in Coyne International Enterprises Corp., auniform leasing company. The investment consisted of a five-year seniorsubordinated term loan of $16 million.

 

Cash provided by operating activities forthe nine months ended June 30, 2002, consisting primarily of the itemsdescribed in “Results of Operations,” was approximately $4.8 million. Net cashused in investing activities was approximately $60.8 million for the nine monthsended June 30, 2002 and primarily consisted of the amounts used to makeinvestments in our six portfolio companies. Net cash used in financing activities was approximately $4.6 million forthe nine months ended June 30, 2002 and consisted primarily of the repayment ofaccrued costs of approximately $640,000 associated with our initial publicoffering and the payment of our first quarter dividend of approximately $1.8million and our second quarter dividend of approximately $2.1 million.

 

During the quarter ended June 30, 2002,cash and cash equivalents decreased from approximately $132 million at thebeginning of the quarter to approximately $71 million at the end of thequarter.  This decrease of approximately$61 million was largely the result of our investing activities, describedabove.

 

On June 28, 2002, the Company entered into aRepurchase Agreement with UBS Paine Webber for $4,900,000.  The Repurchase Agreement was fully collateralized by a United States TreasuryBill with a fair value of $4,998,493 that matured on July 5, 2002.  Theinterest rate on the Repurchase Agreement was 1.96%.  The RepurchaseAgreement was settled on July 1, 2002.  In the future the Company plans touse a similar form of repurchase agreements as an investment option or in orderto satisfy certain asset diversification requirements and maintain theCompany's status as a regulated investment company ("RIC") underSubchapter M of the Internal Revenue Code.  

 

In order to qualify as a regulatedinvestment company and to avoid corporate level tax on the income we distributeto our stockholders, we are required, under Subchapter M of the InternalRevenue Code, to distribute at least 90% of our ordinary income and short-termcapital gains to our stockholders on an annual basis.  In accordance with these requirements, on December 10, 2001, wedeclared a quarterly cash dividend of $0.18 per share on our common stock whichwas paid on January 15, 2002 to stockholders of record as of December 31, 2002,on March 14, 2002 we declared a quarterly cash dividend of $0.21 per sharewhich was paid on April 8, 2002 to stockholders of record as of March 28, 2002,and on June 5, 2002, we declared a quarterly cash dividend of $0.21 per shareon our common stock which was paid on July 8, 2002 to stockholders of record asof June 28, 2002.  These dividends werepaid from ordinary income.

 

We anticipate borrowing funds to obtainadditional capital once the proceeds of our initial public offering have beenfully invested.  We also intend topursue a strategy of securitizing our loan portfolio in approximately twoyears.  We would use the cash we receiveupon the sale of interests in our loans to repay bank borrowings and makeadditional loans.  We can not assure youthat this securitization strategy will be successful.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

We are subject to financial market risks,including changes in interest rates.  Weexpect that ultimately approximately 50% of the loans in our portfolio will bemade at fixed rates, with approximately 50% made at variable rates, however, todate all of our loans have been made at fixed rates.

 

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We expect to borrow funds to financefuture lending activities after we have substantially fully invested theproceeds of our initial public offering. These future borrowings may be at fixed rates or variable rates. Todate, we have not yet borrowed any funds.

 

We expect to hedge against interest ratefluctuations in the future by using standard hedging instruments such asfutures, options and forward contracts. While hedging activities may insulate us against adverse fluctuations ininterest rates, they may also limit our ability to participate in the benefitsof lower interest rates with respect to our portfolio of investments.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1. LEGALPROCEEDINGS.**

 

Neither the Company nor its subsidiary iscurrently subject to any material legal proceeding, nor, to the Company’sknowledge, is any material legal proceeding threatened against the Company orits subsidiary.

 

**ITEM 5. OTHER INFORMATION.**

 

On June 5, 2002, the Company’s Board ofDirectors was expanded to seven members and Michela English was elected director,to serve until the 2005 annual meeting of stockholders of the Company.

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 
| **(a)** | **EXHIBITS**                                                                                        |
|---------|-----------------------------------------------------------------------------------------------------|
|    |                                                                                                |
|    | See the exhibit index on page 21.                                                                   |
|    |                                                                                                |
| **(b)** | **REPORTS ON FORM 8-K**                                                                             |
|    |                                                                                                |
|    | No reports on Form 8-K were filed by the Company during the  period for which this report is filed. |

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                  | **GLADSTONE CAPITAL  CORPORATION**    |
|-----------------------|---------------------------------------|
|                  |                                  |
|                  |                                  |
|                  | By: /s/ Harry Brill                   |   |
|                  |                                  |
|                  | Harry Brill                           |
|                  | Chief Financial Officer and Treasurer |
|                  |                                  |
|                  |                                  |
| Date: August 14, 2002 |                                  |

 

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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.                                                                   |
|        |   |                                                                                                                                                                                                                                      |
| 11          |   | Computation of Per Share Earnings (included in the notes to the  unaudited financial statements contained in this report).                                                                                                                |
|        |   |                                                                                                                                                                                                                                      |
| 99.1        |   | Certification.                                                                                                                                                                                                                            |

 

All other exhibits for which provision ismade in the applicable regulations of the Securities and Exchange Commissionare not required under the related instruction or are inapplicable andtherefore have been omitted.

 

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