[Federal Register Volume 68, Number 7 (Friday, January 10, 2003)]
[Notices]
[Pages 1490-1492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-462]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25881; 812-12658]


Gladstone Capital Corporation; Notice of Application

January 3, 2003.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of an application for an order under section 61(a)(3)(B) 
of the Investment Company Act of 1940 (the ``Act'').

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Summary of Application: Applicant, Gladstone Capital Corporation, 
requests an order approving a proposal to issue stock options to 
directors who are not officers or employees of the applicant (the 
``Non-employee Directors'') pursuant to its Amended and Restated 2001 
Equity Incentive Plan (the ``Plan'').

Filing Dates: The application was filed on October 11, 2001, and 
amended on October 2, 2002, and January 2, 2003.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on January 28, 2003, and should be accompanied by proof of service 
on applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street, NW., Washington, DC 
20549-0609. Applicant, 1616 Anderson Road, Suite 208, McLean, VA 22102.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at

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(202) 942-0611, or Mary Kay Frech, Branch Chief, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. Applicant, a Maryland corporation, is a business development 
company (``BDC'') within the meaning of section 2(a)(48) of the Act.\1\ 
Applicant's primary business is making loans to small and medium-sized 
companies. Applicant states that its investment objective is to achieve 
a high level of current income. Applicant's investment decisions are 
made by its board of directors (the ``Board'') based on the 
recommendations of a credit committee comprised of senior management. 
Applicant does not have an external investment adviser within the 
meaning of section 2(a)(20) of the Act.
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    \1\ Section 2(a)(48) defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act and makes available significant managerial 
assistance with respect to the issuers of such securities.
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    2. Applicant requests an order under section 61(a)(3)(B) of the Act 
approving the grant of nonstatutory stock options pursuant to the Plan 
to its Non-employee Directors.\2\ Applicant has a six member Board. 
Three of the five current members are not ``interested persons'' (as 
defined in section 2(a)(19) of the Act) of the applicant 
(``Disinterested Directors'').\3\ The Plan was approved by both the 
Board and applicant's stockholders on July 23, 2001. On August 8, 2001, 
the Board and applicant's stockholders amended the Plan to increase the 
number of options that may be granted under the Plan. On September 23, 
2002, the Board amended the Plan to adjust the method for determining 
the exercise price of options granted pursuant to the Plan. The grant 
of options to current Non-employee Directors under the Plan will be 
made on the date the Commission issues an order on the application (the 
``Order Date'').
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    \2\ Each Non-employee Director receives an annual director's fee 
of $10,000, a fee of $1,000 for each Board meeting attended (with no 
additional compensation payable in connection with committee 
meetings), and reimbursement for related expenses.
    \3\ The applicant's Board presently has one vacancy. All of 
applicant's Non-employee Directors are Disinterested Directors.
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    3. Each Non-employee Director serving on the Order Date will be 
entitled to receive an option to purchase 10,000 shares of applicant's 
common stock (the ``Initial Grants''), which will vest in two equal 
installments of 5,000 shares on each of the first two anniversaries of 
August 23, 2001, the date of applicant's initial public offering of its 
common stock.\4\ Each new Non-employee Director joining the Board after 
the Order Date will be entitled to receive an option to purchase 10,000 
shares of applicant's common stock (the ``New Director Grants''), which 
will be awarded when such individual joins the Board. Additionally, at 
the time of each annual meeting of applicant's stockholders, beginning 
with the 2002 annual meeting of stockholders, applicant will grant each 
incumbent Non-employee Director an additional option to purchase 10,000 
shares of its common stock (the ``Annual Grants''). The options granted 
under the New Director Grants and the Annual Grants will vest in two 
equal installments of 5,000 shares on each of the first two 
anniversaries of the date of grant.\5\
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    \4\ In the case of one Non-employee Director, the options will 
vest on each of the first two anniversaries of June 5, 2002, the 
date that such Non-employee Director joined the Board.
    \5\ The options granted under the Annual Grants for 2002 will 
vest on each of the first two anniversaries of March 26, 2002, the 
date of applicant's 2002 annual meeting of stockholders.
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    4. The exercise price of the options will not be less than the 
current market value of, or if no market value exists, the current net 
asset value per share of, applicant's common stock on the date of the 
grant.\6\ Under the Plan, ``current market value'' is defined as the 
closing sales price of the shares as quoted on the NASDAQ National 
Market, or alternatively, on the exchange where applicant's shares are 
traded, on the day the option is granted.
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    \6\ The exercise price of the Initial Grants and the Annual 
Grants for 2002 will be the current market value of, or if no market 
value exists, the current net asset value per share of, applicant's 
common stock on the Order Date.
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    5. Options granted under the Plan will expire within 10 years from 
the date of grant. In the event of death or disability of a Non-
employee Director during the director's service, unexercised options 
immediately become exercisable and may be exercised only during the 
period of eighteen months following the date of death or twelve months 
following the date of disability, but in no event after the respective 
expiration date of such options. In the event of the termination of a 
Non-employee Director's directorship for a reason other than by death 
or disability, an option, to the extent then exercisable, may be 
exercised only during a period of three months following the date of 
termination, but in no event after the respective expiration date of 
such options. The options may not be transferred except for disposition 
by will or the laws of descent and distribution.
    6. Applicant's officers and employees, including any employee 
directors, also are eligible to receive stock options under the Plan. 
The total number of shares of common stock currently issuable under the 
Plan is 1,500,000 shares, representing approximately 13.7% of the 
10,071,844 shares of applicant's common stock outstanding as of 
December 31, 2002. As of December 31, 2002, applicant had issued 
options to purchase 1,410,000 shares to its officers and employees 
(including officer-directors) under the Plan. After the Initial Grants 
and the Annual Grants for 2002 are granted to the three current Non-
employee Directors, 40,000 shares of applicant's common stock would 
remain eligible for awards under the Plan.
    7. On December 5, 2002, the Board approved a proposal to amend the 
Plan to increase the number of shares authorized for issuance under the 
Plan to 2,000,000 shares (the ``Pool Increase Proposal''). Applicant 
will present the Pool Increase Proposal to its stockholders at its 2003 
annual stockholders meeting, which is expected to be held on February 
24, 2003. The Pool Increase Proposal, if approved, would represent 
approximately 17.4% of the shares of applicant's common stock 
outstanding as of December 31, 2002. Applicant will not issue any 
options to its officers, employees (including officer-directors) and 
Non-employee Directors beyond those currently remaining available for 
grant under the Plan unless and until its stockholders approve the Pool 
Increase Proposal.
    8. Applicant has no warrants, options or rights to purchase its 
outstanding voting securities other than those granted to its officers 
and employees pursuant to the Plan. The Plan as it relates to the Non-
Employee Directors will not be modified materially from the description 
in the application without obtaining an order of the Commission or 
approval of the Commission staff.

Applicant's Legal Analysis

    1. Section 63(3) of the Act permits a BDC to sell its common stock 
at a price below current net asset value upon the exercise of any 
option issued in accordance with section 61(a)(3) of the

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Act. Section 61(a)(3)(B) of the Act provides, in pertinent part, that a 
BDC may issue to its non-employee directors options to purchase its 
voting securities pursuant to an executive compensation plan, provided 
that: (i) The options expire by their terms within ten years; (ii) the 
exercise price of the options is not less than the current market value 
of the underlying securities at the date of the issuance of the 
options, or if no market exists, the current net asset value of the 
voting securities; (iii) the proposal to issue the options is 
authorized by the BDC's shareholders, and is approved by order of the 
Commission upon application; (iv) the options are not transferable 
except for disposition by gift, will or intestacy; (v) no investment 
adviser of the BDC receives any compensation described in section 
205(1) of the Investment Advisers Act of 1940, except to the extent 
permitted by clause (A) or (B) of that section; and (vi) the BDC does 
not have a profit-sharing plan as described in section 57(n) of the 
Act.
    2. In addition, section 61(a)(3) of the Act provides that the 
amount of the BDC's voting securities that would result from the 
exercise of all outstanding warrants, options, and rights at the time 
of issuance may not exceed 25% of the BDC's outstanding voting 
securities, except that if the amount of voting securities that would 
result from the exercise of all outstanding warrants, options, and 
rights issued to the BDC's directors, officers, and employees pursuant 
to an executive compensation plan would exceed 15% of the BDC's 
outstanding voting securities, then the total amount of voting 
securities that would result from the exercise of all outstanding 
warrants, options, and rights at the time of issuance will not exceed 
20% of the outstanding voting securities of the BDC.
    3. Applicant represents that the terms of the Plan meet all the 
requirements of section 61(a)(3)(B) of the Act. Applicant states in 
support of the application that the Non-employee Directors are actively 
involved in the oversight of applicant's affairs and that it relies on 
the judgment and experience of the Board. Applicant also states that 
the Non-employee Directors provide guidance and advice on operational 
issues, underwriting policies, credit policies, asset valuation, and 
strategic direction, as well as serving on committees. Applicant 
believes that the options to be granted to the Non-employee Directors 
provide significant incentives for the Non-employee Directors to remain 
on the Board and to devote their best efforts to the success of 
applicant's business. Applicant also states that the options will 
provide a means for the Non-employee Directors to increase their 
ownership interests in applicant, thereby ensuring close identification 
of their interests with the interests of applicant's stockholders.
    4. Applicant submits that the granting of options to the Non-
employee Directors to purchase shares of applicant's common stock is 
fair and reasonable and does not involve overreaching of applicant or 
its stockholders. Applicant states that the number of voting securities 
that would result from the exercise of all options issued or issuable 
to officers, employees, and Non-employee Directors under the Plan, 
assuming approval of the Pool Increase Proposal, is 2,000,000 shares, 
or approximately 17.4% of applicant's outstanding common stock, which 
is below the percentage limitations in the Act. The total number of 
options issuable under the Plan that may be granted in any one year to 
Non-employee Directors represents about 0.4% of applicant's outstanding 
common stock. Applicant asserts that, given the small amount of common 
stock issuable upon exercise of the options, the exercise of options 
pursuant to the Plan would not have a substantial dilutive effect on 
the net asset value of applicant's stock.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-462 Filed 1-9-03; 8:45 am]
BILLING CODE 8010-01-P