Good morning, and welcome to the Gladstone Investment Corporation's first quarter ended June 30, 2012, shareholder's conference call. All participants will be in listen-only mode for the presentation. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to David Gladstone. Mr. Gladstone, please go ahead.

All right. Thank you, Keith, for that nice introduction, and hello and good morning to all of you. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. The common stock trading symbol is GAIN and the preferred stock trading symbol is GAINP. Again, thank you all for calling in. We're always happy to talk to stockholders about the company and I wish we could do it more often. We've been trying to figure out a way that we could talk to you more often about the company. We haven't come up with one yet. We all hope you take the opportunity to visit the website at www.GladstoneInvestment.com, where you can sign up for email notices so you can receive information about your company on a timely fashion. Please remember that if you're in the area, the Washington, D.C. area, we're right a stone's throw from Washington, D.C. and McLean, Virginia, so stop by, say hello. You'll see some of the finest people in the business right here in this office. This is a reminder that we're holding our annual shareholders meeting this Thursday, August 9 -- next Thursday, August 9, what am I saying? Thursday, August 9 at the Hilton McLean Tysons Corner located at 7920 Jones Branch Drive in McLean, Virginia. Please remember, if you're not coming to vote your shares or you can vote your shares and still come. We have a lot of items on the proxy and we'd like to get your approval of those so that things -- we don't have to spend a lot of money calling people at dinner time trying to get them to vote. Now, before I get started I need to read a statement about forward-looking statements. This conference…

Thank you, David, and good morning, all. Just as a reminder, the business of Gladstone Investment is to invest in buyout transactions of businesses in the lower middle market. Our investments are primarily subordinated debt with equity and occasionally some senior debt. This combination produces a mix of assets in our portfolio which is key to our strategy. Our debt investments provide income to grow the dividends while we seek to build shareholder value through capital appreciation of the equity investments. In this regard, at June 30, 2012, quarter end, our investment assets debt cost consisted of a mix of approximately $198 million or 72% in debt investments which produces income and about $78 million or 28% in equity securities which we expect will produce capital gains. This ratio of 72/28 is slightly higher in equity than our goal of 80/20 at cost. Of course, there are a number of factors at any time that affect this ratio, including loan payoffs and if there are any debt-to-equity conversions in our portfolio companies. In the most recent quarter, our total interest-bearing debt portfolio had a 12.5% cash yield, up from 12% from the prior year quarter. This is our primary source for paying our dividends. Additionally, we often negotiate success fees as a component of our debt instruments. We recognize these success fees as income when we receive the cash. Success fees are contractually due upon a change of control or sale of a portfolio company and they're generally not recognized as income until received. So during this most recent quarter, we received cash and reported success fee income of $400,000. Further, as of June 30, 2012, approximately 79% of our interest-bearing debt has success fees attached to that and is due to us with an average contractual rate accruing at…

All right. Well, thank you, Dave Dullum. That was a great report and we're all excited for the future of this company. Now, let's hear from the CFO and Treasurer, David Watson, on the fund's financial performance for this quarter. David?

Good morning, everyone. I'll start with the balance sheet. At the end of the June quarter, we had $350 million in assets, $250 million and $230 million in investment debt pair value, $113 million in cash and cash equivalents, and $7 million in other assets. Included in the cash and cash equivalents is $85 million of U.S. treasury securities, which we purchased through the use of borrowed funds at quarter end to satisfy our asset diversification requirements. We had $149 million in liabilities, consisting of $40 million in term preferred stock, $31 million in borrowings outstanding on our 3-year credit facility, and $76 million borrowed via the short term loan and $2 million in other liabilities. In all, as of June 30, 2012, we had $201 million in net assets or $9.10 per share, so we were less than 1-to-1 leverage on our senior secured borrowings. Currently, assuming the aforementioned new portfolio company funding today or tomorrow, we have investments at fair value of approximately $275 million, cash of $5.1 million and $44 million in borrowings on our credit facility. We believe this to be a safe and conservative balance sheet for a company like ours and we believe that our overall risk profile is low. Moving over to the income statement, for the June quarter end total investment income was $5.9 million versus $5.3 million in the prior year quarter, while total expenses, including credits, were $2.7 million versus $1.8 million in the prior year quarter, leaving net investment income, which is before appreciation, depreciation, gains or losses, of $3.2 million versus $3.5 million for the quarter last year, a decrease of 7.5%. This decrease was primarily due to an increase in dividend expense of $0.7 million from our term preferred stock issued in March of 2012 and a…

All right. Thanks, David Watson. I was -- I hope each of our listeners will read our press release and also obtain a copy of our quarterly report, called the 10Q, which had been filed with the SEC and can now be accessed on our website at www.GladstoneInvestment.com and also on the SEC website. I think the big news for this quarter is that we're still actively investing in new portfolio companies, and I think the rest of the fiscal year will show us continuing to increase the assets and hopefully increase the income, and maybe that will get us to a point that we can increase the dividend. We have been active in the capital markets, where we were able to return -- get some long term capital in March with a $40 million term preferred stock offering. Additionally, we have favorable line of credit with BB&T and KeyBank and room to borrow under the loan, so we're looking for new investments these days. We still have some worries out there in the marketplace. We're always worried about the economy. It's not growing. It seems to be contracting a bit these days, and so it's a difficult time to invest because so many [indiscernible] in the mix of analysis. We ask questions about the things that I'm going to mention now, now on every transaction that we look at. For example, what if oil prices spike because of something going on in the economy? Oil prices are too high today and supply is too dependent on countries that don't wish us well. And all of these high gas prices hurt the -- cars and trucks hurt the -- every business in the United States. So we need to develop much more oil and gas here in the United States…

[Operator Instructions] And the first question comes from J.T. Rogers of the Janney Capital Markets.

It looks like you had a nice ramp in origination activity in the last quarter and so far this quarter. I was wondering if you're seeing that continue through year end, or is this maybe just a temporary lift in originations and we expect it to go back down to a lower run rate?

As you well know, this business is hard to predict, right? So it's a relatively lumpy business, as we say. We try to smooth it the best we can. We keep working filling the pipeline. We certainly have a number of investment opportunities we're working on in various stages with indications of interest, a few that are in kind of a letter of intent phase. So over the next 6 to 9 months, say, we think we're pretty close to our basic plan, but certainly we would not be able to say for sure that exactly what we've done the last few months we can exactly replicate, but we're working at it.

What leverage levels at the BDC level are you comfortable with? And how much do you see coming from the line of credit versus other sources of debt?

Yes, we always get nervous once we pass the 50% of equity and start to worry as we move up closer to 1-to-1 leverage, obviously. So maybe you might get to .7x and start to feel uneasy and move on up. But, if you knew you were going to do an offering of more preferred, or you had a debt offering or you were expanding your line of credit, we might have room to go a little further than that. But generally speaking, you're going to see us be very conservative. We're not going to be at .9 to 1 unless something crazy goes on in the economy.

Okay, great. And then -- so up to .7 including debt to equity, including -- you would do that on the line of credit or would you look for another source?

All of those things, the line of credit, the preferred stock and any debt issuances we do, and including any guarantees that we might make of a portfolio company, all of those count as senior securities and they go into the formula. So you look at your equity side based on the appreciation or depreciation that's going on and then you measure that against what you've got in that other bucket, which is the debt and preferred and any kind of guarantees.

Okay, great. And then, I guess, just have you -- wondering if you've started talking with your lenders about expanding availability or been approaching other lenders about expanding the revolving line of credit?

Yes, as you know, we have other lenders in our other lines of credit and we've begun to talk to them about increasing our line as well. And I'm not sure where we'll go with that, but at some point in time you can only borrow or used preferred for so many ways and then you have to go to the capital marketplace for common stock.

From David West from Davenport & Company.

I noticed on your press release you recently gained some recent approval to do some co-investing with other groups. Could you talk about that recent approval and maybe where you stand in that process? Is that likely to be a tool that you'll use?

Well, it's final now, and as you probably remember we had a co-investment approval with a partnership that we never got raised. It was a little bit difficult time to be raising money. So we just expanded that and got it so that the 2 business development companies can co-invest where their goals and objectives are the same, their strategies fit. If we had something that fit into both of those, then we would do co-investing and that would probably allow us in some cases to do a larger transaction than we've done in the past. But it really doesn't change anything for us other than the ability to do a little bit larger transaction and to, quite frankly, make, in this company, almost every transaction qualify within the definitions used by the SEC and the Registered Investment Company Act.

And then turning to the valuations on the portfolio, you mentioned in some cases some lower multiples being assumed. Was that driven from your use of your third-party S&P advisory services?

I'm not sure what you mean. Say that again, please?

You utilize S&P in your valuation as a third-party looking at the valuations of your portfolios. You mentioned in the call that some of the valuation, the lower valuation of the portfolio, was driven by lower assumed multiples. Was that largely driven by S&P?

No. That was actually -- we subscribe to some services that provide us with what multiples are going on in the marketplace. So if a buyout multiple has moved and we look at the multiple we had on that when we purchased it, we adjust it by that amount. That, and -- just to make a simple example, for example, if we bought something at 5x EBITDA and the marketplace has now moved to 7x, we don't move up to 7x. It's just when the market moves from one place to another we use that delta, that percentage change, to change that original number of 5% up or down depending on what's going on in the marketplace. So those multiples are all market-driven and not really coming from Standard & Poor's.

And just as a reminder, this may have been something done last quarter, but on Country Club Enterprises, CCE, the value looks like it's up from the prior quarter, but I think that's because of some new financing you provided. Is that correct?

No. It's the multiple. And the company is back earning strong again this year. And so when use those -- when you have earnings -- obviously, when we don't have earnings we end up valuing them down pretty significantly. This one happens to be coming back very strong this year that we're in, so as a result its value has gone up due to performance.

The next question comes from Lee Carter, a private investor.

David Dullum. On yours -- you usually talk about the owner control of 15 or 17 companies. How many of those might be not earning money and how many might come to fruition over the next year? Or is there no way of seeing that?

[indiscernible] price requesting. It's hard to say. We always continue to evaluate the opportunity to sell a company, generally, as we like to say, driven by the management team if they believe the time is right, and we sort of follow the management teams. Hard to predict where we would be in that right now when we don't have any. I can tell you we're in active conversation, from that perspective. And then, obviously, they all, with the exception of the 2 that we mentioned and referenced that are on what we call non-accrual, everybody is earning relative to what we invested. So hopefully that answered the question?

Yes, yes, that does. I just thought there might be a substantial capital gain in gain sometime because 1 or 2 of the companies are probably doing in excess of the market?

Lee, we do have some companies that are very strong in the portfolio, but we're not ready to sell them. Just because they pick up and start earning a lot of money, and -- if the management team wants to continue to build it, our goal is to build that company and have a later capital gain rather than one today. So the idea is to keep building on some of these. And the others -- the other 3 that we have sold or partially sold on one were all driven by management saying they wanted to sell the company at that point in time. So we follow management, generally speaking. I don't know that we'll ever have a situation in which we will mandate that they do it. There's another exit strategy on a lot of these that's being used today by some of the buyout funds, and that's what is called a dividend recap. And all that means is, once a company has gotten very profitable and they're paying down the debt, one way of not selling it but getting a return is just to borrow money and dividend it out to both us as an owner and the management team as the other owner. And that works very well for some time -- for some of us to take money out of these companies. But we haven't done that yet and I expect that somewhere along the way you'll hear us talk about that. But that's the other way of not selling but getting a return.

How about -- excuse me, I noticed -- and I don't know if it's for gain or what type -- I get confused on occasion. You are now out on the west coast. Will they offer you different kinds of opportunities than you have?

Basically, no, no. We opened the LA office and I think it's the same thing we've always done. It's just we're closer to some of the transactions that are going on in the California marketplace and the upper northwest. So it's just another opening of a marketing office, if you want to think about it that way.

We have a follow-up question -- I'm sorry, do we have a follow-up from J.T. Rogers with Janney Capital Markets.

Just a couple of questions on the portfolio. I think, as a couple people mentioned before, CCU is marked back up to -- fair value is marked back up to par. I was wondering if you are expecting that to come back on accrual status any time in the near future?

Obviously, we keep working with all our companies to keep them and get them back on accrual, and we certainly would hope so. Other companies performed, as we mentioned, well, and David mentioned the valuation reflected that. We would just kind of -- we keep working it, so as soon as we believe that the strength is there, we will put it back on accrual. So keep looking for it.

Okay, and then, 2 companies that I guess saw weakness in the quarter. Danco, they're undergoing their conversion to the long run parts machining. How is that progressing? Is that -- are they continuing to see margin pressure? I just wanted to get an update on that.

Yes, I would actually say they are improving overall. Their mix of business is less [indiscernible] on their key customers. I think we've mentioned this in the past, there's a company called Intuitive Surgical that makes the da Vinci robotic machine. Actually, they're coming out with a new version of that machine. And actually, we started making parts for the new version as well. So between all that transition and their backlog is picking up, looking good, doing some work internally on the operation side of things, so we feel good about that business. It's been in a bit of a slump, frankly, but it's headed, we think, in the right direction.

And we continue to work with these guys, as we mentioned earlier. All our portfolio companies, we take it very seriously. They're all good companies. Sometimes they just need a little bit of help, and we try to work with them to bring that in. And that's what I think we're seeing there.

Okay, great. And so was the decline in fair value there a result of multiple decline rather than weakening performance or cash flow?

Yes, it's been weakening. Of course, our valuation reflects a trailing 12, right? So we've been coming out of the slumps that you're seeing that haven't dropped off some of the tail end of the decline, and we're starting to move them in that direction. So it's performance-based, but again, we work in the right direction.

Okay, great. And then just one last one. Noble Logistics, we saw a little bit of weakening in the fair value in this quarter. I was wondering what's going on there?

Again, similar thing we went through a slight decline in -- again, on the trailing 12. We recently improved the management team there, added a new gentlemen as the President and CEO, and that business is now headed again in the right direction. So just a temporary point in time in terms of valuation.

[Operator Instructions] As there is nothing more at the present time, I would like to turn the call back over to David Gladstone for any closing remarks.

All right. Thank you all for calling in, and we hope to see you at the shareholders? meeting next week. And please, a reminder. Please vote your shares so that we can move that swiftly through the process. And that's the end of this call.

Thank you. That does conclude today's teleconference. You may now disconnect your phone lines. Thank you for participating.