Gladstone Investment Corporation (GAIN)

F1Q12 Earnings Call

July 31, 2012 8:30 am ET

Executives

David Gladstone – Chairman of the Board & Chief Executive Director

David A. R. Dullum – President & Director

David Hibbert Watson – Chief Financial Officer & Treasurer

Analyst

John T. Rogers – Janney Capital Markets

David West – Davenport & Company, LLC

[Lee Carter – Private Investor]

Presentation

Operator

Compare to:
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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. After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to David Gladstone.

David Gladstone

This is David Gladstone Chairman and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investments. 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 we can 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 where you can receive information about your company on a timely fashion. Please remember that if you’re in the area, the Washington DC area, we’re right a stone’s throw from Washington DC 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 next Thursday, August 9

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at the Hilton McLean Tyson’s 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 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 call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they’re based on our current plans and we believe those plans to be reasonable.

Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from future results that are expressed or implied by these forward-looking statements including those factors listed under the caption, “risk factors” in our 10Ks and 10Qs and other filings that we have, especially our registration statement that is filed with the Securities & Exchange Commission. All of which can be found on our website at

www.GladstoneInvestment.com

or at the SEC website which is

www.SEC.gov

.

The company undertakes no obligation to publically update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. So please also note that past performance or market information is not a guarantee of future results.

First of all we’ll hear from Dave Dullum. Dave is the President and a board member of the company. He’ll cover a lot of ground including his future views of this fund. Dave, take it away.

David A. R. Dullum

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 costs. 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% in 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 3.4% per annum. In total this has created accrued success fees of approximately $8.1 million or about $0.37 per share although we do not have these success fees accrued on our balance sheet. Mainly, there is no guarantee that we will be able to collect all of our accrued success fees or knowing the timing of such collections due to this contingent nature.

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