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Executives

David Gladstone - Chairman and CEO

Analysts

Vernon Plack - BB&T Capital Markets

Dan Furtado - Jefferies & Company

Christopher Singley - Singley Capital Management

Ross Haberman - Haberman Funds

Lee Carter - Oppenheimer & Co,

Jon Arfstrom - RBC Capital Markets

Henry Coffey - Ferris, Baker Watts

Gladstone Investment Corporation (GAIN) F3Q08 (Qtr End 12/31/07) Earnings Call February 1, 2008 8:30 AM ET

Operator

Greetings, ladies and gentlemen and welcome to the Gladstone Investment' third quarter 2007 financial results conference. (Operator Instructions)

It is my now my pleasure to introduce to your host Mr. David Gladstone, Chairman of Gladstone Investment. Thank you, you may begin.

David Gladstone

Thank you Diego, and hello and good morning to all of you folks that have called in this is David Gladstone and this the quarterly conference call for shareholders and analysts of Gladstone Investment, trading symbol GAIN. We thank you all for calling in and we are so happy to talk to shareholders this time of the year. And you are all welcomed to come by and see us in McLean, Virginia, please stop by and say hello, you'll see a great team working for you. I think they are the best in the business.

This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933, 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 even though they are based on our current plans and we believe those plans to be reasonable. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption, risk factors, and our periodic filings as filed with the Securities and Exchange Commission that can be found on our website gladstoneinvestment.com and also on the SEC's website. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For the quarter ending December 31st, 2007, it was okay for our company in terms of increasing our assets. We invest in two areas, we buy small businesses with their management teams and we invest in senior syndicated loans of large middle market buyouts. Just as reminder we do invest in home mortgages, nor do we invest in the housing industry, we don't invest in CDOs or CLOs or other pool of loaned assets.

On the buyouts for the quarter, we invested in two new buyouts for total of approximate $37 million we did not exit from any buyouts during the quarter. On the syndicated loan side, during the quarter we didn't invest in any new syndicated loans, however during the quarter we did receive repayments from sales also of syndicated loans of about $24 million, including normal amortization. And we had a few of our other loans pay down by $7 million for a total of $31 million in repayments for the quarter.

Since the quarter's end we did not close any new buyouts of syndicated loans, but we do have some things working I would just say stay tuned and we'll keep you informed. At this point we have about $182 million in buyouts.

At the end of the quarter our investment portfolio was valued at $352 million and our cost was $356 million for about a $4 million difference. And as reported, as part our dividend press release, our quarterly valuation of the portfolio during these changing times increased by 1.5 of 1%. This appreciation in the portfolio came due to the good appreciation of the companies we own, with management, we had about $4.5 million there, even though we had some depreciation of our syndicated loans of about $3 million and that's been due to the panic in the home mortgage area, which has caused a great more turmoil in senior syndicated loan market place as well.

I think our portfolio held up well, and how some of the home mortgage portfolios were off by very wide margins and you saw a lot of finance companies taking tremendous amount of hits to their portfolio. Our portfolio of loans and investments was up by 1.5 of 1% or about $1.5 million, which is about $0.09 per share. I want to call your attention also to a peculiarity in the valuation methodology that we are using for investments, fairly we have a large [ownership] position.

The valuation methodology we adopted for those investments is based on a multiple of earnings as we call it EBITDA, as earnings before interest taxes and depreciation and amortization or sometimes calling cash flow for our portfolio companies. This tells us, what the business could be sold for, when a company has good cash flows the value of the portfolio of company will grow up and if that portfolio company has poor cash flows the value will go down. This is the way the stock market values business. However, if a company has very low cash flows under this valuation technique or losses then the method would result in a very low value or even zero, so the valuation methodology is very conservative when companies have poor or no earnings. This method will produce a lot of volatility in the value of the portfolio.

One of our portfolio companies, for example, had a bad period due to some changes in the industry and even though we are paying our note as agreed, the valuation methodology dictated that we use zero value for the note and the preferred stock that we hold. I personally do not believe the investment is worthless, but once you adopt one of these valuation techniques, you have to use it consistently. So, look for some volatility in the coming quarters as we use this technique as part of our valuations.

Since our inception in July 2005, we've completed nine buyouts and have not exited any buyouts and since July 2005, we've made 72 loans in the senior syndicated loan area for a total of approximately $300 million. The average return on the exits that we've had in syndicated loans has been about 8%.

At the end of the quarter we had one syndicated loan past due with a balance of right around $2.9 million, and that company is what we call in workout mode now, and all the lenders we are just a smaller lender in that group who are involved and I think we'll that one solved, maybe this quarter we'll have that resolved.

This all leads us to say that the program we set up when we founded the company was working as planned when it comes to the quality of our loans and certainly to our buyouts, but it is still difficult to find good buyouts and even good syndicated loans today. So we've been very slow, very cautious in our selection of companies to buy and in particular we've been unwilling to pay too much for companies.

Also we did not expect to [see such a panic] in the syndicated loan marketplace but here we are with a panic and the turmoil has caused loans to depreciate by some amount even though they are paying. With the turmoil caused and panic to debt marketplace, there may be a lot more opportunities for us in the next 12 months. We'll continue to review the market and update you every quarter.

Our balance sheet is very strong. At quarter end, we had a $150 million borrowed on the line of credit and we have about $220 million in equity, so we are less than one-to-one in leverage. This is a very conservative balance sheet for finance company like ours. We believe the risk profile is very low and our line of credit is $200 million and that was just extended for another year this past October. So, we are in good set with our lenders.

For the December quarter net investment income which is before appreciation, depreciation, gains and losses was about $3.7 million versus $2.9 million for the quarter last year has an increase of about 29%. And for the nine months ending December, we had net investment income of $9.6 million versus $8.4 million last year, about a 15% increase.

And in this presentation we are talking about weighted average fully diluted common shares when we use the per share number, that's the most conservative way of stating earnings per share.

For the quarter ending December 31, 2007 net investment income was about $0.23 a share for the quarter, as compared with $0.18 for the same quarter a year ago. This was an increase of about 29% on a per share basis. This mirrors our slow and deliberate increase in our asset.

For the nine months ending December, net investment income per share was $0.58 versus last year of $0.51 for the nine months which is a 15% increase.

Okay. Let's turn to unrealized and realized gains. This is a mixture of appreciation, depreciation, gains and losses. We would like to talk about this in two categories in this section. First, net realized gains and losses, meaning gains versus our last losses as this is the cash and the second then is the unrealized depreciation or appreciation meaning appreciation less depreciation, as this is non-cash accounting, it incomes from the value put on the portfolio. So first for the quarter ending December we had net realized losses of about a $146,000 and that resulted mostly from the sale of two of our loans and the senior syndicated area as we freed up some debt to get cash, we sold two loans to get from cash so that we could close on some of our buyouts.

And for that same quarter we had a net unrealized appreciation of $1.5 million. This is non-cash and it comes from the value put on the portfolio that I talked about earlier when we talked about how the values were derived. The unrealized appreciation or depreciation reported during the quarter ending would have been much higher, but the senior syndicated loans continue to have a bit of downward movement so the appreciation wasn't nearly as much as I had hoped for. These loans are still paying as agreed, but the market for them just is not very solid.

Now turn to net increase and net assets from operations. This is a turn that combines net investment income, appreciation, depreciation, gains and losses. It's quite a mixture of accounting terms, but that's the way the accountants do it for a companies like ours.

For the December quarter this number was $5.1 million versus $2.7 million last year this time, much of it due to the appreciation mentioned in the beginning of the presentation. This December quarter we're at a positive about $0.31 a share versus last year's December quarter at a positive of $0.16 a share. Investor should expect this kind of movement in the portfolio both for up and down which will impact this number that we've been talking about.

We didn't have any phantom income as we call it for the quarter as of December 31, 2007. We don't any loans with paid in kind income or original issue discount. We call this kind of income phantom income, because the company doesn't really receive the cash, but has to recognize it is income and paid out even though it doesn't have the cash to do it. We tend to avoid the phantom income and our portfolio companies are paying on time as agreed expect for the one syndicated loan I mentioned in the presentation.

Our average loan rating for the quarter remains relatively unchanged, although it was down somewhat. The risk rating system we use is set for syndicated loans at an average of 5.4 for the quarter versus an average of 6 at December 31 last year. And the risk rating use for unrated syndicated loans was averaging about 7 now for the quarter versus an average of 7.8 for December 31 quarter last year.

Our risk rating system gives you a probability of default rating for which the portfolio scale from 0 to 10 with 0 representing the highest probability by default. And the risk we here is staying relative the same as last year.

For our rated syndicated loans, they have averaged and continue to average B+ or B1 depending on which rating agency you talk to and this quarter ending December 31 and for last year, so it was unchanged.

This is quite satisfactory for our current portfolio mix we are happy with where we are. Since I last talked to you, last quarter syndicated and sub-debt and all of these syndicated loan market are just has come to a halt and there seems to be a slow move back, but its still given the destruction in the marketplace I just think its going to stay somewhat in turmoil for the next six months or so. Now that's both for the larger companies that we help finance where the marketplace is in this array.

For the buyouts of small companies, the world is still different, the small business marketplace, companies with strong growth rates are still going for strong top dollars. We've seen competition come in and pay eight times cash flow for these companies. So, this is still high and some buyers are not funding financing. And there maybe some repricing of buyouts in the future. This market is having some heartburn, as it's difficult to find debt to leverage these companies out, as much as the buyout funds will like to do it, so then maybe some opportunities in this period that we are in now.

On the other hand, businesses with lower growth rates are being purchased for lower multiples of cash flow, and we've been buying some of them. As we continue to buy them, our balance sheet would show that we provided the debt and equity for the purchase. We do that, so we can generate income from the investment to pay our dividends. I really think the rest of the year will be okay for us and we'll continue to grow our assets in this area and the dividend should follow that trend.

Given the change in the market, I think our time really has arrived. There are lot of opportunities out there and I think 2008 will be a terrific year. We are concentrating in our debt with variable rate loans, so that we can't get hurt when rate increase and while our rates are variable, we often have minimum, most of the time we have a minimum that loan will charge, we call these [floors], so that we don't have declining interest rates hurt our ability to pay the dividend.

We do have $52 million of fixed rate loans and all the fixed rate loans are made through our buyout deals. They are at relatively very high rates. So, we should be okay there, but in order to have some protection we purchased an interest rate cap on about $20 million. We did that to keep our loss to a minimum if rates somehow start rising in the end, so always good to have some protection for that.

Well, we continued to worry about the cost of oil and rippling effect in the economy. It just takes a lot of money out of the pocket for the middle class and they have less money to spend, because gas costs and heating oil costs are taking their income away.

I think restaurants and other things, depended on the consumer are going to have increasingly difficult times in the period that we are going through now. We are no longer worried about inflation, the way the government measures inflation. We are likely not seeing much there for at least six months, may be even a year.

And the amount of money being spent in the war in Iraq is still hurting. I think the troops are the most wonderful people in the world they are certainly the heroes of this century. And we support our troops in Iraq. But, we all have to recognize that the war is burning our economy.

In worst, is the pork barrel spending by federal, state and local government. They just seem to be out of control now. Congress is acting, in my own estimation, irresponsibly and so are most of the state governments. This excess spending causes excess taxation, and that dislocates all economies. It's really, kill the dollar in terms of other currencies like the euro. And the trade deficit with China and some other nations is just terrible. China continuous to subsidize its industries' to the disadvantages of our businesses.

And now we are seeing full impact of the down turn in the housing industry and the mortgage industry. Investors and lenders have lost a lot of money. But I think the worst is over, I think we've now bottomed out as far as this is concerned and we should start to build some strength and sell off some of these houses that are sort of stuck in limbo at this point in time.

In other ways our U.S, economy is continued to hum along, we and the small business were all have kept, I have seen these businesses to keep their cost low and for many of them profits are improving, but there is a slowdown. We have to recognize that. And while we don't see a big slowdown in the companies in our portfolio and we know that there must be some slowdown coming.

But it's not reach the state of showing us as our recession is coming. We still don't believe that there is any recession in the cards for us. We think this will just be a slow 2008 and then we'll turn back.

Manufacturing is not operating at full capacity and I don't think they are going to make it this business cycle and there has been some slowdown in hiring and backlogs have come down a little bit or it just looks like a slowdown and not a recession. The recession we saw in 2001 and 1990 were huge recessions compared to what we are going through now.

I hope you all saw that we filed our Shelf registration segments and now in a position to raise money sometime in the future, should we need to do so. In order to finance our future investments and buyouts, we really have two choices. First of all is the sales from other senior syndicated loans, had a slight loss to raise cash. This was the original plan. I was still on that plan except senior syndicated loans have dropped in price so we have to take a small loss.

The second option is to raise money from our shareholders and our rights offering. Our rights offering is the only fair way to raise money as this depressed stock prices. So every shareholder would have a right to participate in the program. At this point in time, we are leaning towards selling some of our syndicated loans and taking a slight loss, it maybe the best thing for us this time, but again we will discuss that with our Board members in the April meeting, that's coming up in the first week in April of this year.

Dividend declared by our Board of Directors in January is $0.08 a month, run rate of $0.96 a year, that's for January, February and March. And as I mentioned, the Board will meet in first week in April and decide where the dividend should be.

At this rate, the dividend rate and stock price was about $10.15 yesterday. The yield on the stock is now at 9.5%, so a great yield, great income, while you wait, the stock markets only put in return for shareholders on average about 9% to 10% over the last 10 years, 15 years, so being able to get a cash income at 9.5% while you wait for us to put these LBOs on our balance sheet, sounds like a good way to go.

Please go through the website and sign up for e-mail notification service. We don't send out any junk mails, so go to GladstoneInvestment.com and do that.

In summary, as far as we can see the beginning of the calendar year 2008, I think all of 2008 is going to be pretty good. We can only see a couple of quarters out and we want to be careful, we are after all stewards of your money and we'll stay the course and continue to be conservative in all our investment approaches and we'll see what that brings for us in 2008, but I think this will be our best year yet.

I will now open up the call for questions. So if you'll come back on Diego, we will get some questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from Vernon Plack with BB&T Capital Markets. Please say your question.

Vernon Plack - BB&T Capital Markets

Thank you and good morning David. I wanted to see perhaps you could provide a little more color on your pipeline in particular as at least the way that we are looking at it, it appears that -- I believe, you have made an investment since perhaps October. Can you provide some color just in terms of what your pipeline look like, what?

David Gladstone

Sure. I'll be glad to. The pipeline is steady, it's filling up, here is what's going on, just like in the home mortgage place, the home buyers are sitting on the sidelines and not willing to sell at these low prices, because they want to get a good price for their house. And the same thing is happen to some of the sellers of businesses. They are sitting on the sidelines and saying, my buddy down the street got X dollars for his house or X dollars for his business, he got 10 times EBITDA, I want the same amount or I am not going to sell.

As time goes on people get a little weary of that and eventually they sell their house, and in our case they sell their business. We've got a number of deals perking and working now and I am hopeful that we can have some announcements this quarter.

But two deals last quarter was good quarter for us, if we do tune again this quarter even if we do at the end of the quarter it will be a good quarter as well. But the number of businesses for sale is out there, but the prices are still relatively high and we just don't want to leverage these companies especially in a slowdown.

Vernon Plack - BB&T Capital Markets

And have you seen prices come down to any extent or what is your thought on pricing in some of these businesses?

David Gladstone

Now, there is two kinds of businesses that we look at, one with very strong growth rate those were all chased by most of the LBO funds and they are chasing them because they can buy them even at high price s at eight or ten times EBITDA and then turn around in three years hopefully and double the payouts and double the earnings and then sell out. They need a lot of equity in those and they don’t get any income to pick up while they are waiting.

We would have a hard time doing that, because if we did it, our current return will be so lower would endanger our dividend. So we've concentrated on what I call the smaller cash flow companies in smaller market in which the company is making now good amount of money, has a great deal of protection in terms of competition coming in that might have a 70% or 80% market share.

And after looking at those we can buy them for four or five times their cash flow and load them up with that we can get paid, a good amount of income while we wait for them to pay down the debt over a four or five years, may be six years and then at the end of that period time we would leverage them back up and take a large dividend out with management and then have them paid of the debt again over a four or five year period

So, yes there are plenty of deals out there, yes a lot of the growth stories are going still for large dollars and its only the – I'll say the more mundane companies, that small cash flow companies that are going for reasonable prices and we've got a number of those in our sight and hopefully we'll close a couple of more in this quarter and couple of more next quarter.

Vernon Plack - BB&T Capital Markets

Just one last question David, do you feel so you are seeing enough deals now or you are getting in front of enough of these deals were, you feel you are seeing your fair share of opportunities?

David Gladstone

Vernon, we see them all. We are in the pipeline, we see just about everything that comes along. There are larger transactions that we see and don’t do anything with it, for example, if there is a buyout that is going to cost $50 million because it's $10 million in EBITDA, it's very hard for us to do that transaction. So, we are still not doing the larger transactions that we'd like to do and hopefully somewhere along the way we will grow to be big enough so that we can do a little bit larger transactions. So, we are in the pipeline. All of the brokers in this business, they know each time they find a smaller deal that we are going to interested in it. So, we are seeing them all, it's just a question of pricing that’s all.

Vernon Plack - BB&T Capital Markets

Okay. And just one other thing I forgot to mention, but Lexicon, it looks like that was written down another $400,000 or so and your comments earlier would suggest that you feel as though that that loan will go back on accrual status sometime here, soon.

David Gladstone

I know it will be worked out this quarter, because Vernon we are a tiny piece of that and there have been several proposals posted and negotiated and I think they'll come to some kind of conclusion within this quarter. And I'm not really able to tell you what that conclusion will be, but it'll be fine.

Vernon Plack - BB&T Capital Markets

Thank you.

David Gladstone

Next question please.

Operator

Thank you. Our next question comes from Dan Furtado with Jefferies & Company. Please state your question.

Dan Furtado - Jefferies & Company

Good morning, David.

David Gladstone

Good morning, Dan

Dan Furtado - Jefferies & Company

Hi. I just had one quick question on the management fee policy or actually the reimbursement of it. I've noticed, it's obviously gone up over the last couple of quarters. How do you see that trending in the future and kind of what's your philosophy around, where you'd expect that to go over the next few quarters?

David Gladstone

Yeah, we typically have two parts of that. One part of course is the fact that we reduced the fee pretty dramatically for senior syndicated loans, that is, we don't charge quite as much. So, the get back here is related to the way that we priced that, but it is more importantly related to the fact that you have to hit your goals in order to get your money. So, to get back, we'll continue as long as we need to get it back in order to meet the dividends. And I think you'll see this quarter or maybe next quarter a dramatic increase in the ability to payout this fee incentive fee to the people who are working here.

Dan Furtado - Jefferies & Company

Thanks, great and one quick follow-up, what are you thoughts on SFAS 157 and the impact that it could potentially have on valuation in this space?

David Gladstone

We really don't think it will impact us at all, because we have been under SFAS 157 indirectly. It has been proposed now for, I don't know, five to 10 years it seems to me that it has been working, but for the last of couple of years since it looked like it was going to come through, even though it was in (inaudible) format, we have been working SFAS 157, and I think there is no impact for us.

Dan Furtado - Jefferies & Company

Excellent, thank you.

Operator

Our next question comes from Christopher Singley with Singley Capital Management. Please state your question.

Christopher Singley - Singley Capital Management

Hi, good morning. The first question I have is, can you refresh my memory about what the BDC regulations specified about the maximum percentage of controlled investments?

David Gladstone

It is not the BDC legislation it's actually the tax legislation.

Christopher Singley - Singley Capital Management

Al right, thank you. What are their limitation?

David Gladstone

Yeah, let me explain it to you. The tax regulation says that you can only own, only have 50% of your assets in companies where you are the voting shareholder of greater than 10% of the stock. Now, the way that that works is that preferred stock is convertible and warrants don’t count. So in many instances, you may have a controlled situation for SEC purposes, but not have a controlled [DO] for an IRS purposes. And in fact most of the transactions we have, need to test a control for the SEC but don't need to test for the IRS.

Christopher Singley - Singley Capital Management

I see. Thank you. So you are not, on your current capital base, bumping up anywhere close to that?

David Gladstone

No, not that controlled one, no. We are bumping up against the size limitations, we've got to. We can only have so much of our assets in companies where we have more than 5% of our assets.

Christopher Singley - Singley Capital Management

I see. And so for the other part of the portfolio, it's not invested in these buyouts, it seems for the long-term plan you're moving from shifting away from these syndicated loans in to the more of a straight substantially-debt or what is the target investment mix that if you had all your [drubs]?

David Gladstone

All of our drub is we would have all of our dollars in buyouts and we would have no syndicated loans.

Christopher Singley - Singley Capital Management

Okay. And we tend to working within the IRS framework her disregarding the definition of control, like excluding certain preferred and warrants and do you (inaudible) you can accomplish that?

David Gladstone

Oh yeah, I think that is easy to accomplish.

Christopher Singley - Singley Capital Management

All right. Okay. Thank you very much.

David Gladstone

Next question?

Operator

Our next question comes from Ross Haberman with Haberman Funds. Please state your question.

Ross Haberman - Haberman Funds

Good morning, David. How are you?

David Gladstone

I am just fine.

Ross Haberman - Haberman Funds

Quick question, could you elaborate on how much below I guess cost is the syndicated loans fortune, the portfolio, which should we discuss, you might want to sell some?

David Gladstone

Yeah, and we are not too far off the index. The index is running about 93%, so you are talking about somewhere between 5% and 7% would be the range.

Ross Haberman - Haberman Funds

Of the total amount, how much was a syndicated loans?

David Gladstone

Total portfolio is how much Mike now?

Unidentified Company Representative

About $174 million.

David Gladstone

About a $174 million?

Ross Haberman - Haberman Funds

Okay. And just one other numbers question. The equity portion of the companies, which you own, my recollection now is $30 million or $35 million last quarter. How much was that as of the end of this quarter?

David Gladstone

Just the equity ownership?

Ross Haberman - Haberman Funds

Yeah, $30 million to $35 million fix in my mind from last quarter.

David Gladstone

Yes, it's about $35 million, it's about $35 million now, it hasn't changed.

Ross Haberman - Haberman Funds

Okay. So, there wasn't much adjustment there?

David Gladstone

Not much adjustment, that's right.

Ross Haberman - Haberman Funds

The volatility or the variability which you were discussing, is it going to become mostly in that portion of the asset base?

David Gladstone

Well, certainly once we get rated the senior syndicated loans, it would be there, that would be the point that you would see the most movement.

Ross Haberman - Haberman Funds

And is that percentage, the equity percentage is that cap that any dollar or total percentage of the total?

David Gladstone

No, not cap.

Ross Haberman - Haberman Funds

Okay, thanks guys, and best of luck.

David Gladstone

Next question please.

Operator

Thank you. Our next question comes from [Lee Carter] with Oppenheimer & Co. Please state your question.

Lee Carter - Oppenheimer & Co.

Good morning David

David Gladstone

Good morning Lee.

Lee Carter - Oppenheimer & Co.

It's snowing out here. Dave thanks. Couple of three months ago you mentioned you had not estimated loss to be about $200 billion on subprimes, is that still your figure and you thought it might be bottoming around in April?

David Gladstone

I think it could be in the $200 billion to $400 billion, I don't remember, I thought $2 billion was my low and $4 billion was my high. I don’t think this is a big deal for the economy to absorb.

Lee Carter - Oppenheimer & Co.

We did a $187 billion on savings alone. So in today's market, you are right, it seems like you'd be right. Any indication of an IPO coming out in '08 out of you, or sale, any indication at this time?

David Gladstone

Yeah, you could have one of our companies probably not go public, but you could have it have sold.

Lee Carter - Oppenheimer & Co.

Okay. Because that’s when the earning pop a little bit. Secondly, any indication, no, I'll pass on that question, somebody else asked them. Right now, it looks like Gladstone or GAIN is looking like it's the pick of the litter and the class, does in a nice silk purse, that’s what I feel. Anyway, that was a good comments, I heard David, and that is not my, idea, but they don’t restate dividends and that kind of effects you?

David Gladstone

Yeah, that affects you. Once you paid it out you can't restate it, so what you've got, you got and we have never missed a dividend, never decreased the dividend and we even increased the dividend on this one and hopefully this year we'll do it again.

Lee Carter - Oppenheimer & Co.

Okay. As you are in the marketplace, its size of your companies or anything else negative, why are they selling a near quality package, do you think it will be selling on a of 7% or 8% in today's market?

David Gladstone

Well, that's what we believe, but I believe when the tide goes out it takes all both down and we are in the finance business and people don't like finance companies right now. They all believe we're going into held my hand basket.

Lee Carter - Oppenheimer & Co.

Okay. Thanks David.

David Gladstone

Okay. Next?

Operator

Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Please state the question.

Jon Arfstrom - RBC Capital Markets

Thanks. Good morning, David.

David Gladstone

Good morning, Jon

Jon Arfstrom - RBC Capital Markets

Question for you on your capital rates comment. Would there be a method, if you needed to raise some capital for a buyout, is there a methodology that you would use in terms of choosing, which syndicated loans you sell?

David Gladstone

Sure, we choose the one that we have the lowest loss on them. Now we had something that had some special reason to be so we would. But these are pretty vanilla type loans and so you choose the one that was trading the highest, so you could trigger the less loss.

Jon Arfstrom - RBC Capital Markets

Okay good. And then in terms of your increase evaluation on the control investments, were there one or two that caused that or was it EBITDA strength across the Board?

David Gladstone

I think it was more of the strength across the Board, but, I can't remember exactly. You have to take the list of loans and kind of go down the list and check them of yourself. I am sorry I don't that in front of me.

Jon Arfstrom - RBC Capital Markets

Okay. Well that's fine. Okay that's it. Thank you.

Operator

(Operator Instructions) Our next question comes from Henry Coffey with Ferris, Baker Watts. Please state your question. Mr. Coffey, your line is open please go ahead.

Henry Coffey - Ferris, Baker Watts

David, before I get into it, I wanted to commend you on what you are doing with this management team. We got a couple of other companies just could learn a few lessons from your book. If you look at your portfolio would you ever, particularly the syndicated loan book kind of just the opposite of what you said, would you ever give us some consideration in essence instead of boosting the quality by selling whatever you perceive to be a dog like what you think the quality on the assets is pretty universal across the Board?

David Gladstone

Well, that's what I meant when I said these are pretty much vanilla loans. We did a good job of selecting on them. Sure if there was one, we felt like was sort of out of the box we'd sell it.

Henry Coffey - Ferris, Baker Watts

And then this was commented earlier delinquencies and past dues and non-accruals in the portfolio anything that if you have any loans that fit in to that box right now?

David Gladstone

We only have the one Lexicon, everybody else is paying as agreed, and when we say paid as agreed, lot of people will say they received the payment within 90 days or 60 days. These are all current I mean one day late is late.

Henry Coffey - Ferris, Baker Watts

Right, exactly. And finally I don’t know if this is piracy or inspiration, I know in the past you've done this sort of thing, would there be any financial benefits to putting the two companies back together again, since one has a lot of capital and the other one is raising equity from time-to-time or do you think that would just not really create any value?

David Gladstone

Well it probably would create some short-term value in the sense that you'd have a larger entity the bad news would be the co-mingling, two types of loans and investments and two types of people. Lending people are relatively different from buyout people. And we are trying to build teams around both of those concepts. I think when capital gets to be around $500 million in market cap, people will stop asking me that question and certainly when we get this one up around $500 million it won't matter either. So, we just have to work our way there. Its unfortunate that we are small as we are, of course we are trying to some larger deals in this company.

Henry Coffey - Ferris, Baker Watts

Whatever way you cut it, your quality is weaning out, so save the course?

David Gladstone

Well tell the marketplace, Mr. Henry Mr. Market is not listening to us.

Henry Coffey - Ferris, Baker Watts

I am on my cell phone I'll dial all one trillion investors out there.

David Gladstone

Okay. Thank you. Next question.

Operator

Mr. Gladstone, we have no further questions at this time.

David Gladstone

All right that ends the conference call and we thank you all. And we will be on the line next week with Capital. Thank you again.

Operator

Thanks, sir. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your line at this time. Thank you all for your participation.

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Source: Gladstone Investment F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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