Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Gladstone Capital Corporation's Second Quarter Ended March 31, 2015, Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference to our host, Mr. David Gladstone. Sir, you may begin.

All right. Thank you, Eric, and nice introduction. Good morning, everybody. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Capital. Common stock trading symbol is GLAD, and we do have some preferred stock trading under the symbol GLADO with O onto it. Thank you, all, for calling in. We're always happy to talk to our shareholders and analysts and wish we could do this more often. We would like to giving you updates on our company our portfolio and our business environment. As always, you have an open invitation to stop by our office here in McLean, Virginia, just outside Washington D.C. Please stop by and say hello. Our team is here. And most of the people, about 60 or so, are here and I think they are finest in the business. So we'll start off our with General Counsel and Secretary, Michael LiCalsi. He is also President of our Administrator, and he'll make a statement regarding forward-looking statements. Michael?

Good morning, everyone. This conference call may include 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 are based on our current plans, which we believe 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 any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption Risk Factors in our Form 10-K filing and our registration statements filed with the SEC, all of which can be found on our website at gladstonecapital.com or the SEC’s website at sec.gov. 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, after the date of this conference call, except as required by law. And please also note that past performance for market information is not a guarantee of future results. Please take the opportunity to visit our website and sign up for our e-mail notification service. We don’t send any junk mails, just timely news on all of our companies. You could also find us on Facebook, keyword: The Gladstone Companies, and follow us on Twitter at GladstoneComps. I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for our second fiscal quarter ended March 31, 2015, again, filed yesterday with the SEC. You can access the press release and 10-Q on our website, www.gladstonecapital.com, and SEC’s website, www.sec.gov. An audio presentation of this call is also available on our website. And now we will begin by hearing from Gladstone Capital's President, Bob Marcotte.

Good morning, everyone. As many of you know, Gladstone Capital is the lending fund of the Gladstone Companies. We provide cash flow-based loans to privately held U.S.-based businesses in the lower middle market, which we define as having $20 million to $100 million in revenues and $3 million to $15 million in earnings before interest, taxes and depreciation. Our loans are used to fund private equity buyouts, make acquisitions, meet growth capital needs or to recapitalize or refinance an existing capital structure. Gladstone capital was one of the first BDCs focused on lending to the lower middle market, established 2001, and today that dedication, experience and consistency are core part of our value proposition. We approach the market with an investor perspective and strive to deliver market-oriented capital solutions to support each business' unique capital and growth profile. The majority of our loans today are the businesses backed by private equity sponsors and include a combination of secured first- and second-lien loans and may include an equity co-investment. We target to make investments of $8 million to $20 million, but will opportunistically consider smaller positions in broadly syndicated loans from time to time. With that introduction, let's review our results for March 31st quarter and our outlook for the markets in which we operate. Regarding investment activity, we are pleased to report that for our second fiscal quarter ending March 31, 2015, despite the usual low in new deal activity in the first quarter of the calendar year, we closed one proprietary deal and some follow-on investments, totaling $31 million of fundings for the quarter. Additionally, we experienced minimal repayments during the quarter, so the new investments translate into net portfolio growth of $30.5 million or 7.9%. The new proprietary deal closed during the quarter was for Precision Metal Hose,…

Great. Thanks, Bob, and good morning. I will now report on some of GLAD's summary financial results and overall portfolio-specifics for the quarter ended March 31, 2015. On our income statement, net investment income was $3.7 million or $0.18 per share for the quarter, which was unchanged from the prior quarter. Interest income on our debt investments increased quarter-over-quarter by $1.1 million or 14%, as the new originations added $483,000 on the quarter, as success fees declined in the absence of any excess compared to last quarter. Interest expense increased by $346,000 quarter-over-quarter with the increased utilization on our line of credit. However, the blended financing costs have dropped to 5.1%, inclusive of our term-preferred issue from 6.5% the prior quarter. Moreover, with the recent amendment and extension of our line of credit, we anticipate the borrowing cost to come down an additional 50 basis points. Nonfinancing costs, net of all adviser credits, on the quarter increased slightly by $149,000 compared to the prior quarter to $3.2 million. However, they declined relative to the average total assets to 3.5% compared to 3.8% last quarter. Net investment income of $3.7 million fell short of the common distributions declared of $4.4 million for the quarter. However, this shortfall does not reflect the recently revised line-of-credit borrowings or any adviser incentive fee credit. As we mentioned last quarter on the earnings call, our adviser elected to shift the determination of any incentive fee credit from a quarterly determination to an annual determination at the end of fiscal year, which for us is September 30, 2015. Our fund has experienced significant income swings on investment exits historically. And in the absence of a fee callback feature, the quarterly credit determination was expected to generate greater than 100% coverage of common distributions annually, as it…

All right. Good reports from Melissa and Bob and Michael. They are all good reports. And just to summarize, March 31, '15, Gladstone Capital closed several attractive investments, total of about $31 million. We maintained a healthy list of new investment opportunities that we hope to close over the ensuing months and continue to grow our business and develop resources. So we are moving along as planned, and everybody on the team is doing good job. Subsequent to March 31 quarter, we strengthened our capital position, obviously, when we amended and extended the $140 million credit facility by 3 years and achieved a reduction in borrowing rates as well as improved the collateral advance rates and better match our current asset mix. We also increased our liquidity by selling off some of the syndicated loans. Having all these banks come back in should give everybody some comfort they went through the company in a pretty thorough manner. Our main focus now, just like it was in the past, is making loans to more companies. Many borrowers are looking to take advantage of the capital availability and actively shopping financing. But most smart businesses are not just looking for low rates, they also want a partner, that's going to help them succeed, and this is where we Excel. With all of the business experience that we have and the strong relations that we have out in the marketplace with financial sources, we bring a very powerful package for each of the businesses to look at when we compete against others. Lastly, access to long-term capital will always be a top priority for us. We utilize our current credit facility and look to raise long-term debt and preferred and even some common stock along the way, as needed. Recent economic indicators appear…

[Operator Instructions] And our first question comes from Bob Brown, Private Investor.

A few questions. First of all, on the last quarter call, you talked about improvements in Sunshine and Heartland. I know you mentioned Sunshine earlier. I was wondering if you could update us on Heartland.

Bob, do you want to talk about Heartland?

Yes, Heartland is a smaller company. We are currently working through an exit plan that falls in the category of transactions that we expect to close, but can not cover specific details. Smaller businesses oftentimes take negotiation of sale of asset and/or refinancing in order to affect an exit. We are working on both of those fronts and hope, as we said earlier, to be able to report on that in the next quarter.

Okay. Second question is, you mentioned -- I know that seasonality, you mentioned, are low in terms of first quarter deals. I was wondering, at least on an annual basis, do you have kind of -- what are the goals? And what should we try to expect in terms of for new loan originations, even if it tends to be a little lumpier on a quarter-by-quarter basis?

I think, when we look at the market flows, we have a certain number of business development folks, we have a certain amount of market coverage. We're currently running -- I think this quarter was an okay quarter. $30 million, $31 million invested is probably a little bit low, given the average transaction size and resources. I would say that the fourth quarter, which if I recall was north of $60 million of closings, was probably a little high. So if you were to try to take a midpoint of those 2, I think you would probably come up with an average expected on a quarterly basis, which I think would put you probably in the $150 million range ballpark. When we think about it, that's probably on the order of 14 to 16 deals over the course of the year. Relative to our staffing, relative to our ability to due diligence and relative to our normal market flows that's probably a good place to be.

Okay. And so if you could just help me understand the issue about the adviser credits -- in other words, in theory, if there was no success fees and we ended up $0.18 a quarter, so we were short, what, $0.03 x 4, $0.12, we get a credit back from adviser of $0.12 sort of the dividend would be covered?

That's the understanding. I will say that the unusual thing in our portfolio, much like other BDCs without equity-oriented instruments, as David had alluded to, there is a couple of things on the horizon that we expect to be able to realize on, which will cause a lump of potential opportunity cash flow and earnings. And we expect that to back fairly significant portion of whatever that shortfall is. And to the extent that, that doesn't happen, we've reiterated our commitment to support the -- we would exit that investment and clear that $0.03 shortfall for a couple of quarters. We would not, obviously, have to waive a portion of the incentive fee to make up that shortfall.

So Bob, just to piggy back on back on that, we have 2 fees that come in. One, of course, is the regular advisory fee that we get; and then there is an incentive fee. So we use the regular advisory fee to pay all the people base salary and a little bit extra, and then the incentive fee is used primarily for our bonuses at year end. And so when we give up back some of the bonus earnings that we have gotten, that's what's you're looking at when we say a credit to the dividend. So everybody here is working to make sure the dividend hits the Mark, because if they don't, come out of the bonus pool. So it's a direct relationship between us and the shareholders.

Correct. Got it. And last question. In terms of -- if there is a backup in rates, right -- in other words, so if the rates rise by 0.5 point or 1 point, is it simply dollar-for-dollar? Or would we expect to see -- in other words, at the expense -- the interest expense we pay were essentially just to offset the extra income? I assume not. I assume we'd be making more money as rates go up. Is that correct?

The first, roughly, 75 basis points would be a -- and there would be a negative consequence. Many of our loans have floors in them. Because LIBOR rates are so low, as LIBOR increases, until it clears the floor of all the existing loans, there would be an increase in interest expense relative to the interest income. The total amount of that exposure is relatively modest. It's, I think, in the order of magnitude -- I think, the number is something around $0.5 million of the exposure. After the LIBOR increases beyond that, it would be 1:1.

1:1, got it. Okay, so the increase in rates, I mean, were hedged essentially, but it's not like it would be a windfall for us?

That's correct initially, and then as it moves up, it's 1:1.

Obviously, that directly increases the yield on the underlying common, once it goes beyond that floor.

All right. Well, I'm sorry. Can you explain that last statement?

Well, because we are leveraged less than 1:1, as the interest income increases, we will have more net interest income to support the dividend.

You don't have all your deals covered by debt. Obviously, some of it's covered by equity as well as it's more equity than it is debt. So as a result, you're going to have a pickup as interest rates go up.

[Operator Instructions] And I am showing no further questions at this time. I'd like to turn it back to David Gladstone for closing remarks.

All right. Thank you, all for calling in. That's the end of this call.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.