Gladstone Investment Corp (GAIN) 2011 Q4 法說會逐字稿

Good morning, and welcome to the Gladstone Investment Corporation's fourth-quarter and fiscal year ended March 31, 2012 shareholders conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to our Chairman, Mr. David Gladstone. Please go ahead, sir.

All right. Thank you, Denise, for that nice introduction, and good morning to you all. This is David Gladstone, the Chairman. And this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. The common stocks trading symbol is GAIN. And now our preferred stock trading symbol was GAINP for preferred.

Now thanks, you all, for calling in. Happy to talk to shareholders about the Company. I wish we could do it more often. Maybe we'll figure out some way to do an interim call one day. And we hope to take this opportunity -- that you'll take this opportunity to visit our website at www.gladstoneinvestment.com. You can sign up for email notices there so you can receive information -- timely information about all the things that are going on at your Company.

And please remember that if you're in the Washington, D.C. area, you have an open invitation to visit us here in McLean, Virginia. We're just outside of downtown D.C. Please stop by, say hello. You'll see some of the finest people in the business.

And now let me read this -- the statement that we always put in the front of all of these. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934, including statements which 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 this plans to be reasonable.

Many of these forward-looking statements can be identified by the use of words such as anticipate, believe, expect, intend, will, 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 and implied by these forward-looking statements, include those factors listed under the caption "Risk Factors" in our 10-K and 10-Q filings. Our prospectus is filed with the Securities and Exchange Commission, all of which can be found on our website at www.Gladstoneinvestment.com and also on the SEC 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, after the date of this conference call. Please also note that past performance and the market information is not a guarantee of future results.

First, we will hear from Dave Dullum. He's the President and a Board member of the Company. He'll cover a lot of ground, including views of the future at this time. Dave Dullum?

Thank you, and good morning, everybody. As usual, I'd like to review the plan for Gladstone Investment, which is to invest in bio 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 our dividends, while we seek to build shareholder value through capital appreciation of our equity investments. For instance, at 3/31/12, our investment assets at cost consisted of approximately $191 million, or about 72%, in debt investments, and about $75 million, or roughly 28%, in equity securities which, over time, we expect will produce the capital gains.

This ratio of roughly 72%-to-28% is slightly higher in equity than our goal of 80/20. This currently is due to certain loan payoffs and a recent debt equity conversion in the portfolio, but we do seek to have this ratio track towards this 80/20 target over time. I do wish to emphasize, though, that while the portion of our assets that we hold in equity securities is not producing current income, the debt portion is.

For instance, the most recent quarter, our total interest-bearing debt portfolio realized a 12.4% cash yield, which is, of course, the primary source to pay our dividends. For the fiscal year, the cash yield is 12.3%, roughly up from 11.4% from the prior year. Additionally, we often negotiate what we call success fees, which is a component of our debt instruments. We recognize these success fees as income when we receive the cash.

So for the fiscal years ended March 31, 2012 and 2011, we had success fees of approximately $700,000 and $5.4 million, respectively. However, these amounts are not included in our reported yields, as they are not really consistent and they would skew our actual current cash run rate return. To further explain this, these success fees are contractually due upon a sale of a portfolio company and, generally, are not recognized as income until we actually receive it.

To further quantify this, at March 31, 2012, approximately 73.4% of our interest-bearing debt had success fees attached to it, which is due with an average contractual rate accruing at around 3.3% per annum. In total, this has created accrued success fees of approximately $7.3 million, which is roughly $0.33 per share, although we do not have these success fees accrued to our balance sheet.

As an example of the value of these success fees in the last two years, we have received about $6.1 million in such fees. Now, there is no guarantee that we'll be able to collect all of our accrued success fees or know the timing of such collections, as they are a contingent item. Now, as to the equity that we own in each of our businesses, while not producing current cash income, we believe they will appreciate and add value over time. As an example, since mid-2010, we have realized capital gains of approximately $28.6 million through the stock ownership in various of our portfolio companies.

Now, as we grow our portfolio, we will seek to increase the interest income that pay dividends, but also be seeking asset appreciation through growth in this equity value of the stocks that we own. We believe the strategy is working, and our net asset value, or book value per share, being a good indicator, actually has grown over the last year from about $9 per share as of March 31, 2011 to $9.38 as of March 31, 2012, or an increase of about 4.2%. Our primary goal is to grow our dividend to shareholders while increasing a total asset value.

Now, looking at our deal origination, generally, we obtain our investment opportunities by partnering with the management teams, private equity firms, and other sponsors of buy-outs. Our combination of debt and equity gives us a competitive advantage, in that it provides two important and necessary portions of the capital structure in our buy-out transactions.

In addition, we may find opportunities to provide capital in support of business owners and the management teams who are not seeking to necessarily sell the company outright, but to sell a portion of their company to us. In this case, we will invest in debt and equity in exchange for a significant ownership in their business. And in other cases, where the owners of a business have a need to strengthen the balance sheet for growth, we could invest in debt and equity for this purpose.

Regarding our activity over the past quarter and year, we actually made no new investments during the fourth quarter ended March 31, 2012. Though, for the year ended March 31, 2012, we invested in four new buy-outs, Mitchell Rubber; SOG, otherwise known as Sog; SBS; and Channel Technologies. And we reported on all of these before. This was for a total of $76.9 million, of which $60.5 million was in senior and subordinated debt combined, and $16.4 million in equity in these companies.

During our fiscal fourth quarter, we deployed approximately $5 million in four of our existing portfolio companies, and we also received $2.2 million in repayments. For the year ended March 31, we deployed $14.4 million to seven of our existing portfolio companies. We also received $19.2 million in repayments, which does include the payoff at par of one of our syndicated notes, American Greetings Corporation, and also one of our proprietary loans in Quench Holdings Corporation.

Interestingly, on the Quench loan, it was valued at 75% at March 31, 2012, but when it paid off at 100%, this generated a nice gain in value. The payoff of the AMG, or American Greetings Corporation, represented the last syndicated loan investment in our portfolio.

So as a result of these activities, at the end of the fiscal year, we had $266 million invested in portfolio companies at cost and total assets at fair value of $325 million. Subsequent to the year-end, we made one new proprietary investment in a company called Packerland Whey Products, Inc. in Green Bay, Wisconsin, for a $9.5 million, three-way combination of debt and equity. Packerland is a processor of raw fluid whey, specializing in production of protein supplements for dairy and beef cattle.

Additionally, in a subsequent period, we deployed to existing portfolio of companies approximately $700,000 and received principal repayments of about $2.6 million. During the year, we maintained our dividend to stockholders, as well as for the current quarter March 31 of $0.05 per share. However, we were able to, during the year, increase and raise our dividend by a total of 25%, and we paid a bonus dividend of $0.03 per share in March 2012. We look forward to continuing favorable dividend payouts for the upcoming fiscal year ended March 31, 2013.

Turning to the portfolio company and updating that. In general, our portfolio companies are performing well and we are seeing improvement across the board. Since March 31, 2011, the portfolio values have increased by approximately 6%. On these calls, I like to acknowledge the value of our portfolio management activity, which is, indeed, one of our strengths. It is an important part of the investment management approach of working to limit losses, increase equity value, and preserve the cash flow from our portfolio of companies.

The portfolio management team provides value-added services such as strategic and business planning. Now, this is where we work with outside resources to assist the portfolio of companies in continuing to review their competitive positioning, their talent resources, among other key business metrics.

Secondly, our team also helps with operating management support. In this activity, we tap experienced operating management talent who are on our staff or from a pool of talent that we have cultivated over the years. They help the portfolio of companies streamline operations and evaluate add-on acquisitions as we think are interesting.

Third, we also organize conferences for the CEOs of our portfolio of companies. This facilitates interaction between our portfolio of companies' management teams, so that they can exchange ideas such as best practices and purchasing, pricing, organization health, and various manufacturing disciplines. We believe all these activities are extremely important in the competitive strength while adding value to our portfolio.

In regards to the marketplace for our products, it's smaller companies in the buy-out area, we believe the flow of opportunities for these buyers continues to be good in both the quality and quantity. There are two main drivers for this. First, while the general economic conditions create some uncertainty, we do continue to see improved stability and more middle market businesses returning to profitability. This improvement in profitability is causing an increase in the supply of good businesses for sale, as owners are taking advantage of these positive results.

Second, senior debt from traditional banks and lending resources is available at attractive rates where we're able to actually raise the debt levels at approximately 2 to 2.5 times EBITDA of these various companies.

Third, the private equity funds that sponsor these buy-outs have significant amounts of capital deployed and are anxious to put money to work.

The result of these aspects is, one, we are finding opportunities where the valuations relative to the trailing EBITDA are around 5 to 6.5 times for good companies. We are seeing some higher valuations which we do tend to avoid, and indeed, have, frankly, lost some opportunities where we believe the valuation was too high to get the returns that we would seek.

Secondly, private equity firms are able and willing to increase the equity portion of up to 50% of the total capital required, which makes some of these transactions easier to get done.

And third, the mezzanine and equity co-investment -- in other words, our product -- is in demand to fill that gap between the senior lenders I referenced earlier and these equity investors.

So how about the pipeline? Well, the factors I just mentioned are favorable to that. We are active in our marketing and deal-generating activity, where we stress our competitive advantage of being able to provide the subordinated debt and the equity completed transaction. Very important. However, we do continue to be cautious about the economy and we will be diligent in our pursuit of new investments.

We believe that our marketing efforts and presence in the marketplace should allow us to continue on a growth trend, with additional new investments over the next year. In fact, we're in active due diligence for the few companies where we had executed letters of intent during the quarter.

So our outlook for this fund and our goal is to maximize our distributions to shareholders, which we, again, increased a total of 25% for the year, while achieving solid growth of both equity values and assets in the portfolio through the proprietary investments in the lower middle market company buy-out arena.

So this concludes my part of the presentation and turn it back over to David Gladstone.

All right, Dave Dullum. That was a good report. We are excited about the future for this Company, but now let's hear from our Chief Financial Officer, David Watson, on the Fund's financial performance to this quarter. David?

Okay. Good morning, everyone. Before I go through the financial statements, I would like to highlight several key points.

First, our closing on one new buy-out subsequent to year-end totaling $9.5 million highlights our commitment to steady investment growth. Since October of 2010, we have invested in seven new proprietary portfolio companies, totaling approximately $133 million.

Second, we believe our portfolio is performing well and the credit quality is good. This is reflected in the $9.2 million of net appreciation on our portfolio for the fiscal year.

Third, we believe our capital position is in good shape, as we were able to raise $40 million in new term preferred stock in the capital markets in March, to complement our $60 million, three-year line of credit. At the time of this call, we have no borrowings outstanding on our line in credit, and we have about $9.9 million in cash on the balance sheet. So we have the ability to deploy more capital for the right opportunities.

And lastly, 100% of our distributions paid in fiscal year ended March 31, 2012, were covered by income and not a return of capital, which highlights our commitment to sustainable distributions and preservation of stockholder capital.

Now for the details, and I'll start with the balance sheet. At the end of the March quarter, we had $325 million in assets, consisting of $226 million in investments at fair value; $92 million in cash and cash equivalents; and $7 million in other assets. Included in the cash and cash equivalents is $85 million of US treasury securities, primarily through the use of borrowed funds at quarter-end to satisfy our assets diversification requirements. We had $118 million in liabilities consisting of $40 million in term preferred stock, $76 million borrowed via a short-term loan, and $2 million in other liabilities. We did not have any borrowings outstanding on a three-year line of credit.

As mentioned briefly in my opening remarks, we completed a public offering of 1.6 million shares of our 7.125% Series 2017 term preferred stock, a price of $25 per share, resulting in gross proceeds of $40 million. We used the proceeds from the offering to repay the outstanding balance on our line of credit and to make new investments.

Due to its mandatory redemption feature, we classified the preferred stock as a liability on our balance sheet as of March 31, 2012. Related to this offering, we incurred $2 million in deferred offering costs during the fourth quarter, which we recorded as an asset on our balance sheet and are amortizing over the redemption period ending February 28, 2017.

In all, as of March 31, 2012, we had $207 million in net assets, or $9.38 per share, so we were less than 1-to-1 leveraged on our senior secured borrowings. Currently, we have cash of $9.9 million and no line of credit or short-term borrowing. We believe this to be a safe and conservative balance sheet for a company like, ours and we believe our overall risk profile is low.

Moving over to the income statement, for the March quarter-end, total investment income was $5.8 million versus $3.8 million in the prior-year quarter, while total expenses, including credits, were $2.3 million versus $1.9 million in the prior-year quarter, leaving net investment income, which is before appreciations, depreciation, gains or losses, of $3.5 million versus $1.9 million for the quarter last year, an increase of 80%.

The increase was primarily due to a larger interest-bearing portfolio and higher yield on debt investments, resulting from the new investment activity since March 31, 2011, which increased our interest income by $1.6 million during the current quarter. I think it is important to point out that our weighted average yield on interest-bearing debt investments increased to 12.4% in the current quarter, up from 11.9% in the prior-year quarter, which primarily resulted from the addition of approximately $89 million of new, higher yielding debt investments that we have made since October 2010, that have a weighted average interest rate of 13.1% as of March 31, 2011.

For the year ended March 31, total investment income was $21.2 million versus $26.1 million in the prior-year, while total expenses, including credits, were $7.5 million versus $9.9 million in the prior-year periods, leaving net investment income of $13.7 million versus $16.2 million for the prior year, a decrease of about 15%.

The primary driver of the decrease in current income versus the prior year's income, was a success fee and dividend income of $9.1 million in aggregate, resulting from our exits from A. Stucki and Chase in June and December of 2010, respectively, partially offset by an increase in interest income of $3.9 million, due to a larger interest-bearing portfolio and higher yield on debt mezzanine, resulting from the new activity since March 31, 2011, and by a decrease in the incentive fee earned during the current year.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet, with a change in fair value from one period to the next getting recognized in our income statement. Unrealized appreciations and depreciation is a non-cash event.

Regarding our realized activity, for the March 2012 quarter-end, there were no realized gains or losses in our portfolio. For the 2012 fiscal year, we had a net realized gain of $5.1 million, which primarily related to Cavert Wire's recapitalization in April of 2011, where we received growth cash proceeds of $5.6 million from our sale of Cavert's common equity.

As for our unrealized activity, for the March 2012 quarter-end, we had net unrealized depreciation of $3.9 million of our entire portfolio. For the 2012 fiscal year, we had net unrealized appreciation of $9.2 million, which was primarily due to increased multiples and, to a lesser extent, increased performance at certain of our portfolio companies, which resulted in notable appreciation in our equity investments.

Our entire portfolio was fair valued at 85% of cost as of March 31, 2012, which is up from 78% as of March 31, 2011. Our stock, as of yesterday, is trading at 79% of net asset value per share. This means that the current price of our stock is 34% below the cost basis of our net assets.

Now let's turn to net increase and net assets from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation, and realized gains and losses. For the March 2012 quarter-end, this number was a decrease of $0.4 million, or $0.02 per share, versus an increase of $2.8 million, or $0.13 per share, in the prior year's March quarter. The year-over-year change is primarily due to net unrealized depreciation in the current quarter versus unrealized appreciation in the prior quarter, partially offset by increased interest income recorded in the current quarter.

For the March 2012 year-end, this number was an increase of $22 million, or $0.99 per share, versus an increase of $16.4 million, or $0.74 per share, in the prior fiscal year. The primary reason for the increase year-over-year is due to a net gain on investments of $8.3 million in the current year compared to a net gain of $0.3 million in the prior year.

While we believe our overall investment portfolio is stable, as demonstrated by cumulative net gains over the past two years, and continues to meet expectations, today's markets move fast and are generally volatile. Investors should expect continued volatility in the aggregate value of our portfolio.

From an asset quality standpoint, the risk-rating system we use set our portfolio loans, which represent 100% of our portfolio at a weighted average based on principal balances of 5.3 for this quarter, which is down from 5.7 in the quarter ended March 31, 2011. Our risk-rating system gives investors a probability of default rating for the portfolio with a scale of 0 to 10, with the 0 representing a high probability of default.

We see the risks in this portion of the portfolio staying relatively the same as prior quarters, with a decrease from last year primarily resulting from having a less seasoned portfolio, since a major component to our risk-rating calculation is the remaining duration our investments have until maturity. Currently, all of our portfolio companies are paying current, except for two, ASH and CTE, which remain on non-accrual this quarter.

Regarding interest rate risk, 77% of our loans have variable rates, but they all have a minimum or floor in the rate charged. So with the low interest rates that we have experienced over the last two to three years, these floors have minimized the negative impact on our ability to make distributions. The weighted average floor on our accruing variable rate loans is 3.1%, with an average margin of 9.2%, resulting in an all-in average rate of 12.3%. The remaining 23% of our accruing loans are fixed with an average rate of approximately 11.7%.

On the other side of the balance sheet, in the event we have borrowings outstanding on our line of credit, we have an existing interest rate cap on $50 million of the debt on our credit facility, in order to have some protection on our cost of funding if interest rates rise over the next couple of years.

With that, we look forward to maintaining momentum, and hope to continue to increase our income-generating assets to increase our recurring income and to increase our distribution to stockholders. And now, I will turn the call back over to Mr. Gladstone.

All right. Thank you, David Watson. I hope each of our listeners will read our press release and also obtain a copy of our Annual Report called the 10-K, which has been filed with the SEC yesterday, and can be accessed on our website, www.gladstoneinvestment.com, and also on the SEC website.

I think the big news this year was that we're actively investing again -- new portfolio companies, existing portfolio companies, about $91 million. I think the backlog is building. I think the next 11 months are going to continue to be good times for this Company. Other successes this year -- the dividend increased by 25%, an extra dividend of $0.03; net value per share increased from $9 to $9.38; fair value moved from 78% to 85% -- all of those are good news for existing shareholders.

And we've been active in the capital markets obtaining some long-term capital. As you remember from many of the last discussions, lamented inability to get long-term capital, and finally, with this $40 million term preferred offering, we added $40 million of longer-term debt. Additionally, we have very favorable three-year line of credit with BB&T and KeyBanc, and room to borrow under that line. And we're looking to add some new investment opportunities now, as you saw starting out of the blocks, we started out with a new one that Dave Dullum talked about.

I think this is a fabulous Fund at this point in time with a great opportunity for the future. The team, led by Dave Dullum and others, just give shareholders a good return for the last year. And we're certainly looking forward to the new year.

People always ask me what could trip us up and what could make things go wrong, and of course, I mention the same ones almost every time. The oil prices are still a very heavy weight on the economy. Oil prices are much too high and supply is too dependent on countries that obviously don't wish us well. The high gas prices for cars and trucks literally hurt every business that has transportation needs. We just need to develop more oil and gas here in the United States.

We're certainly worried about inflation, the decision by Congress and the President of the United States to expand the money supply. Ultimately, we call serious inflation, as this idea that we can borrow and spend our way to prosperity has been disproven so many times, so I don't need to disprove it here, especially in the Great Depression after 1929. The government caused the 1929 depression to last much longer by continuing to feed money into the recession, and the recession of 1920 to '21, the government stayed out of the way and the country recovered very fast, and led to the roaring '20s which, ultimately, had a problem, of course.

Spending by the government is still out of control. The government can't continue to print money. They're now borrowing $0.43 of every dollar, or should I say, they're printing $0.43 of every dollar that they spend. So the remainder of 2012 may be as high as $0.50 of every dollar that's spent will be printed.

The amount of money being spent on the war in Afghanistan still hurts our economy and we hope that will end soon. All of us support our troops in Afghanistan and they're the true heroes of this period in history, since they risk their lives for us every single day. We wish for their safe return home.

And of course, the government is, again, talking about raising taxes. And of course, the tax will only be on the rich, they tell us. If they'd only tax the millionaires the way they're talking about it, it would keep the government running for about 15 days. So that's obviously not the only answer. And when you get down to the nitty-gritty, the tax increases will be on the middle class. And now they've lowered the number to anyone making over $100,000 will be taxed. Just remember that 50% of the population of the United States don't pay any income taxes.

I'd also would like to mention the trade deficit with China and certain other nations is just terrible. China continues to subsidize their industries to the disadvantage of our businesses. And this, of course, means that companies can't compete, and as a result, they move overseas. We watched GE move an enormous plant, was built in Brazil rather than in the United States just for that simple reason.

The continued downturn in housing industry and related disaster in the home mortgage default areas continues to drag down the economy. No one really knows how many more home mortgages will go into default and fail and be foreclosed on. There's still projections that there's trillions of dollars out there. It was, of course, the main cause of the recession in the beginning, and the lack of a quick recovery continues to hold back the economic recovery that we're all hoping for.

We see the economic problems in the Eurozone; they hurt some of our companies, but not a lot. We don't have that many companies that have business in Europe or our investments are in US companies that have little contact in Europe. However, if Greece goes under and goes out of the Eurozone, I think it will hurt many of the banks, not only in Europe, but certainly here as well.

And, of course, unemployment is far too high. The numbers used by the government still don't include those workers who are working part-time, but seek full-time work or that have stopped looking for work altogether. More realistically, you should use the number that the government does have, which says it's about 18% if you include those two groups in there.

In spite of all the negatives, the industrial base of the United States today is not a disaster. It's a lingering recession. We keep bouncing along the bottom. And the impact on our portfolio companies is not a disaster, but it's still not pleasant. Like most companies, some of our portfolio companies have not seen an increase in revenues or in their backlogs. However, others have seen great increases and a few of them are seeing absolute dramatic increases.

So it's a very uneven recovery today and we're hoping that as time goes on, things will get better. Now, we believe that the downturn that hit us so hard in 2009 has reached bottom, and that we're now beginning to see some economic improvement; but it's still a very poor economy and the US government is still doing not enough to help get us out of this situation.

Our distributions declared by the Board of Directors in April, of course, were $0.05 a month for April, May and June. We feel very comfortable with that rate. This is a run rate of $0.60 a year. They declared a dividend -- an extra dividend of $0.03 a share in March. We had to do that because so much income was coming in that we wouldn't have met the government's payout test if we didn't pay that out. So we had to pay out a little extra at the end of the year.

The Board next meets in July to consider a vote upon the July, August and September dividends, so we'll see what comes up then. At the current distribution rate, based on the common stock price yesterday at $7.38, the yield on the distribution is now high at about 8.1%. And if you factor in the extra $0.03, that would push it up almost to 8.5%.

Our term preferred stock, the monthly distribution is 7.125% of our term preferred stock, which translates into about $1.78 annually. This term preferred stock had a closing market price yesterday of $25.35, so we're up $0.35 from the original issue. The main thing to think about here, it cost us a little over $2.8 million to meet that dividend, and we have about 4.8 to 5 times that amount of income coming in. So that stock, which is traded on NASDAQ under GAINP -- G-A-I-N-P for preferred -- is giving about a 7% yield today that is really in solid territory with the coverage that we have.

Well, please go to the website and sign up for our email notifications. We don't send out junk mail, just news about your company. Now, you can go to www.gladstoneinvestment.com, is the site. You can also follow us on Twitter using the name Gladstonecomps -- c-o-m-p-s, and you can find us on Facebook under the keyword The Gladstone Companies. Just to note, I didn't buy any shares in Facebook, thank goodness.

As far as we can see, the next six months looks really okay. We're in good shape. But, as you know, I mention each time, we can only see a couple of quarters out and we want to be careful with your money. We are stewards of your money and we're looking for new investments now, and hope we can find some very good ones.

With that, Denise, if you'll come on and let us have some questions from the analysts and our loyal shareholders, we'll go into the question-and-answer period.

(Operator Instructions) Ross Haberman, Haberman Management Corporation.

Nice quarter, nice year. Had one very brief question. You made reference to two nonperforming credits. Could you tell us a little bit about them? What you had originally invested? What you're carrying them at? And will they end up being converted to equity if they haven't been so yet? Thank you.

Well, they're both in the portfolio. ASH has been written down to zero. We keep putting a little money in there. We're working with -- to get a new CEO onboard right now, and that one is, I think, will come back in the following year. Hard to know. It's in the business of selling yellow school buses to various folks out in -- various school districts out in Phoenix, Arizona, and also in Las Vegas. And that company has had its problems, simply because the school bus business is down substantially because the counties and cities don't have the money to buy new buses.

So it's going to take a while for that one to get back. They're also involved in the service business. They convert a lot of vans into things that will used by plumbers and electricians and those kind of things. So a good company, good people. Just needs a second management team, I think, to run it and that's where we're going with that one.

And, Dave Dullum, why don't you take CCE and just talk about it? They're doing well now, but -- and coming back strong.

Yes, well, I'll try. CCE is a -- also distributor of golf cars in the Northeast. And we have to, basically, as a result of, obviously, issues with the golf market in general -- this was over a year or so ago -- restructure the balance sheet somewhat.

They're doing very well this year. They've maintained a presence in their market, have large market share. And I expect we will be able to convert that one back to accrual status sometime.

And by the way, as in ASH, we, as in all of our cases, we work very hard to have these companies, even though we might go into a, I'll call it, temporary sort of restructure to be sure the businesses perform. We work hard at doing that and then we bring them back to current pay status. So I'd hope that both of these might do that certainly over time.

So CCE had a problem with its competition. The competition came in, cut price, and just like in any industry, when you have one of the competitors cut price, it hurts everybody in the business. But they've sort of learned their lesson now and pricing has come back to a reasonable amount. And so, as a result, I think that one, as Dave said, will be back in the paying categories sometime during the next 12 to 18 months.

Typically, when you try to restructure these, do you -- is the number one -- clearly, you want to [right] the company and give it the right capital structure. But do -- how readily are you open to converting part of the investment to equity? Or you really don't ever want to do that and that's the last option? (multiple speakers) B, if you can keep your investment in some kind of debt paying instrument.

Well, in the case of some of these companies, we are primarily the only debt there. So what we normally do there is just give them relief on the payments. In some cases, we have converted to preferred stock, meaning we get out before the original investors.

But, it's -- you're right in saying it's the last thing we do is convert to equity. Now, it will be interesting to see, in some of these cases, when they come back. And we'll tap those when we come back in six months or so, as we move through these fix-ups in these two companies. I know in Gladstone Capital, we've had a couple that have come back pretty nicely.

And we just have to see if these two get back. I think CCE will be back soon. I'm not so sure when ASH will come back, because it's in the middle of Phoenix and Las Vegas where the economies are really hit very hard.

Okay. Thanks, guys. The best of luck.

Thank you. Next question, please.

J.T. Rogers, Janney Capital Markets.

It sounds like the investment pipeline is strong. You've got a -- one deal has already been closed since quarter-end and you're working on some additional term sheets. But I was wondering what led to the slower originations in the most recent quarter? I know the business is lumpy, but is this -- does that have anything to do with valuation on new deals? I believe you mentioned something about that in your comments.

Yes. Yes, J.T., I think, to some extent, that's true. I think you hit it on the head, though. It is a lumpy business. We were very active. We have a very long, good, strong, I'd call it, pipeline. And as you know, in some deals, as I mentioned, the valuation is just so high, we just don't get there. And other people are willing to pay a turn or two more than we are.

So we're patient in what we're doing. And the key is to keep a good supply of prospects, again, in that pipeline. I feel really good about that. And our targets we have internally, we're re sort of moving towards those. So, as you say, we got a good start in terms of the deal we closed right after the quarter-end. And a couple that are in the pipeline, hopefully, will come to fruition sometime soon.

J.T., as Dave Dullum mentioned, the worst thing you can do in this business is to overpay. It always comes back to bite you somewhere along the way. So we're just being cautious. Do you have another question?

Yes. A couple more, just a follow-up to that is, are there any industries or sectors that you think are particularly attractive right now, in terms of by their valuation or just on a fundamental basis?

You know, typically, the area we operate in, as you well know, where we see -- we're looking at things that somewhat are related to some of the aerospace on the commercial side. Not defense, necessarily. Just other basic manufacturing businesses where we're looking at a number of those types of companies. So that's really where we are. We see a few in the healthcare services area. Those valuations seem to be somewhat reasonable. So I'd say that's -- those are the ones that come to mind immediately.

Okay, great. And then it looks like the fair value of Danco has been trending down since -- really since December of 2010. Then the rate of decline accelerated a little bit in the most recent quarter. I was wondering what drove that decline and what's going on with that business?

Yes they are -- that's a good -- very good company. They specialized in a very high -- highly engineered machining of parts for a company -- I think we've mentioned this, in fact, on prior calls. You've heard of the da Vinci robotics machine that one of their companies -- their major customers is manufacture those machines. And we're kind of shifting from a, I'd call it, a more short run to longer run machining of products and expanding their customer base.

So the company, frankly, is going through a bit of a transition in that regard. We're working on that in a very positive way with beefing up the management team, including on the sales side. So it's just going through that, that period where we're, as I say, sort of transitioning. But we feel good about them, and their quality of what they do is certainly a good thing. So I hope it's temporary, frankly, and we'll just have to keep working at it.

That makes sense. As they transition from short run to longer run machining, is there any risk there that opens up competition from maybe larger machining companies that could start filling those orders? Or might be more interested in?

Certainly always that risk, right? It's more about just doing a better job internally, maintaining their margins. And, as I say, making that internal transition, frankly, themselves more from the short run development stage, let's call it, to managing longer runs. So I'd say that's really more than necessarily opening up significantly to competition.

Okay. That makes sense. And then just, sorry, one last question on ASH Holding. I guess you increase the revolver by about just a little under $3 million. What drove the decision to increase that?

Yes, we -- ASH is one, as David Gladstone mentioned earlier, we -- it's one that we've obviously bought a lot because of the economy they're struggling with. We had a senior lender in there and they were coming to the end of their term. And it gave us more flexibility to, frankly, take them out, which is basically what we did.

So that in combination, though, with -- and this is very important -- with their main supplier which is Thomas Bus, which is who we're the dealer for, providing floor planning effectively on a large number of school buses. We essentially stepped in to take the revolver capability around parts, supplies, and so on. So we actually also increased our collateral, if you will, by taking that on. So it was, frankly, just the ability to have more control over how we manage that business ourselves.

Hey, great. That makes a lot of sense. And so is that $3 million increase, would that be collateralized by receivables and inventory?

Yes, receivables, inventory, right. Mainly, again, receivables, parts, and also underlying value in some of the buses as well, our floor plan.

Okay, great. Thanks a lot.

Yes, sir.

Next question, please.

(Operator Instructions) Adrian Day, Adrian Day Asset Management.

Good morning, David. Clearly, there's room to increase the dividend again. And I was just wondering if perhaps you're being a little bit cautious to see how things go? Or might we see another bonus dividend rather than an increase in dividend?

Hard to say at this time. We always like to be so far in the money that when we increase the dividend that there's no chance that we have to reduce it. And obviously, we got off to a good start by having an extra $0.03 a share for the year ending, and paid that out as an extra dividend.

I don't like extra dividends simply because, at the end of the day, I think no one really cares about them. And, as a result, we'll work real hard this year to see if we can expand the dividend a bit in order to take up the extra income that we have. But hard to know at this time, Adrian. I know everybody asks me the same question. With this Company, with only 18 investments now, really very hard to project exactly when we'll reach that point that will make us all happy enough to increase the dividend.

Okay. Fair enough. Thanks.

Next question, please.

And showing no additional questions, this will conclude our question-and-answer session. I would like to turn the conference back over to our Chairman, Mr. David Gladstone.

All right. Thanks again for everybody for tuning in. We look forward to hearing from you and you're free to email our HR person here. Lindsay always looks for questions in the email. And again, we'll see you next quarter. That's the end of this call.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.