Gladstone Investment Corp (GAIN) 2013 Q3 法說會逐字稿

Good morning and welcome to the Gladstone Investment Corporation third-quarter ended December 31, 2013, conference call. (Operator Instructions). Please note that this event is being recorded. Now, I would like to turn the conference over to David Gladstone. Mr. Gladstone, please go ahead.

All right. Thank you, Keith. And hello and good morning to all of you out there. This is David Gladstone, Chairman. And this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. Common stock on the NASDAQ trading symbol GAIN. We also have a preferred stock which trades under the symbol GAINT.

And thank you all again for calling in. We're always happy to talk to shareholders about the Company and wish we could do it more often. We hope you take the opportunity to visit the website, www.GladstoneInvestment.com where you can sign up for email notices so you can receive information about the Company in a timely fashion. And please remember that if you are ever in the Washington DC area, you have an open invitation to visit us in McLean, Virginia. So please stop by and say hello. You'll see some of the best people in the business.

And I will read now the statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meanings of these Securities Act of 1933 and Securities Act of 1934 including statements with regard to 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 and we believe those plans to be reasonable.

Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. There are many factors that may cause our actual results to be materially different from future results that are expressed or implied in the forward-looking statements including those factors listed under the caption, risk factors, in our 10-K and 10-Q filings and our registration statement filed with the Securities and Exchange Commission. All of those 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 or market information is not a guarantee of future results.

With that out of the way, we will hear from Dave Dullum. Dave is President and a Board member of the Company. He will cover a lot of ground, a lot of interesting information. And Dave, take it away.

Hello, thank you, David, and good morning, all. I would like to start with a brief review of what we do. This really helps to keep the long-term goals in mind as we really update you on our short-term results.

Gladstone Investment, as you know, provides capital for the buyout of businesses. These are usually companies with annual sales between $20 million to $100 million. This is where we provide subordinated debt and equity and, occasionally, some senior debt in these transactions. This combination produces a mix of assets for Gladstone Investment which is the basis of our strategy. Our debt investments provide income to pay and grow the monthly dividends, and we expect the equity to appreciate and provide capital gains from time to time.

This is what we really believe differentiates us from other public BDCs that are predominantly debt focused. So please keep in mind that we expect the equity portion of our assets to contribute to the overall value of our Company as we grow. For example, last August we sold Venyu Solutions Inc., a company which we purchased with its management team in late 2010. The equity portion of this investment generated cash proceeds of approximately $32 million, which resulted in a real as capital gain of approximately $25 million and attendant dividend income of approximately $1.4 million.

In addition, we also received full repayment of our debt investment of roughly $19 million and an additional approximately $2 million in success fee income.

Therefore, our original investment of $6 million in equity generated approximately a 5.5 times return including the dividend that we received.

The sale of Venyu is actually the fourth exit from our management-supported buyout investment since June of 2010. So, important here is that these four liquidity events have generated approximately $54.5 million of realized gains since June of 2010. This has enabled us to offset our cumulative realized losses, and we're now, I'm happy to say, in a cumulative net realized gain position.

So as mentioned in previous calls, the realized losses, which were primarily incurred during the recession when we were required to sell performance-indicated loans by a former lender. Therefore, with the continued growth in operating income and these realized gains, our board has also then be able to declare a monthly dividend of $0.06 per common share for January, February, and March 2014. This amount actually is the same as last quarter when we had increased the monthly dividend rate by 20% from the previous quarter.

So generally, as far as originations, how do we keep doing this?

Well, we obtain our investment opportunities by partnering with management teams of other sponsors, as we call them, in the purchase of a business. Our strategy here is to provide a financing package which includes both debt and the equity which gives us, we believe, a competitive advantage as it actually helps the sellers with a high degree of comfort that the purchase will actually happen dealing with one source such as ourselves.

So the sources for deal generation that we concentrate on for these buyout opportunities are what we call independent sponsors, middle-market investment bankers, and middle-market private equity firms. Occasionally in addition to an outright purchase, we might find opportunities to partner with a business owner who will also sell a portion of his company to us and use that capital to grow the business.

Looking at our activity for the quarter, which ended December 31, 2013, we closed three new investments totaling about $42.3 million as follows. In October, we invested $16.3 million in a combination of debt and equity to purchase Alloy Die Casting. ADC is a manufacturer of high-quality finished aluminum and zinc castings for the aerospace, defense, aftermarket automotive, and industrial applications.

In December, we invested approximately $13 million in a combination of, again, debt and equity to purchase Behrens Manufacturing, LLC. Behrens is a manufacturer and a marketer of high-quality, classic-looking galvanized steel utility products and containers.

Also in December, we invested $13 million, again in a combination of debt and equity, to purchase Meridian Rack & Pinion. Meridian is a provider of aftermarket and OEM replacement automotive parts which it sells through both also channels and also online at www.buyautoparts.com.

So a key theme here, just to refresh, is it was debt and equity that was invested in all of these deals. And so, all three deals we invested in aggregate of $42.3 million, and our affiliated fund, actually Gladstone Capital Corporation, invested $18.1 million in addition to our $42.3 million as a coinvestor.

Further, in October we received a full repayment of our debt investments in Channel Technologies Group, LLC, which is in the amount of approximately $16.2 million. Simultaneously though, we invested $1.3 million in additional preferred and common equity securities in Channel. So at this point, we have no debt outstanding in Channel, but we are now essentially an equity investor.

Also in December 2013, we received the full repayment of our remaining debt investment in Cavert II Holding Corp., which was an aggregate amount of approximately $6.1 million. So both of these pay offs resulted in prepayment and success fee income totaling $1 million.

We also sold two what we considered distressed portfolio companies during the quarter which resulted in a $12.1 million aggregate realized loss. However, these sales were accretive to our net asset value in aggregate by approximately $5.7 million and reduced our nonaccruals outstanding.

Regarding our new deal pipeline, the team, again, is very focused and engaged on active marketing and deal generating activity. The results of last quarter reflect that, and we continue to try to find opportunities which will fit our investment parameters which roughly our valuations relative to EBITDA at approximately 6.5 times. Today's market -- it is a bit troughy and frequently we do see opportunities with higher valuations than these, and we tend to avoid them. Occasionally though, we might pursue one of these if there is some unique characteristics to the particular transaction.

So we are encouraged by our marketing efforts as reflected in our new deal activity. We are growing our presence in the marketplace, and we're providing the foundation, we believe, to continue our growth trends.

So in summary, our goal for this fund is to maximize distributions to shareholders with solid growth in both the equity and the income portion of our assets. And David, this concludes my part of the presentation.

All right, David Dullum. Thank you for that. That was good. And now we will go over to David Watson and hear about the financial side of the business.

Sure thing. Good morning, everyone. As David said, we had a lot of activity this quarter closing three new deals, two substantial repayments, and two sales. This follows the prior quarter where we had a big win with the sale of Venyu. Assets such as Venyu generates substantial other income for us and a results in a lot of earnings volatility. And in fact, in early 2010 we had generated almost $23 million in other income from our portfolios. And this accounted for about 21% of our total income over the same period. However, even though we are consistently generating this type of income over the long term, it is very lumpy, and we could go long periods without generating any of this type of income.

So in order to better understand our baseline performance of the last two quarters, if one were to exclude the impact of the Venyu sale, other income events, and [that kind of factors] from our financials, our net investment income quarter over quarter would be consistent.

So with those overriding thoughts in mind, I will get into the details of our financials.

Regarding our balance sheet, at the end of the December quarter, we had $318 million in assets consisting of $291 million in investments at fair value, $15 million in cash and cash equivalents, and $12 million in other assets. At our cost basis, 73% or $252 million of our portfolio of assets consisted of debt investment, and 27%, or $98 million, consisted of equity securities, which we will hope will produce capital gain over time.

Included in the cash and cash equivalents is $10 million of U.S. Treasury securities purchased through the use of borrowed funds at quarter end to satisfy our asset diversification requirements. The amount of the T-bills that we have had to purchase has generally been coming down consistently over the past year. And I am happy to report that we have had -- we would have had some diversification requirements over the past two quarters without purchasing any T-bills. However, we will continue to utilize the purchase of T-bills until we are 100% confident with our margins of error on [the test].

As for our liability, we had $93 million, consisting of $40 million in term-preferred stock; $36 million in borrowings outstanding on our $105 million, three-year credit facility; $5 million in secured borrowings; $9 million borrowed via the short-term loan; and $3 million in other liabilities. In all, as of December 31, we had $225 million in net assets, or $8.49 per share.

Today, we have investments at fair value of $291 million, cash of $3 million, $34 million in borrowings on our $105 million credit facility, and $5 million in secured borrowings.

So in other words, we have over $70 million in available capital to deploy in new investments before any potential increases in our borrowing capacity.

Moving over to the income statement for the December quarter end, total investment income was $8.7 million versus $11.4 million in the prior quarter.

Total expenses, including credits, were $4.3 million versus $5.1 million in the prior quarter, leaving net investment income of $4.4 million versus $6.2 million for the prior quarter, a decrease of 29%. This was primarily due to the $1.9 million of success fees and $1.4 million [dividend] income partially offset by an increase in incentive fees relative to the sale of Venyu in the prior quarter.

As mentioned earlier, since early 2010 other income has accounted for over 21% of our total income on average. Last quarter was 32%; this quarter it was 13%; and over the two quarters it has averaged 24%, which is slightly above our recent historical average. While -- our baseline earnings, which excludes the impact of other income and related incentive fees, grew last quarter and remained stable this quarter. We continue to expect volatility in our net investment income for the foreseeable future.

So in total, our net investment income which was $0.17 per common share, decreased 29% over the prior quarter of $0.24 per common share.

We think it is important to take a moment to touch on the significant, steady growth that we have had in our portfolio and income since we started our origination efforts in late 2010. The year-over-year net growth rate since that time and the size of our weighted average interest-bearing assets has been 22.5%. The year-over-year net growth rate over the same period in the amount cash interest income recorded has been 27%. In addition, our weighted average to yield on interest-bearing debt investments has increased to 12.7% in the current quarter, up from 11.3% in late 2010. Keep in mind, we often have success fees as a component of our debt instruments, but they are excluded from our reported deals. Success fees are contractually due upon the sale of a portfolio company although the portfolio company is to be paid earlier.

So as of December 31, approximately 79% of our interest-bearing debt has associated success fees with the weighted average contractual rate of 3.1% per annum. The success fees owed to us are approximately $16.2 million, which is about $0.51 per share. We generally do not accrue the success fees on our balance sheet. So for comparison purposes, if we had accrued these success fees as we would a PIK, our weighted average yield on interest-bearing assets would approximate 15.8% during the December quarter. Again, there is no guarantee that we will be able to collect all of the success fees or have any control over their timing.

So overall, we believe that the [positive] portfolio and yield growth and our debt investment to loan has positioned this Company well for the future and, in part, has enabled us to increase our dividend rate on our common stock by 50% since late 2010.

Let's turn to realized and unrealized changes and 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 the change in fair value from one period to the next recognized the income statements. Unrealized appreciation and depreciation is a non-cash event.

So as we mentioned earlier, we generated approximately $25 million in realized gains in the last quarter with the sale of Venyu. And Venyu, together over three other early liquidity events, has generated $55 million in realized gains in early 2010, and so we have overcome are cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender.

We are happy to say we're in a realized gain position today. We took this opportunity during the three months ended December 31 to strategically sell two of our distressed portfolio companies, ASH and Packerland, to existing members of their management team and other existing owners. This resulted in realized losses of $11.4 million and $1.7 million, respectively. These sales, while a realized loss, were accretive to our net asset value in aggregate by $5.7 million and reduced our nonaccruals outstanding.

As for our unrealized activity, net unrealized depreciation over our portfolio for the quarter ended December 31 was approximately $2.3 million. This included the reversal of $13.2 million in aggregate unrealized depreciation primarily related to the ASH and Packerland sales. Excluding reversals, we had $15.5 million in net unrealized depreciation for the three months ended December 31. This unrealized depreciation was primarily due to decreased equity valuations in several of our portfolio companies. This results from the combination of a quarter-over-quarter decrease in these portfolio companies earnings and decreases in certain comparable multiples used in our methodology to estimate the fair value of the equity of our investments.

We're always mindful of the amount of unrealized depreciation on our portfolio quarter over quarter. But as with our other income, we experienced a lot of volatility in our valuations as a market comparable multiples are difficult to obtain for the lower middle market private companies which is what we invest in. So to underscore that point, over the last five quarters, excluding reversals, we have seen our unrealized appreciation and depreciation fluctuates significantly, going from zero to $10.4 million in appreciation; to $11.4 million of depreciation; to $1.7 million of appreciation; and finally to $15.5 million of depreciation in the past quarter.

But given our long-term view related to our investments, we have been pleased with the realized value to which we have exited our investments and are generally less concerned about the inherent quarter-to-quarter fluctuations in our valuations.

So for the December quarter end, our entire remaining portfolio fair valued at 80.7% of cost, down from 81.1% of cost last quarter.

Now, let's turn to net decrease/increase and net assets from operations. This term is a combination of net investment income, unrealized net appreciation or depreciation, and our realized gain from losses.

For the December 2013 quarter end, this number was a decrease of $10.7 million, or $0.40 per share, versus an increase of $14.9 million, or $0.57 per share, in the September quarter. The quarter-over-quarter change was primarily due to the aforementioned realized activity and unrealized amounts over the past two quarters.

All of our portfolio of companies are current in payments except for one, which continues to remain on nonaccrual, and that one represents 0% of the fair value and 4.6% of the cost basis of our total debt investment portfolio as of December 31.

Regarding our interest rate risk, approximately 81% 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 experience over the last several years, these floors have minimized the negative impact on our ability to make distribution. As of December 31, the weighted average floor on our variable-rate loans is 2.7% with a margin of 10% resulting in an all-in rate of 12.7%. The remaining 19% of our loans are fixed with a weighted average rate of 11.8%.

Over the last three fiscal years and the current fiscal year to date, our net investment income per share of $2.59 has outpaced the distributions we have made to our common shareholders by $0.37 per share, or 14%. This has largely been driven by income generated from our equity investments. Our Board continues to maintain a conservative distribution policy to ensure we earn our dividend.

As a reminder, [we] generally have to distribute at least 90% of their taxable ordinary income in capital gains. And as in the past, we will continue to utilize section 855A of the IRS code which allows us to carry forward a reasonable portion of our income and gains. The balance as of March 31, 2013, was $3.1 million, and it has since increased with our performance in the Venyu sale during the first nine months of this fiscal year ending March 31, 2014.

Given our desire to be tax efficient, last quarter the Board increased our monthly sustainable distribution rates by 20% to $0.06 per common share a month and also declared a one-time special distribution of $0.05 that was paid in November. We look forward to maintaining all this momentum and increasing shareholder value.

And now, I will turn the call back over to Mr. Gladstone.

All right. Thanks. That was a great report, David Watson, and a good report from Dave Dullum, too. I hope all the listeners out there read our press releases and also obtain a copy of our quarterly report called the 10-Q which has been filed with the SEC and can be accessed on our website at www.GladstoneInvestment.com and on the SEC website as well.

For the quarter ending December 31, the major news of the quarter was an increase in the dividend, of course, and continued investments in new portfolio companies. Most of those happened at the end of the quarters so we didn't get much bang out of their income. We think the rest of the fiscal year will continue to be good, and we will keep investing. And given the liquidity being generated from the Venyu sale and the expansion of our line of credit from $70 million to $105 million this year, we have plenty of room to evolve under the line and make new investments. So we're out there looking and Dave Dullum is doing a great job of finding new investments.

We still have other concerns, and we have some external things to our operations here that we worry about. Of course, it's difficult time to invest because so many external things are in the mix. We ask questions about these external items each time we look at it, and unfortunately, we don't have any answers for many of these questions. Of course, oil prices could have spiked, and that would certainly slow and stop the recovery that we are in. Oil prices, I think, are still too high. We have massive oil and gas reserves in the United States, but the US government has just not let businesses develop them.

High gas [policies] for cars and trucks, which hurt every business in the United States because transportation is so important.

We all worry about inflation. The decision by Congress and the president of the US to expand the money supply will ultimately cause serious inflation, we believe.

It's a bad idea to say that we can borrow and spend our way into prosperity. And that socialistic theory has been disproven here in the US as well as in hundreds of other countries over time. Spending by the federal government, of course, is still out of control, and we cannot continue to borrow -- the government cannot continue to borrow and spend as much money as they are doing today. It is just unsustainable.

The amount of money being spent on the war in Afghanistan still hurts, but we have been told it is going to end this year, 2014, and I certainly hope that is true.

So terrible news out there that part of the government still wants to raise taxes of all kinds. And of course, the middle class pays the bulk of taxes, and they will be hit if taxes are raised. I just hope Congress and the President don't try to raise taxes again.

The trade deficit with China and certain other nations is just terrible. China continues to subsidize all of their industries to the disadvantage of our businesses in the United States as many of our companies can compete with them. We must have a government that will stop China from cheating like this, but doesn't seem to be happening in today's marketplace.

The stagnation of the housing industry may be coming to an end. I just read today that mortgage applications are up again this month and they seem to be up one month and down enough. It just is unpredictable at this point in time. But unless the lenders are again making loans to those who cannot make mortgage payments as they did before, I think we are on pretty solid ground for that kind of recovery.

Unemployment in the US is still far too high. The numbers used by the government and reported by the popular press don't include those working part-time that are seeking full-time jobs nor does the government figure include those that have stopped looking for work all together. I think a more realistic number for the unemployment rate in the US today is to use some of the old statistics is about 15%.

In spite of all those negatives, the small business based in the US today is not a disaster. Many of them have hunkered down and continue to be strong. However, I do warn that the number of new businesses that are starting up each year is the lowest in 20 years. That will have an impact in future years in terms of small businesses available to lend to.

Like most companies in the US, some of our portfolio of companies have seen a great deal of progress in terms of revenue backlog. However, others are seeing good increases and strength there. And a few others are seeing great increases. It's a very uneven economy that we're in today with some industries taking off and others falling behind.

Our monthly distribution declared by the Board of Directors in January was $0.06 per month for each of January, February, and March of 2014. This was the run rate of $0.72 a year, and as mentioned before, 20% increase over the September 2013 quarter.

As mentioned in our last call, the board declared and paid a special bonus dividend of $0.05 per common share in November. That is the second such special dividend. And when you have capital gains the way that we have them, it is often prudent to pay out extra dividends. We don't get much credit in the marketplace, but it is good to pay it out.

The Board next meets in April to consider the growth fund dividend for April, May, and June of 2014. And the current distribution rate for the common stock and for the common stock priced at about $7.98 yesterday. The yield on the distribution is now very high, in my opinion, at just a little over 9%.

One of the reasons we think the yield is high and that it should trade at a much lower yield because the growth in the dividend and the buildup of possible capital gains seems to be a fairly good indicator of the future.

Please go to our website and sign up for email notifications. We don't send out junk mail, just news about your Company. We are at www.GladstoneInvestment.com. That is the site. You can also follow us on Twitter using GladstoneComps and find us on Facebook under the keywords, the Gladstone company.

As far as we can see today, I think we can look out about six months. We think everything is going to be okay even though the stock market seems to not think so. But the economy is not strong, and we're looking for new investments now. I hope we have more good news for you when we have this call next quarter.

Now I am going to stop, and let's say, Keith, if you will come on, we will take questions from analysts and some of our shareholders.

(Operator Instructions) Dan Furtado, Jefferies.

I just had one or two quick questions. Nice quarter.

On the capital deployment side, we have seen this accelerate nicely in the quarter. Could you help investors understand how much of this is due to internal focus, so to speak, since 2010, and how much do you think it's due to the business environment you are operating in today?

It is Dave Dullum. I will take a crack at that. I think it's obviously a combination of both. I do feel that the business environment is pretty decent, but frankly, our efforts and we have touched on this before, we've got good focus around all of the Gladstone entities and so we have our GAIN team, which is right now approximately 11 folks. We, I think I had mentioned in a previous call, added a managing director in Chicago the middle of last year. Comes from the private equity world.

So we have really stepped up our marketing effort, our focus, our direction, and frankly, our skill set around the type of transactions we are looking for -- again, being this combination of equity with obviously, significant debt in these buyouts.

So I would say, again, a bit of both but more around the effort. And I think our team had done a great job in ferreting out and getting to the areas where we find the types of companies that we are looking to invest in -- again in the $3 million low end to up to $8 million or $9 million EBITDA and at valuations that we believe make some sense to us.

So I am optimistic about the trend.

Thank you for the clarity there. And then, is there any noticeable difference on the competitive front or would you consider that to be more or less status quo from the previous couple of quarters?

I would say it is probably status quo. Again, when we look at competition, we're not really looking at competition regarding just pure debt-oriented BDCs recognizing again we bring the debt with the equity when we do a transaction. So, for us, again, it's more just slogging it out there and generating opportunities.

And Dan, what you see in the marketplace is we are not competing so much with the other BDCs and (inaudible) that are out there in this fund. This fund competes with some of the smaller buyout funds and with some of the people that bring deals to the marketplace. So this is really a buyout fund in the sense that it is looking for long-term capital gains. It's a little bit different than most of the BDCs.

Got you. Well, thanks for the clarity, David and David. I appreciate it.

Mickey Schleien, Ladenburg Thalmann.

I have several questions. I wanted to start with the marks on B-Dry, Noble, and Danco, which are now down to the neighborhood of 20% to 25%. I just can't understand how those can still be on accrual status with marks that low which usually imply a company that is severely distressed. Can you explain that?

It is Dave Dullum. Well first of all, all three are paying their interests. So that is one of the key drivers and clearly the concern might be, hey, where will they be six, nine months from now? I think as you well know, and we've said many times before, we work very hard with our underlying portfolio of companies. And even though, as you point out, the marks may be down, the values may be down, we keep being concerned more around their ability indeed to service their debt and what is going on with fixing those companies.

So at this point, I have to say that all three of those businesses are generating positive cash flow. We see them staying. By and large, you can have changes from time to time, obviously, in the portfolio for longer term. And that this point, frankly, I don't see a rationale for putting them on nonaccrual when indeed they are paying the interest. Now if something changes, obviously, we will do that. But I hope that helps with the question.

Well, I still don't understand how you get down to a 20% to 25% mark if the borrower is servicing the debt. Can you help me understand that?

Well, keep in mind -- remember, our valuation, which we have discussed before, is a little tricky, right? Meaning that we were valuing both the equity and the debt in all of those companies with the exception actually of Noble, because that was a very early deal that we did, we have a significant ownership position, relatively speaking. So keeping in mind that the debt might be marked down somewhat. S&P does that for us. The equity portions, however, on the waterfall can take a relatively significant decline just because of the methodologies, as you know, that we use.

For instance, I know we have -- not one of those companies, but another one of our companies that frankly we had its valued at the quarter end have roughly a four times multiple. The industry, by the way, for that particular company is over six times, which is a pretty significant change, right, delta.

So frankly, again, it is a combination of both the valuation on the equity portions of those companies obviously being down, driving the overall decline versus the fact that they are paying a current paying position on the debt portion of those securities.

Well the real [equation] for Mickey is the one that that he asked and that is how can you get to a 25% value if they are strong enough to keep making their payment. And all I can tell you is that we use a very strict approach to valuations, and we think we've done a good job. But no one knows until a buyer shows up what the true value is.

So we have been perhaps a little too conservative, but at the same time we feel comfortable with those valuations.

Okay, I might circle back with you on that one.

And a related question, looking at the unrealized depreciation in the quarter, excluding the reversal, by my count most of that was driven by 10 companies which is a large part of the portfolio where the loan investments remain marked at par. But the Board marked down the preferred and the equity investments. So I'm getting mixed signals because at the beginning of your prepared remarks you said that in general the market is choppy and that valuations are trending above your target, which is around 6.5 times EBITDA. But when I look at your Q, the Board used EBITDA multiples for the preferred and common equity, which were 0.2 turns lower in the current quarter than the previous quarter.

And you also mentioned that earnings in some cases decreased quarter to quarter, but generally speaking the economy was pretty good in the fourth calendar quarter. So how do you reconcile all of that? I was really surprised that you took that much of a hit on NAV from this factor.

David Watson can chime in, but I want to give you an example without getting too specific. For instance, I mentioned one of the companies that is in that 10 that you mentioned roughly has an EBITDA -- use this as a fairly close example -- approximately just under 7 times, right? And the multiple because of our methodology and I think we have talked about this before and what we have published takes another look back on EBITDA which is not as relevant in this case, but also on the way which we come up with the multiple. The multiple used for that particular company was 4 times. The multiple for the industry and the point you made, we would never obviously, value this company in the normal course or certainly sell it at 4 times but the industry average for that particular kind of company, it is about 6. So 2 times delta multiple on $7 million is $14 million. So there is an example of where we have a significantly undervalued situation in a really good company just because of the methodologies that we use -- have been using for our valuations and our waterfalls to come to the underlying equity value.

So your point is very valid, and it's a great question. Again, I think it points to the issue around what I would consider very, very conservative valuation methodologies today relative to the underlying equity values of our companies. And so, it is a methodology we use so that is what we use.

So again, specifically that would be an example of one company out of all of those -- and there's others like that, by the way -- that the market multiple you would generally probably apply is at least a turn, maybe in some cases two turns, higher than what we use. And that would have obviously, significant impact on the value.

Dave, how concerned are you that you saw -- I think David Watson mentioned that the bulk of these companies saw a decline in their earnings in the fourth calendar quarter versus, I guess, the previous quarter. How concerned are you with that trend given that, like I said, the economy was fairly decent in that quarter.

Okay, remember, too, also, we use trailing 12 when we do our valuations. So you are always obviously looking -- you have to think about where the trailing 12 started. And you can have again, using a simple example, with these companies that are maybe say, doing $5 million, $7 million, $8 million EBITDA, right? And if you had a trailing 12 decline, which is [possible] of a couple $100,000 times a multiple of say 4 or 5 times, that is $1 million of decline in value.

The right question -- you are asking the right question -- are we concerned if I see a $200,000 decline on a trailing 12 quarter to quarter in terms of the fundamentals of the business, the basic answer is certainly not based on our current portfolio.

So you have those kind of movements. And we're taking companies that say looking back over a year ago, they might have been coming slowly out of a decline. And so if you lop that off, you would find -- and we don't use a looking-forward kind of EBITDA, so that is where you get these anomalies.

Okay, so the point is that it's not really quarter to quarter, it is trailing 12 versus the previous trailing 12.

So now we are more than a month into the last fiscal quarter of the year. I guess you are starting to see the numbers for January. What trends are you seeing so far in your portfolio companies?

We don't get financials until probably the end of February for most of the portfolio of companies. So there's not much we can say about January at this point other than we have not had any major bad news come to [our platform].

Okay. My last question relates to ASH and Packerland, which were relatively recent investments -- one in fiscal 2011 and one in fiscal 2012 -- which were made when the economy was on an upswing. So I'd like to understand, what caused those businesses to deteriorate to the point that you decided to take an exit?

I think you and I chatted briefly about this. ASH is the first investment that Gladstone Investment made back in -- it was roughly 2005. And obviously, over the years, it had added investment. So I don't know -- the data on that, just to be clear. So that is an older [cooled] investment.

Okay, so I am mistaken then. That is an older --

No problem. And so that one, we frankly had reached a point with that business. I think we talked about this before. And frankly, got a management team in place. We felt the opportunity where we thought it was headed we were better off at this point. We had the opportunity to essentially take this, I will call it, write down and let the management have the ability really to take that business forward. It is doing very nicely. I think the other side of that coin, even though we have had that write off, certainly we do have currently, the way we did the transaction, have left with a $5 million roughly piece of debt which is actually paying currently. It is actually cash. And that company is generating positive EBITDA.

So it was a proper and decent thing to have done. And we now have a modest investment in that business that in fact is paying currently in cash on our interest.

Packerland was one that was a relatively small investment that we made in, let's see, that was an early 2011, I believe. And it was one that had an issue right out of the box unfortunately that all investors missed. We did not need that as a direct investment. The good news was that a significant portion of our investment in debt and a relatively small investment in equity, mainly preferred equity. And shortly after the transaction, we were actually able to get back all of our debt investment on that and had a lingering preferred piece. So, we also took the opportunity to negotiate with actually the lead investor on that to sell, if you will, our preferred position back to them and actually got cash out of the deal and then took a write-off of approximately $1.5 million.

So net-net, the total investment actually, given that we got our debt back, had a modest, relatively speaking, actual decline in write-off. But there were some unusual circumstances around that company which really was what caused the transaction.

And Mickey, both of these were valued at $0 last quarter.

Right. Okay, those are all my questions. Thanks for your time this morning.

(Operator Instructions).

J.T. Rogers, Janney Capital Markets.

Most of my questions have been answered, but looking at the other expense line, it looks like administration fees, professional fees, and other have been trending up over the most recent quarters. I'm just wondering what is driving that and if you expect that to ease at all over the coming year.

Sure, J.T., this is David. The other expense line popped up a little bit in the December quarter. And that is really reflective of the excise tax that we had to accrue and pay this quarter. And that was approximately $260,000, which is something that you are not going to see in any of the other three quarters. And that number was less than prior calendar years.

And then for -- there is also some -- as we are putting on more deals and have a lot more activity in the fund, there is the possibility of having more dead deal expenses to expense. Certain ones don't get consummated, and that can result in either to uptick in year other expense line item as well.

Okay, great. That is it for me. Thank you.

Sure thing, J.T. Can we have some other questions, please?

Actually, there are no more questions at the present time. So I would like to turn it back over to management for any closing comments.

Well, thank you all for tuning in, and we look forward to seeing some of you at the next meeting. That is the end of this call.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.