Gladstone Investment Corporation 5.00% Notes Due 2026 (GAINN) Q4 2011 Earnings Report, Transcript and Summary

Good morning and welcome to the Gladstone Investment Corporation’s Fourth Quarter and Fiscal Year Ended March 31, 2012 Shareholders Conference Call. [Operator Instructions] Please note this event is being recorded. I’d 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. And the common stock trading symbol is GAIN and our preferred stock trading symbol is GAINP for Preferred. Thank you all for calling in. Happy to talk to shareholders about the company, 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 DC area, you have an open invitation to visit us here in Mclean, Virginia. We're just outside of Downtown DC and please stop by, say hello, you will see some of the finest people in the business. And now let me read this statement that we always put in the front of all of you. 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 with regard to the future performance of the Company. These forward-looking statements inherently involve certain risks and uncertainties, and other factors even though they’re based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipate, belief, 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, including those factors listed under the caption called “Risk Factors” in our 10-K and 10-Q filings, and our prospectus as filed with the Security 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 in the market information is not a guarantee of future results. First, we will hear from Dave Dullum. He is the President and a board member of the company. He will cover a lot of ground, including views of the future at this time. Dave Dullum?

Thank you and good morning everybody. As usual I like to review the plan for Gladstone investment, which is to invest in buyout transactions of businesses in the lower middle market. Our investments are primarily subordinated debt with equity and occasionally some senior debt. This combination produces a mix of assets in our portfolio, which is key to our strategy. Our debt investments provide income to grow 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 a $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%, slightly higher in equity that our goal of 80-20. This currently is due to certain loan payoffs and a recent debt-to-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, in 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 dividend. For the fiscal year the cash yield was 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’re not really consistent and they would skew our actual current cash run return -- 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 has 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 the success fees accrued to our balance sheet. As an example the value of these success fees in the last 2 years, we’ve received about $6.1 million in such fees. Now there is no guarantee that we will 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’ve 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 and pay dividends, but also be seeking asset appreciation through growth in this equity value of the stocks that we own. We believe this 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 the total asset value. Now looking at our deal origination, generally we obtain our investment opportunities by partnering with management teams, private equity firms, and other sponsors of buyouts. Our combination of debt and equity gives us a competitive advantage in that it provides 2 important and necessary portions of the capital structure in our buyout 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 4 new buyouts. Mitchell Rubber; SOG, otherwise known as SOG; SPS 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 4 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 7 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 $9.5 million through a combination of debt and equity. Packerland is a processor of raw fluid whey, specializing in the production of protein supplements for dairy and beef cattle. Additionally, in the subsequent period we deployed to existing portfolio companies approximately $700,000 and received principal repayments of about $2.6 million. During the year we maintained our dividend 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 our portfolio value has 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’s an important part of the investment management approach of working to limit losses, increase equity value, and preserve the cash flow from our portfolio companies. The portfolio management team provides value-added services such as strategic and business planning. Now this is where we work without resources to assist the portfolio companies in continuing to review their competitive positioning, their channel 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’ve cultivated over the years. They help the portfolio company streamline operations and evaluate add-on acquisitions as we think are interesting. Third, we also organize conferences for the CEOs of our portfolio companies. This facilitates interaction between our portfolio companies management teams, so that they can exchange ideas such as best practices in purchasing, pricing, organization health and various manufacturing disciplines. We believe all these activities are extremely important in a competitive strength while adding value to our portfolio. In regards to the marketplace for our products with smaller companies in the buyout area, we believe the flow of opportunities for these buyouts continues to be good in both the quality and quantity. There are 3 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 buyouts have significant amounts of capital to deploy 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 5x to 6.5x 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 see. 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 easy 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 a subordinated debt and the equity to complete a 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 with a 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 buyout arena. So, this concludes my part of the presentation. I will turn it back over to David Gladstone.

All right. Dave Dullum, that was a good report. We’re 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 for 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 buyout subsequent to year-end totaling $9.5 million, highlights our commitment to steady investment growth. Since October of 2010, we have invested in 7 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. So, we were able to raise $40 million in new term preferred stock in the capital markets in March to complement our $60 million 3-year line of credit. At the time of this call, we have no borrowings outstanding on our line of 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 will 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 equivalent, was $85 million of U.S. treasury securities primarily through the use of bond funds at quarter-end to satisfy our asset 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 do not have any borrowings outstanding on our 3-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 2013 Term Preferred Stock at 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 cost 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 1:1 leveraged on our senior secured borrowings. Currently, we have cash at $9.9 million and no line of credit or short-term borrowings. 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, at 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 appreciation, depreciation, gains and losses, up $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, the 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 31st, 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 period, 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 the 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 a higher yield on debt investments, resulting from the new investment 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 the change in fair value from one period to the next getting recognized in our income statement. Unrealized appreciation 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 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 is fair valued at 85% of cost as of March 31, 2012, which is up from 78% as of March 31, 2011. And 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 in 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 to 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 2 years and continues to meet expectations, today’s markets move fast and are generally volatile, and investors should expect continued volatility in the aggregate value of our portfolio. From an asset quality standpoint, the risk rating system we use is that are portfolio loans, which represent 100% of our portfolio, at a weighted average based on principal balances up 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 0 representing a high probability of default. We see the risk in this portion of the portfolio staying relatively the same as prior quarters with the decrease from last year primarily resulting from having a less-seasoned portfolio since the major component to our risk rating calculation is the remaining duration our investments have to maturity. Currently, all of our portfolio companies are paying current except for 2, ASH and CCE, 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’ve experienced over the last 2 to 3 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 improve our income-generating assets to increase our recurring income and to increase our distribution to stockholders. And now, I’ll 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 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 and 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 an ability 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 3-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 the 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 lead 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 very heavy weight on the economy, oil prices are much too high and supply is too dependent on countries that obviously don’t adjust well. The high gas prices for cars and trucks literally hurt every business that has transportation needs, and 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 will cause serious inflation. As this idea that we can borrow and spend our way to prosperity has been disproven so many times, 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 lead to the roaring 20’s, which ultimately had a problem of course. Spending by the government is still out of control, the government can’t continue to print money and 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 of history since they risk their lives for us every single day, and 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, and if they 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, and just remember that 50% of the population in the United States don’t pay any income taxes. I also 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 and we watched GE move; an enormous plant was built in Brazil rather than in 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 are still projections that there is 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. Our investments are in U.S. 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 2 groups in there. In spite of all the negatives, the industrial base in the United States today is not a disaster, its lingering recession. We keep bouncing along the bottom and the impact on our portfolio of 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. 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 U.S. 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 us 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 and vote upon the July, August and September dividend, 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 will 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 a $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 is it cost us a little over $2.8 million to meet that dividend and we have about 4.8x to 5x that amount of income coming in. So that stock, which is traded on NASDAQ under GAINT, G-A-I-N-T, 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 e-mail notifications. We don’t send out junk mail, just news about your company. Now, you can go to www.gladstoneinvestment.com is the site and 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 note, I didn’t buy any shares in Facebook, thank goodness. As far as we can see the next 6 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, 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. With that, Denise, if you’ll come on and let us have some questions from the analysts, and our loyal shareholders, we will go into the question-and-answer period.

[Operator Instructions] Our first question this morning will come from Ross Haberman of Haberman Management Corporation.

One very brief question, you made reference to 2 non-performing 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?

Well, they’re both in the portfolio. ASH has been written down to 0. We keep putting a little money in there. We’re working with -- to get a new CEO on board 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 were used by plumbers and electricians and those kinds 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, Ross, CCE is a -- also distributor of golf carts in the Northeast. And we had to, basically as a result of obviously issues with the golf market in general, this is over a year or so ago, restructure the balance sheet somewhat. They’re doing very well this year. They've maintained presence in their market, have large market share and I expect we will be able to convert that one back to cool status some time. 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 business is performing, we work hard at doing that and then we bring them back to current pay status. So I’d hope that hope of these might do that certainly over time. So CCE had the 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 sort of learned their lesson now. And pricing has come back to a reasonable amount and so as a result, I think that one will, as Dave said, will be back in the paying category sometime during the next 12 to 18 months.

So 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 you -- how readily are you open to converting part of the investment's equity or you really don’t ever want to do that and that’s the last option? [indiscernible] if you can keep your -- you can keep your investment in some sort of debt-paying instrument.

Well, in the case of some of these companies, we’re 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 it to equity. Now it will be interesting to see in some of these cases when they come back and we will tap those when we come back in 6 months or so as we move through these fix ups in these 2 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 2 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.

And our next question will come from J.T. Rogers of Janney Capital Markets.

It sounds like the investment pipeline is strong, as 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 think maybe you mentioned something about that in your comments.

Yes, J.T., I think to some extent that’s true and you hit it on the head, though, it is a lumpy business. We were very active, we have a very long good strong, I would call it pipeline, and as you know in some deals as I mentioned the valuations are so high, we just don’t get there and other people willing to pay, a turn or 2 more than we are. So we are 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 are sort of moving towards those so. And 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.

Okay, 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.

Just a follow-up to that is are there any industries or sectors that you think are particularly attractive right now in terms of either valuation or just on a fundamental basis?

Typically where the scenario we operate 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 can see a few in the healthcare services area, those valuations seems to be somewhat reasonable. So, I would say that those are ones that come to mind immediately.

Okay, great. And then it looks like the share values of Banco has been trending down since for -- 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 sort of what’s going on that business?

Yes, they are -- that’s a good -- very good company. They specialize in a very highly engineered machining of parts for a company; I think we’ve mentioned this in fact on prior calls. You’ve heard of the DaVinci Robotics Machine, that one of their companies -- their major customers is manufacturer of those machines. And we’re kind of shifting from a, I would call it a more short run to longer run machining of products and expanding their customer base. So, the company is 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 sale side so it's just going through that period where 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 its temporary, frankly, and we 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 for maybe larger machining companies that they could start filling those orders or might be more interested in?

It's 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 run. So, I’d say that’s really -- it’s more than, that’s necessarily opening up significantly to competition.

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

Yes, we -- ASH is one and as David Gladstone mentioned earlier, we -- it's one that we’ve [indiscernible] obviously a lot because of the economy they’re struggling with. We had a senior lender in there and they were coming near 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 [indiscernible] which is who we're the dealer for, providing floor planning effectively on large number of school buses. We essentially stepped in to take the revolver capability around part supplies and so on. So, we actually also increased our collateral if you will, by taking that on. So it’s frankly just the ability to have more control over how we manage that business ourselves.

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

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

[Operator Instructions] And our next question will come from Adrian Day of Adrian Day Asset Management.

Clearly, there is 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?

It’s hard to say at this time. We always like to be so far in the money that when we increase the dividend that there is no chance 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 that no one really cares about them and as a result we will 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 everyone 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.

I am showing no additional questions. This will conclude our question-and-answer session. I’d 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 will 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.