Gladstone Capital Corp. F1Q10 (Qtr End 12/31/09) Earnings Call Transcript

| About: Gladstone Capital (GLAD)
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Gladstone Capital Corp. F1Q10 Earnings Call February 2, 2010 8:30 AM ET


David Gladstone - Chairman & Chief Executive Officer

Chip Stelljes - President & Chief Investment Officer

Gresford Gray - Chief Financial Officer


Vernon Plack - BB&T Capital Markets

Greg Mason - Stifel Nicolaus & Co.


Greetings, and welcome to the Gladstone Capital first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host Mr. David Gladstone, Chief Executive Officer for Gladstone Capital. Mr. Gladstone, you may now begin.

David Gladstone

All right Jackie, thank you for that nice introduction, and hello and good morning to all of you out there. I’m David Gladstone, Chairman. This is the quarterly conference call for shareholders and analysts for Gladstone Capital, traded on NASDAQ under the symbol GLAD. Again, we thank you all for calling in. We’re always happy to talk to shareholders about the company and I wish we could do this more often.

We hope you have the opportunity to visit our website, its, where you can sign in for e-mail notices, so you receive the information, and please remember that if you’re in the Washington DC area, you all have an invitation to visit us here in McLean, Virginia, and stop by and say hello.

I do need to read the statement that we always read. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934, including statements with regard to future performance of the company. These forward looking statements inherently involve certain risks and uncertainties, even though they’re based on our current plans, and we do believe those plans to be reasonable.

There are many factors that may cause the actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption ‘risk factors’ in our 10-K and 10-Q filings and in our prospectus as filed with the Securities Exchange Commission. Those can be found on our website at and also at 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.

As usual, we’ll start off with our President, Chip Stelljes. Chip is the Chief Investment Officer of all the Gladstone companies. He’ll cover a lot of ground; then we’ll go to Gresford, the Chief Financial Officer. Chip, go ahead.

Chip Stelljes

Thank you, David. As most of you know, the difficult economic climate continues and is compounded by a still difficult lending environment, but we are seeing some new investments being made with some investors in the marketplace, believing that the worst is behind us, but the continued instability of the financial and lending markets, combined with the absence of real signs of a recovery in the economy continues to make us cautious.

We did not close any new investments during the quarter, but invested $2 million in the existing portfolio of companies, in the form of additional investments or draws on revolver facilities. We also took back the $200,000 note from the sale of some portfolio company assets for an aggregate $2.2 million invested.

During the quarter we received repayments of approximately $18.2 million due to loan sales, pay offs, normal amortization and pay down of revolvers. This included the full pay off of the Tulsa Welding Investment of $12.1 million, a partial pay-off of the BAS senior term loan of about $1 million and the sale of Kinetek and Wesco syndicated loans for $2.8 million.

So in total we had a net production decrease in the portfolio of about $16 million for the quarter. The net proceeds were used to pay down our line of credit. Since the end of the quarter we made about $2.7 million in additional investments in existing portfolio of companies.

Additionally, after the ended the quarter we received $6.8 million in repayments, which included a $4 million repayment from one company, ActiveStyle. Additionally, after the end of the quarter we sold one syndicated loan that was held in our portfolio of investments at December 31. That syndicated loan had a fair value of about $300,000, and we expect to receive the proceeds within the next few weeks.

As for the pipeline and our outlook, we continue to see new investment opportunities with pricing and structures that are attractive. If we can access more capital, we believe that we can make investments and achieve strong rates of return. We continue to work to increase the yield on our existing portfolio by refinancing lower yielding senior loans with third party lenders, while trying to maintain the higher yielding junior debt.

At the end of the December quarter our investment portfolio was valued at approximately $307 million, versus a cost basis of $347 million, so approximately 88% of cost. Although the values did not change materially this quarter, we’re not seeing a resurgence in valuations and still believe that valuations are more reflective of the overall poor market for loans rather than the performance of our specific portfolio. That being said, we continue to closely monitor our portfolio of companies revenues and backlogs to judge where we think the underlying companies are headed.

At the end of the quarter we had six loans with six companies on non-accrual, and a number of companies experiencing problems that may prevent them from making timely payments in the future. We’ve taken operating control of several of these and are working hard to fix the problems and improve profitability.

On a dollar basis, the loans classified as non-accruing have a cost basis of $13.1 million or about 3.7% of the cost basis of all loans in our portfolio. Our portfolio of companies are not immune to the current economic climate, and so we may have some additional nonperforming loans and some write-offs, but I assure you we are working very hard to keep them to a minimum.

We continue to have a high concentration of variable rate loans, so that we should participate when rates begin to increase, and while our rates are variable, they often have a minimum interest rate or a floor, so that declining interest rates are mitigated. Approximately 84% of our loans have floors, 2% have floors and ceilings, and however 10% do not have floors at all and with short term floating rates at all-time lows, we’re generating less income. The remaining 4% of our loans have fixed rates.

Another measure of the quality of the assets is that our average loan rating for this quarter that just ended remained relatively unchanged. Our risk rating system attempts to measure the probability of default for the portfolio, by using a zero to 10 scale. Zero represents a high probability of default and 10 represents a low probability.

Our risk rating system for our non-syndicated loans showed an average rating of 7.2 this quarter, 7.3 for the same quarter of the prior year. The average risk rating for unrated syndicated loans was 8.0 for this quarter, versus an average of 6.5 for the prior year’s quarter. As for our rated syndicated loans, they had an average rating of CCC+ or CAA1 for this quarter, and in the prior year quarter, overall the risk profiles remain relatively constant according to our risk rating model.

While the risk rating is showing only slight changes in the portfolio, we do see changes that may not be picked up by our risk rating system, and our companies, again are not immune to the current poor economic conditions. We want to avoid relying solely on a single risk rating system, as so many investors did with the rating which is part of the economic downturn.

In addition to quality of assets, the quality of our income continues to be good. As we discussed before, we do not intend to generate income from paid-in-time or originally issued discount structures. These generate non-cash income which has to be accrued for booked and taxed, but is not received until much later, sometimes not at all. This income is subject to our 90% pay out requirement. So the company would not receive the cash but would have to pay out the income.

From inception through 12-31-2009 we have made loans to 127 companies, totaling greater than $950 million. Our cumulative net losses have been approximately 3%, total investments since inception. We’ve been repaid or exited from 81 companies as of 12-31-2009, and the average return on the exits has been about 8% for syndicated loans and 13% for non-syndicated loans.

The historical returns after have dropped some as we booked the loan sales that we’ve announced, and as we reported in the past, we had to sell some of our performing loans during 2009 to pay down our short term line of credit.

As for the marketplace, the senior and second lien debt marketplace for our larger middle market companies continues to improve. At December 31 we had a cost basis of approximately $10 million in senior and second lien syndicated loans. This is where we have most of our variable rate loans without floors, and these loans have seen their values decline more than the others.

As I stated earlier, we sold the majority of this portfolio since the middle of 2009. The market pricing for the larger middle market loans continues to change. For senior syndicated loans of $200 million or greater; rates prior to the credit crunch were approximately 2.5% over LIBOR. LIBOR of course is the London Interbank Offering Rate which is recognized as the leading indicator of short-term corporate rates.

Today the spreads seem to be closer to 6% or more over LIBOR. Because these new loans are at higher spreads, the old loans demand a lower market price. In light of this market, and without regard to any changes in prices, we had intended to hold our syndicated loans until they mature, because we believed ultimately we would recover our capital if we did not sell them, but we chose to sell the ones we did at a discount in order to reduce our outstanding indebtedness under the credit line. Of the remaining syndicated loans, all of them are paying as agreed.

In addition to widening spreads over LIBOR, the norm for LIBOR has traditionally been about 5% to 6%, but it was approximately two tenths of 1% at December 31, 2009. LIBOR is artificially low, given the emphasis on lowering rates worldwide to spur lending and abnormally low LIBOR has depressed our income.

The small loan market in which we invest most of our capital has not seeing much new competition. Most banks continue a policy of tightened credit standards, especially for companies at the lower end of the middle market. Currently most banks are only willing to make purely asset based loans to that business segment; we normally compete with other BDCs, private lenders such as the mezzanine loan funds and a few remaining hedge funds and some of the small business investment companies out there.

Our loan request pipeline is still good, if we can access capital and get comfortable with the risk in the economic cycle it may materialize into more new investments as we enter our 2010 fiscal year. Our goal is to be a strong profitable company rather than the biggest company.

With that I’m turning the presentation back over to David.

David Gladstone

Thank you, Chip. That’s a very good report. Now let’s turn to the financials and for that we’ll hear from Gresford Gray, our Chief Financial Officer. Gresford.

Gresford Gray

Thanks David. We’ll begin with our balance sheet which continues to remain strong. At the end of the December quarter we had about $329 million in assets, consisting of $307 million in investments at fair value and $12 million in cash and other assets. We borrowed about $74 million in our line of credit and had about $251 million in net assets. Therefore we are less than one-to-one leverage and this is a very conservative balance sheet for a finance companies which are usually leveraged much higher, we believe that our overall risk profile as low.

During the quarter we reduced the size of the credit facility by $25 million from $127 million to $102 million. We’re in good standing with our line of credit from KeyBanc and BB&T. Turning to our income statement, for the December quarter net investment income was about $4.4 million, versus $5.9 million for the same quarter last year, a decrease of about 25%.

The decrease was primarily due to a decline in investment income resulting from the sale and repayment of loans during the quarter and lower transaction fees paid by the portfolio companies. Please note that LIBOR has fallen and remained low which has negatively impacted the earnings from our syndicated loans. However, since we have sold many of our syndicated loans, even if rates go back up, we do not expect that our income will increase materially.

On a per share basis net investment income for the quarter was $0.21 per share, as compared to $0.28 per share for the same quarter last year. This was a per share decrease of about 25% which again was caused by the changes in our balance sheet. As many of you may be aware, net investment income is the most important number to us, because it’s the number that is closest to our taxable income which is the income we use to pay our dividends.

Now let’s turn to unrealized and realized gains and losses: This is a mixture of appreciation, depreciation gains and losses and I’ll discuss two categories in this section. First I’ll talk about gains and losses because they are cash items, and second I’ll address appreciation and depreciation which are non-cash items.

For the quarter ended December 31, we had a realized loss of about $0.9 million primarily due to the sales of two syndicated loans. Regarding unrealized appreciation for the quarter, we had net unrealized appreciation of about $2.6 million and this represents the net change in the fair value of our investment portfolio including the reversal of previously recorded unrealized appreciation or depreciation when gains and losses are realized.

During the quarter the unrealized appreciation included $0.9 million in previously unrealized appreciation from the syndicated loans that were sold. As such, the realized loss we incurred this quarter from the syndicated loan sales, which I talked about earlier, was completely offset by the reversal of the previously unrealized depreciation, resulting in a net zero loss for the quarter.

The unrealized appreciation included an additional $0.7 million and previously unrealized depreciation from loans that were paid off during the quarter. As of December 31 our entire portfolio was fair valued at 88% of cost, and the cumulative unrealized appreciation on our investments do not have an impact on our current ability to pay distributions to stockholders, however it may be an indication of future realized losses which could ultimately reduce our income available for distribution.

As explained in our recent SEC filings when markets demonstrate characteristics of illiquidity, we are required to value our syndicated loans using a discounted cash flow method. However, in monitoring the market activity during the December quarter, we continue to use third party bid quotes to value our syndicated loan as of December 31.

During the quarter we had another component of unrealized depreciation which related to our credit facility. For the quarter ended December 31, we recorded an unrealized depreciation of $219,000 based on estimates of value provided by an independent third party. On our balance sheet as of December 31 we had a cumulative net unrealized appreciation on our line of credit of about $130,000, down from the $350,000 at September 30.

Now let’s turn to the net increase or decrease in net assets resulting from operation. This is a combination of net investment income, appreciation, depreciation gains and losses. Please note that we’re talking about weighted average, fully diluted common shares when we use per share numbers.

For the December quarter we had net increase in net assets resulting from operations of $6.3 million, versus a net decrease of $9.1 million in the prior year period. This is a positive $0.30 per share for the current quarter versus a negative $0.43 per share for the prior year quarter. With the continued uncertainty in the current economy and credit markets, investors should expect continued volatility in the aggregate value of the portfolio.

Now I’ll turn the program back over to David.

David Gladstone

Okay, thank you Gresford. That was an excellent report and presentation, and I hope all of our readers out there and our listeners will read the press release, and also obtain a copy of the quarterly report called the 10-Q which we filed with the SEC yesterday. You can access the press release and the 10-Q on our website at, and also on the SEC website at

I think the big news for this quarter is that we continue to make progress with our portfolio of companies and our desire to pay down our short term banker, one with KeyBanc and BB&T. They’re great lenders, but as you know they replaced our primary lender, Deutsche Bank, and they are short term revolving lines of credit.

So as part of the new agreement as Gresford mentioned, we were required to reduce the commitment to KeyBanc to $75 million, down by $25 million. We did that by December 31 and during the quarter as we reduced that down, we kept going, and so our line is at $102 million, but currently as of about February 1, 2010 we had only $32 million borrowed on the line of credit. So you can see we performed well in getting that short term line of credit down to something that makes a lot more sense.

Many of the loans that we sold off or paid off were lower yielding loans, and so our portfolio is performing a little bit better in terms of yield, and our line of credit has to be reduced by another $25 million in May, and we are already in a position to honor that, because we are only borrowing $32 million today. So we are in great shape in terms of the balance sheet now. We feel very comfortable with where we are.

The biggest challenge today is the debt market place for our company, and for our portfolio of companies that we finance. We have a line of credit with very supportive lending institutions, and that line of credit is working fine, and I believe it’s sufficient for us for the near term, but it does come due in May, and we’re working with our lenders to extend the line of credit under a very modified credit agreement that’s much better for us.

We’ve agreed on the term sheet, but we’re waiting for legal agreement to be finalized, and we’re hopeful that we can have a new line of credit in place, certainly and hopefully in February, and certainly by March, but with all forward-looking statements, we never know the outcome until it really happens, so please keep that in mind.

Even though we’re working at a nice new line of credit and that line is unfortunately short term, in order to make a lot of new investments we need to raise long term debt or long term capital of some form, such as issuance of preferred stock or additional shares of common stock or some kind of long term debt. All of our new investments are long term, so we need a long term liability to go along with that. We really can’t rely on short term lines of credit to finance the company over the years.

If we do get a new short term line of credit in place we’ll start looking for some new deals, because we do have room for one or two new deals to put on the books. So we feel comfortable doing that with our line of credit, but we won’t be ramping up until we find some way to find some long term financing.

By the way, all of you out there, I just read an article by a writer that must be a show for one of the short sellers. He was making a case and an argument that shareholders should expect a dividend cut, and his main reason for saying that is that we’re paying out all of our net investment income and have no reserves. He knows, and certainly all of you know that all investment companies are required by the tax law, to pay out 98% of our net investment income in order to remain a regulated investment company and not pay taxes.

It’s just like every mutual fund, and I don’t know how much the short sellers pay to have people write articles like this, but it just shows how bad things have become in the marketplace. I hope it didn’t cost them much, because telling the world that an investment company has to pay out all of their income as a reason to sell their stock, would mean that you’d be selling all of your mutual funds, and that’s just a silly recommendation.

Anyway, back to my part of the presentation. For our portfolio of companies, we worry too that they’ll not be able to get lines of credit and term loans if they need, and there are a fair number of regional banks out there today making new loans based primarily on assets of the business.

These asset based lenders as they’re called, are much more plentiful today than they were last year, and we see a portfolio of companies and folks getting short term lines of credit, but these are again just short term lines of credit and our portfolio of companies like us need to have long term debt, but these banks today are only making short term loans. So we’ve had to provide the long term debt to our portfolio of companies. That’s not all bad; we can charge a reasonable rate for it.

We do have worries, not only about the financial industry, but also about oil prices and the economy. As it comes back, oil prices will probably go up pretty substantially again, and we worry about inflation that’s becoming the number one issue that we worry about today. Our law-makers in Washington continue to expand the money supply, and that’s got to cause inflation some time over the next couple of years.

The government is projecting to issue about $2 trillion in T-bills. The government is really sopping up all the available credit out there. Many of the banks are buying T-bills in record numbers, and so as a result they don’t have the money to finance smaller businesses.

The spending by the federal government, of course as I mention every time is off the chart. We look at these so called stimulus package, and they’re filled with goodies that are helping out many of the supporters of the legislators. They have very little to do with small businesses or creating jobs, and we think that hurts us long term.

Stimulus spending is dislocating a lot of marketplaces. I’m not sure how all of this will turn out. It just looks like to me that they’re propping up or nationalizing a lot of banks, insurance companies, auto businesses, and I don’t know whether they’ll get to healthcare or not now, but the election that happened is in place, but all of this is really not good for the economy long term, to have this kind of government intervention in the business world.

The amount of money being spent on the war in Iraq and Afghanistan still hurts our economy. They don’t even put that on the financial numbers for our economy and it really is quite a drain on all of us. Again, all of us here at this company, and I’m sure all of you out there support our troops. They are the true heroes in this period in history, and they are risking their lives for us every single day, and we hope and pray for their safe return, but again, the cost that’s going through our economy is very, very horrendous.

All this spending will mean more taxes, and our people can’t handle more taxes. It’s a cause for more dislocation and the government will have to sell more debt as they’re doing today, which all of this will cause more inflation. There are just many in Congress calling these increased taxes so-called wealthy, only on the wealthy and their definition of wealthy includes most of the middle class and probably every one of you that are out there listening to this presentation today.

Trade deficit with China doesn’t seem to stop, it’s just horrendous. China continues to subsidize their industries to the disadvantage of our businesses. Their subsidies go in terms of the oil prices, they subsidize that tremendously, and this just means our companies can’t compete with them, and jobs leave the United States and go to Asia. Now even China has stopped buying the government paper, so they’re not even supporting us on that side of our balance sheet.

The downturn in the housing industry is still just a disaster. Home mortgage defaults continue to hurt our economy. I don’t think anyone knows how many home mortgages will ultimately fail, but by some estimates it’s in the trillions of dollars, and that’s the main cause of this recession. If we can get the housing market turned around I think things will be better.

About 80% of all the new homes now that are being purchased are being purchased with loans that are guaranteed by the US government through FHA and VA, etc, so even the government is doing its best to prop that one up, but it’s still not happening as fast as we’d all like.

In spite of all of those negatives, the industrial base of the US is still not a disaster. The recession has had an impact on our portfolio of companies and most small businesses, but it’s not a disastrous one. Like most companies, our portfolio of companies haven’t seen an increase in revenue or backlogs, and most have cut a lot of their cost as best they can and gotten their earnings back up through a reduction of costs, but their revenues are not increasing at any dramatic pace. We see some of them moving up and others that are still flat.

At this point we have a low rate of non-paying loans, so we’re in pretty good shape compared to a lot of others out there. We feel very fortunate to have such a good portfolio. The only thing that’s hurting us today is the lack of bank lending money to companies for long term needs. Short term loans, the asset based lenders seem to be available.

Most small businesses can get some kind of revolving line of credit, however most of the banks pretty much stopped making any kind of long term loans, and this is just like the recession in 1990, except this time the federal government is pouring money into the banking system rather than taking the banks over and selling the assets. What are the banks doing with the money? Well, as I mentioned before, a massive amount of them are being put into T-bills rather than loaned out to the small businesses.

However, I do believe that the downturn that began in late 2008 will continue well into 2010. However, I don’t think the economy is in any trouble, any second dip down. I think we’re stabilizing at this point in time, and if that’s true I think we’ll have a chance to take advantage of it as we move through 2010.

I’m getting somewhat bullish on the market place now, and I know that’s unusual for me. Our plans today are to seek some long term debt for our fund. We need to borrow long term in order to invest long term, and we’re making the rounds to some long term lenders such as insurance companies to see if we can raise long term debt. This will take some time, but we are hearing some encouraging news from the long term lenders out there, and we’re also looking at issuing something like preferred stock.

It would be a little bit expensive today, so we’re not running in that direction, but if preferred stock comes down a little bit more, we might issue some preferred stock in our company, and we’ll look at some convertible preferred stock as well. So we’re examining all of the capital market places right now, and we’re seeing some encouraging signs. So I think 2010 will be a good year for us to issue some longer term capital, and make some longer term investments.

We are considering issuing some common stock, but just not at this price. It’s just too low today, so even though we have permission from our shareholders and hopefully they’ll do it again at our shareholders meeting, we’re not going to issue stock at this low price, compared to our net asset value. That may change I think in 2010. It will change, and so sometime before the end of 2010 hopefully our share price will increase, and we will be able to issue some stock.

Our distributions are at $0.07 per share for each of the months; January, February and March, and our projections, we didn’t assume that we were going to be making any new investments. Therefore if we start making some new investments, we believe that we can exceed those projections, and certainly there’s no guarantee, but that’s what we’re working on now.

At the current distribution rate of dividends, and with a stock price at about $7.45 as it was at yesterday’s close, the yield is about 11.2%. So that’s a heck of a yield for a company that is in a good stable position today.

Let me remind you, please go to the website,, and sign up for our e-mail notification service. We don’t send out junk mail, just news about our company, and again, so far as I can see, economic conditions are looking like they’re changing, they’re getting better. We think the economy is reaching bottom if it hasn’t reached bottom already.

We are starting to gain some strength, and we just don’t know when the marketplace is going to come back to some strength, and I think the next two quarters will be very telling. We are stewards of your money, so we’ll stay the course, and continue to be conservative, make sure that each investment that we look at has a good chance of surviving through any kind of economic downturn that might continue.

I invite you all to come to our shareholders meeting on February 18. It’s here at 11:00 am at the Hilton Hotel in McLean, Virginia; that’s at 7920, Jones Branch Drive, and if you’re not coming, please vote your shares using your proxy so that we can get the votes in. You can vote by obviously your proxy being mailed in. Mail in that proxy card, and if you can and want to you can call 800-690-6903 and vote, but you have to have your proxy card in hand, because they’re going to ask you for that proxy control number when you get ready to vote. Again that number is 800-690-6903.

Another way to vote of course is to go online. Many of you are astute at that. You just go to, and you can vote online; again, you need your proxy control number, and many of you can just call your broker, they can help you get your vote in. The recent regulation changes that have made voting of shares a very difficult matter; the government now requires that shareholders of stock actually vote their shares, so your broker can’t vote your shares anymore he used to. You actually have to vote the shares.

As a result, the cost to your fund to round up the votes by calling and asking shareholders to vote their shares, to ensure that we have a quorum is a major expense. I used to just toss the mutual funds I would get; I’d just toss them out. Now I always vote them, because I know how difficult it is to get the shares in. If you make us spend a lot of money to round up the votes, it just takes dollars away from our ability to pay dividends.

Well, that’s enough. Again, I hope you’ll show up for the shareholders meeting. We always have a lively meeting with lots of questions, but we’ll open up the lines now. So Jackie, if you’ll come back on and set us up for some questions please.

Questions-and-Answer Session


(Operator Instructions) Your first question comes from Vernon Plack - BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

David, I’m trying to get a better understanding of interest income on controlled investments. I know that number has bounced around the last several quarters. This most recent quarter was $693,000; the quarter before I think was only $57,000; the prior quarter was actually higher, $700,000 and $480,000, but then it goes back to $20,000. I’m just trying to understand why that number has bounced around like it has, and what we can expect going forward.

David Gladstone

Do you want to answer that one, Gresford?

Gresford Gray

Yes. Vernon, that’s a factor of us having more control investments as of December 31. If you recall from December of ‘08 we had much fewer investments. So that’s the primary factor.

David Gladstone

What happens Vernon is that sometimes when we don’t like what’s going on with regard to the ownership, some of these funds, these LBO funds just want to walk away from their investment. So we take control and have turned these companies around.

Vernon Plack - BB&T Capital Markets

I’m looking at this past quarter, it was $693,000, the quarter before was only $57,000. I know you didn’t have that much change in your control investment portfolio overall and the quarter before that was $754,000. So it went $754,000 to $57,000 to $693,000. I don’t think that necessarily reflects overall changes in the amount of control investments that you have. I’m just trying to understand it better, probably more importantly how should I look at that number going forward? Is it more of a $60,000 number; is it more of a $700,000 number?

David Gladstone

We’re not going to be able to research that now. Why don’t we research it and we’ll put it on our Q&A on the website.

Vernon Plack - BB&T Capital Markets

Okay, and just to confirm, I believe you had one new non-accrual SCI?

Gresford Gray

That’s correct.

Vernon Plack - BB&T Capital Markets

Okay, and one other just quick question. You mentioned that your borrowings now are around $32 million, which means well from today until the end of the quarter it looks like you sold roughly $40 million in additional investments to bring that number down?

David Gladstone

Yes, we’ve sold a number of investments, and the number keeps bouncing around. It’s probably closer to $57 million today. I got the number wrong at $32 million, so about $57 million today.

Vernon Plack - BB&T Capital Markets

Okay, so you have $57 million in debt outstanding right now?

David Gladstone

Right. We draw down, and Vernon it’s a revolting line of credit. So if some of our portfolio companies need money they call us up, and we pull down on our revolver and they’re asking us under their revolver, so it goes up and down.


(Operator Instructions) Your next question comes from Greg Mason - Stifel Nicolaus & Co.

Greg Mason - Stifel Nicolaus & Co.

David, last quarter I think you mentioned you were in discussions about an SBIC facility. Could you give us any updates on progress there?

David Gladstone

Not much progress, don’t know what’s holding us up, but we’re submitting an application document this week, the final next round of that. So we shall see. I don’t know what; they are just back logged back there. We’ve met with them several times. So we’ll just have to see what happens.

Greg Mason - Stifel Nicolaus & Co.

Now that you’ve been through this several times, what’s kind of the process after you do this kind of final submission? What’s typically the process that you have to do?

David Gladstone

Quite frankly I don’t know, because this is a new administration and new people and they have their own methodology of going about it. So Greg, we’re not sitting still hoping the SBIC will come into place. We’re working with the several long term lenders and hopefully we’ll get something out of that before the summer-time.

Greg Mason - Stifel Nicolaus & Co.

I was looking through the income statement and typically you reimburse the incentive fee, the full amount, and it looks like this quarter you reimbursed $22,000 of the $370,000 in incentive fees. Can you talk about what was going on with that reimbursement this quarter?

David Gladstone

Yes, we said to ourselves that now that we’re all changed and everything is no longer the way it was before, that we would just live by the contracts. So what we’ve done is taken that incentive fee and said to ourselves, let’s put that aside and see if we need that fore pay to the employees, as opposed to the shareholders. So, we’re probably moving away from the old credit of all the incentive fee, into a period of time in which we actually take the incentive fee into the management company and pay it out as bonuses.

Greg Mason - Stifel Nicolaus & Co.

Can you tell us the logic behind reimbursing $22,000. I think it was the actual number we saw in the Q?

David Gladstone

I can’t remember the actual reason, but I think it’s based on the fact that we needed a few dollars in order to make the $0.07 per share paid per month in dividends. So it was a minor amount that needed to make that dividend payment.


(Operator Instructions) Mr. Gladstone, there are no further questions at this time.

David Gladstone

All right, thank you all for tuning in and we’ll catch you next quarter. That’s the end of this conference call.


Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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