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EX-32.1 - EXHIBIT 32.1 - Medley Capital Corpv332770_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Medley Capital Corpv332770_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Medley Capital Corpv332770_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 FORM 10-Q

 

x             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 31, 2012

 

OR

 

¨             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number 1-35040

 

Medley Capital Corporation

 

(Exact name of registrant as specified in its charter)

 

Delaware   27-4576073
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

375 Park Avenue, Suite 3304

New York, NY 10152

(Address of principal executive offices)

 

(212) 759-0777

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

 

As of February 6, 2013, the Registrant had 28,662,049 shares of common stock, $0.001 par value, outstanding. 

 
 

   

TABLE OF CONTENTS

 

        Page
         
Part I.   Financial Information   F-1
         
Item 1.   Financial Statements   F-1
         
    Consolidated Statements of Assets and Liabilities as of December 31, 2012 (unaudited) and September 30, 2012   F-1
         
    Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011 (unaudited)   F-2
         
    Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2012 and 2011 (unaudited)   F-3
         
    Consolidated Statements of Cash Flows for the three months ended December 31, 2012 and 2011 (unaudited)   F-4
         
    Consolidated Schedules of Investments as of December 31, 2012 (unaudited) and September 30, 2012   F-5
         
    Notes to Consolidated Financial Statements (unaudited)   F-7
         
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   1
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   15
         
Item 4.   Controls and Procedures   15
         
Part II.   Other Information   16
         
Item 1.   Legal Proceedings   16
         
Item 1A.   Risk Factors   16
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   16
         
Item 3.   Defaults Upon Senior Securities   16
         
Item 4.   Mine Safety Disclosures   16
         
Item 5.   Other Information   16
         
Item 6.   Exhibits   17
         
SIGNATURES   18

  

 

 
 

  

Part I. Financial Information

 

Item 1. Financial Statements

 

Medley Capital Corporation

 

Consolidated Statements of Assets and Liabilities

 

   As of 
   December 31, 2012   September 30, 2012 
   (unaudited)     
ASSETS    
Investments at fair value    
Non-controlled/non-affiliated investments (amortized cost of $513,307,380 and $394,482,053, respectively)  $512,260,768   $393,741,357 
Affiliated investments (amortized cost of $8,824,810 and $8,678,596, respectively)   8,433,692    8,208,006 
     Total investments at fair value   520,694,460    401,949,363 
Cash and cash equivalents   1,666,601    4,893,616 
Interest receivable   6,079,250    3,940,148 
Deferred financing costs, net   5,525,720    4,651,724 
Other assets   541,711    232,496 
Deferred offering costs   61,451    103,671 
           
     Total assets  $534,569,193   $415,771,018 
           
LIABILITIES          
Revolving credit facility payable  $44,000,000   $15,000,000 
Term loan payable   80,500,000    55,000,000 
Notes payable   40,000,000    40,000,000 
Payable for investments purchased   -    10,212,300 
Management and incentive fees payable, net   4,500,238    3,514,772 
Accounts payable and accrued expenses   775,396    924,152 
Administrator expenses payable   522,044    465,412 
Deferred revenue   163,164    173,627 
Interest and fees payable   292,494    1,048,205 
Due to affiliate   268    13,246 
Offering costs payable   67,694    80,073 
           
     Total liabilities  $170,821,298   $126,431,787 
           
NET ASSETS          
Common stock, par value $.001 per share, 100,000,000 common shares authorized,          
     28,662,049 and 23,110,242 common shares issued and outstanding, respectively  $28,662   $23,110 
Capital in excess of par value   358,122,695    285,012,499 
Accumulated undistributed net investment income   6,857,075    5,559,635 
Accumulated net realized gain (loss) from investments   177,193    (44,727)
Net unrealized appreciation (depreciation) on investments   (1,437,730)   (1,211,286)
Total net assets   363,747,895    289,339,231 
           
Total liabilities and net assets  $534,569,193   $415,771,018 
           
NET ASSET VALUE PER SHARE  $12.69   $12.52 

 

 

See accompanying notes to consolidated financial statements.

F-1
 

 

Medley Capital Corporation 

 

Consolidated Statements of Operations

 

  

For the three months

ended December 31, 2012

  

For the three months

ended December 31, 2011

 
   (unaudited)   (unaudited) 
INVESTMENT INCOME    
Interest from investments    
     Non-controlled/Non-affiliated investments  $14,470,967   $5,537,730 
     Affiliated investments   368,536    1,554,071 
          Total interest income   14,839,503    7,091,801 
Interest from cash and cash equivalents   1,103    1,843 
Other fee income   2,878,876    1,135,556 
     Total investment income   17,719,482    8,229,200 
           
EXPENSES          
Base management fees   2,095,956    1,045,267 
Incentive fees   2,404,282    1,206,662 
Interest and financing expenses   2,317,286    282,026 
Administrator expenses   522,044    296,246 
Professional fees   292,113    292,104 
Directors fees   112,536    115,254 
Insurance   67,436    104,414 
General and administrative   290,702    101,703 
     Expenses before management fee waiver   8,102,355    3,443,676 
     Management fee waiver   -    (41,126)
          Total expenses net of management fee waiver   8,102,355    3,402,550 
          Net investment income before excise taxes   9,617,127    4,826,650 
          Excise tax expense   -    (35,501)
NET INVESTMENT INCOME   9,617,127    4,791,149 
           
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:          
Net realized gain/(loss) from investments   221,920    111,521 
Net unrealized appreciation/(depreciation) on investments   (226,444)   (513,452)
     Net gain/(loss) on investments   (4,524)   (401,931)
           
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS  $9,612,603   $4,389,218 
           
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.39   $0.25 
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER          
     COMMON SHARE  $0.39   $0.28 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING          
     - BASIC AND DILUTED (SEE NOTE 10)   24,767,375    17,320,468 
           
DIVIDENDS DECLARED PER COMMON SHARE  $0.36   $0.25 

 

 

See accompanying notes to consolidated financial statements.

F-2
 

 

Medley Capital Corporation

  

Consolidated Statements of Changes in Net Assets

 

 

 

 

  

For the three months

ended December 31, 2012

  

For the three months

ended December 31, 2011

 
   (unaudited)   (unaudited) 
INCREASE FROM OPERATIONS:
Net investment income  $9,617,127   $4,791,149 
Net realized gain/(loss) from investments   221,920    111,521 
Net unrealized appreciation/(depreciation) on investments   (226,444)   (513,452)
Net increase/(decrease) in net assets from operations   9,612,603    4,389,218 
SHAREHOLDER DISTRIBUTIONS:          
Distributions declared ($0.36 and $0.25 per share, respectively)   (8,319,687)   (4,330,118)
Net decrease in net assets from shareholder distributions   (8,319,687)   (4,330,118)
CAPITAL SHARE TRANSACTIONS:          
Issuance of common stock, net of underwriting costs   73,279,838    - 
Offering costs   (164,090)   - 
Net increase in net assets from capital share transactions   73,115,748    - 
Total increase/(decrease) in net assets   74,408,664    59,100 
Net assets at beginning of period   289,339,231    217,652,696 
Net assets at end of period  $363,747,895   $217,711,796 
           
Net asset value per common share  $12.69   $12.57 
Common shares outstanding at end of period   28,662,049    17,320,468 

 

 

 

See accompanying notes to consolidated financial statements.

F-3
 

 

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

  

For the three months

ended December 31, 2012

  

For the three months

ended December 31, 2011

 
    (unaudited)    (unaudited) 
Cash flows from operating activities          
NET INCREASE IN NET ASSETS FROM OPERATIONS  $9,612,603   $4,389,218 
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM          
     OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:          
           Paid-in-kind interest income   (2,157,838)   (751,153)
           Net amortization of premium (discount) on investments   (177,148)   32,942 
           Amortization of deferred financing costs   266,601    93,410 
           Net realized (gain) loss from investments   (221,920)   (111,521)
           Net unrealized (appreciation) depreciation on investments   226,444    513,452 
           Proceeds from sale and redemption of investments   38,845,811    3,415,000 
           Purchase of investments   (155,260,446)   (47,928,146)
           (Increase) decrease in operating assets:          
                Interest receivable   (2,139,102)   (731,020)
                Due from counterparty   -    (4,665,511)
                Other assets   (309,215)   708,545 
           Increase (decrease) in operating liabilities:          
                Payable for investments purchased   (10,212,300)   - 
                Accounts payable and accrued expenses   (148,756)   2,995 
                Management and incentive fees payable, net   985,466    727,052 
                Administrator expenses payable   56,632    (50,047)
                Interest and fees payable   (755,711)   188,616 
                Deferred revenue   (10,463)   42,349 
                Due to affiliate   (12,978)   112,266 
NET CASH USED BY OPERATING ACTIVITIES   (121,412,320)   (44,011,553)
           
Cash flows from financing activities          
Proceeds from issuance of common stock, net of underwriting costs   73,279,838    - 
Offering cost paid   (134,250)   - 
Borrowings on debt   113,200,000    32,600,000 
Paydowns on debt   (58,700,000)   - 
Financing cost paid   (1,140,596)   (14,272)
Payments of cash dividends   (8,319,687)   (4,330,118)
NET CASH PROVIDED BY FINANCING ACTIVITIES   118,185,305    28,255,610 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (3,227,015)   (15,755,943)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   4,893,616    17,201,643 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $1,666,601   $1,445,700 
           
Supplemental Information:          
     Interest paid during the period  $2,787,493   $95,000 
Supplemental non-cash information          
     Paid-in-kind interest income  $2,157,838   $751,153 
     Net amortization of premium (discount) on investments  $177,148   $(32,942)
     Amortization of deferred financing costs  $(266,601)  $(93,410)
     Issuance of common stock in connection with dividend reinvestment plan  $742,366   $- 

 

 

See accompanying notes to consolidated financial statements.

F-4
 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

December 31, 2012

(unaudited)

  

Company (1)  Industry  Interest  Maturity  Par Amount (2)   Cost   Fair Value   % of
Net Assets (3)
   LTV (5)
(unaudited)
 
                              
Non-controlled/Non-affiliated Investments - 140.8% (3)                               
Senior Secured First Lien Term Loans                               
Revstone Aero LLC  Aerospace & Defense  15.31% (LIBOR + 12.00% Cash, 3.00% PIK)  6/30/2017  $15,234,006   $15,025,570   $15,025,570    4.1%   77.3%
Revstone Aero LLC (fee note) (7)  Aerospace & Defense  17.38% (7)  6/30/2017   500,000    243,186    243,186    0.1%   77.3%
Welocalize, Inc. (term loan A)  Business Services  10.00% (LIBOR + 8.00%, 2.00% LIBOR Floor)  11/19/2015   4,686,891    4,686,891    4,686,891    1.3%   25.0%
Welocalize, Inc. (term loan B)  Business Services  12.25% (LIBOR + 9.00%, 2.00% LIBOR Floor, 1.25% PIK)  11/19/2015   5,496,248    5,496,248    5,496,248    1.5%   25.0%
BayDelta Maritime LLC (term loan)  Cargo Transport  13.75%
(11.25% Cash, 2.50% Deferred)
  6/30/2016   6,669,293    6,553,825    6,669,293    1.8%   30.3%
BayDelta Maritime LLC (fee note) (7)  Cargo Transport  14.88% (7)  6/30/2016   250,000    153,897    153,897    0.0%   30.3%
Bennu Glass, Inc.  Containers, Packaging and Glass  15.00%  4/30/2015   10,000,000    10,035,876    10,000,000    2.7%   28.4%
Tenere Acquisition Corp.  Diversified/Conglomerate Manufacturing  13.00% (11% Cash, 2.00% PIK)  12/15/2017   9,009,000    9,009,000    9,009,000    2.5%   69.8%
Flexera Software LLC  Electronics  7.50% (LIBOR + 6.25%,
1.25% LIBOR Floor)
  9/30/2017   3,900,000    3,900,000    3,900,000    1.1%   33.3%
Velum Global Credit Management LLC  Finance  15.00%  3/31/2014   10,000,000    10,090,422    10,000,000    2.7%   23.1%
Water Capital USA, Inc.  Finance  14.00% (7.00% Cash, 7.00% PIK)  1/3/2015   24,274,579    24,274,579    24,274,579    6.7%   10.5%
The Great Atlantic & Pacific Tea Company, Inc.  Grocery  11.00% (LIBOR + 9.00%, 2.00% LIBOR Floor)  3/13/2017   7,940,000    7,940,000    7,940,000    2.2%   19.4%
Calloway Laboratories, Inc. (term loan A)  Healthcare, Education and Childcare  12.00% (10.00% Cash , 2.00% PIK)  9/30/2014   2,754,125    2,751,126    2,754,125    0.8%   9.1%
Calloway Laboratories, Inc. (term loan B)  Healthcare, Education and Childcare  12.00% (10.00% Cash , 2.00% PIK)  9/30/2014   19,159,897    19,103,163    16,957,136    4.7%   88.5%
Meridian Behavioral Health LLC (term loan A)  Healthcare, Education and Childcare  14.00%
(12.00% Cash, 2.00% PIK)
  11/14/2016   6,139,140    5,687,236    6,227,299    1.7%   42.3%
Meridian Behavioral Health LLC (term loan B)  Healthcare, Education and Childcare  12.00%  11/14/2016   3,750,000    3,750,000    3,588,449    1.0%   42.3%
American Gaming Systems LLC  Hotels, Motels, Inns and Gaming  11.50% (LIBOR + 10.00%, 1.50% LIBOR Floor)  8/15/2016   10,129,808    10,129,808    10,129,808    2.8%   78.8%
Modern VideoFilm, Inc.  Leisure, Amusement, Motion Pictures, Entertainment  13.50% (LIBOR + 9% Cash, 3% PIK, 1.50% LIBOR Floor)  9/25/2017   11,325,821    11,003,325    11,003,325    3.0%   83.5%
Strike Holdings LLC  Leisure, Amusement, Motion Pictures, Entertainment  13.00% (LIBOR + 10.0% Cash, 2.0% PIK, 1.0% LIBOR Floor)  8/31/2017   15,857,903    15,857,903    15,857,903    4.4%   62.9%
Harrison Gypsum LLC  Mining, Steel, Iron and Nonprecious Metals  10.50% (LIBOR + 8.50% Cash, .50% PIK, 1.50% LIBOR Floor)  12/21/2017   24,620,000    24,620,000    24,620,000    6.8%   69.7%
Brantley Transportation LLC  Oil and Gas  14.00% ('LIBOR + 10.0% Cash, 2.5% PIK, 1.5% LIBOR Floor)  8/2/2017   10,990,277    10,990,277    10,990,277    3.0%   67.0%
Geneva Wood Fuels LLC (4)  Personal and Nondurable Consumer Products (Manufacturing Only)  15.50% (LIBOR + 13.00%, 2.50% LIBOR Floor)  12/31/2012   7,500,000    7,500,000    6,117,000    1.7%   95.3%
Physicians Care Alliance LLC (term loan)  Personal and Nondurable Consumer Products (Manufacturing Only)  11.00% (10% Cash, 1.00% PIK)  12/28/2017   15,734,306    15,734,306    15,734,306    4.3%   31.9%
Physicians Care Alliance LLC (revolver)  Personal and Nondurable Consumer Products (Manufacturing Only)  N/A (8)  12/28/2017   -    -    -    0.0%   N/A
Cenegenics LLC  Personal, Food and Miscellaneous Services  12.25% (10% Cash, 2.25% PIK)  12/20/2017   20,015,000    20,015,000    20,015,000    5.5%   35.4%
FC Operating LLC  Retail Stores  11.50% (LIBOR + 10.25%, 1.25% LIBOR Floor)  11/14/2017   11,500,000    11,500,000    11,500,000    3.2%   65.3%
Total Senior Secured First Lien Term Loans        $257,436,294   $256,051,638   $252,893,292           
                                   
Senior Secured Second Lien Term Loans                               
Aurora Flight Sciences Corporation  Aerospace & Defense  13.25%
(11.25% Cash, 2.00% PIK)
  3/16/2014  $15,570,092   $15,570,092   $15,570,092    4.3%   32.3%
Kelley Amerit Holdings, Inc.  Business Services  12.20%
(LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)
  12/21/2016   9,159,130    9,159,130    9,159,130    2.5%   43.1%
Prestige Industries LLC  Business Services  13.00% (10.00% Cash, 3.00% PIK)  1/31/2017   5,894,335    5,760,072    5,363,841    1.5%   92.1%
Taylored Freight Services LLC  Business Services  13.00% (LIBOR + 9.5% Cash, 2.0% PIK, 1.5% LIBOR Floor)  11/2/2017   14,024,111    14,024,111    14,024,111    3.9%   55.3%
YRCW Receivables LLC  Cargo Transport  11.25% (LIBOR + 9.75%, 1.50% LIBOR Floor)  9/30/2014   4,885,151    4,770,688    4,836,297    1.3%   71.5%
RCS Management Corporation & Specialized
Medical Services, Inc.
  Diversified/Conglomerate Service  13.00% ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)  9/23/2015   25,378,338    25,378,338    25,378,338    7.0%   59.7%
Aderant North America, Inc.  Electronics  11.00%  6/20/2019   4,550,000    4,550,000    4,550,000    1.2%   52.3%
Flexera Software LLC  Electronics  11.00% (LIBOR + 9.75%,
1.25% LIBOR Floor)
  9/30/2018   6,000,000    6,000,000    6,000,000    1.6%   48.2%
Caregiver Services, Inc.  Healthcare, Education and Childcare  14.45% (12.45% Cash, 2.00% PIK)  12/29/2017   15,129,615    15,129,615    15,129,615    4.2%   62.4%
Sequel Youth and Family Services LLC  Healthcare, Education and Childcare  14.00%  12/23/2014   10,500,000    10,500,000    10,500,000    2.9%   41.3%
Gulf Coast Asphalt Company, Inc.  Oil and Gas  15.50% (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 3.5% PIK)  6/14/2017   11,280,490    11,280,490    11,280,490    3.1%   49.1%
Hoffmaster Group, Inc.  Personal and Nondurable Consumer Products (Manufacturing Only)  11.00%
(1.50% Base + 9.50% Spread)
  1/3/2019   6,000,000    6,000,000    6,000,000    1.6%   67.0%
Hoffmaster Group, Inc.  Personal and Nondurable Consumer Products (Manufacturing Only)  10.25% (LIBOR + 9.0% Cash, 1.25% LIBOR Floor)  1/3/2019   2,000,000    1,981,268    1,936,459    0.5%   67.0%
Santa Cruz Nutritional  Personal and Nondurable Consumer Products (Manufacturing Only)  14.50%  5/25/2015   15,000,000    15,000,000    15,000,000    4.1%   42.3%
Insight Pharmaceuticals LLC  Personal, Food and Miscellaneous Services  13.25% (LIBOR + 11.75%, 1.50% LIBOR Floor)  8/25/2017   7,724,138    7,724,138    7,724,138    2.1%   65.4%
United Road Towing Inc.  Personal, Food and Miscellaneous Services  15.00%
(11.50% Cash, 3.50% PIK)
  10/21/2016   15,558,131    15,558,131    15,130,239    4.2%   91.1%
United Restaurant Group L.P.  Restaurant & Franchise  15.21% (LIBOR + 11.50% Cash, 3.50% PIK)  12/31/2016   10,549,463    10,549,463    10,443,991    2.9%   63.4%
Total Senior Secured Second Lien Term Loans        $179,202,994   $178,935,536   $178,026,741           
                                   
Senior Secured Notes                               
Tower International, Inc.  Automobile  10.625%  9/1/2017  $6,101,000   $6,212,310   $6,521,969    1.8%   46.8%
Exide Technologies  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  8.625%  2/1/2018   12,500,000    10,756,561    10,656,250    2.9%   66.0%
Atkore International, Inc.  Mining, Steel, Iron and Nonprecious Metals  9.875%  1/1/2018   5,000,000    4,831,215    5,343,750    1.5%   41.7%
Prince Mineral Holdings Corp.  Mining, Steel, Iron and Nonprecious Metals  11.50%  12/15/2019   6,800,000    6,720,632    7,072,000    1.9%   80.2%
Tempel Steel Company  Mining, Steel, Iron and Nonprecious Metals  12.00%  8/15/2016   12,000,000    11,792,731    11,731,420    3.2%   87.0%
Linc Energy Finance (USA), Inc.  Oil and Gas  12.50%  10/31/2017   3,500,000    3,377,999    3,377,999    0.9%   37.0%
U.S. Well Services LLC  Oil and Gas  14.50%  2/15/2017   16,588,941    16,429,751    16,429,751    4.5%   60.3%
Dispensing Dynamics International  Personal and Nondurable Consumer Products (Manufacturing Only)  12.50%  1/1/2018   4,800,000    4,704,038    4,704,038    1.3%   52.7%
Sizzling Platter LLC  Restaurant & Franchise  12.25%  4/15/2016   5,278,000    5,244,698    5,452,316    1.5%   50.2%
Integra Telecom, Inc.  Telecommunications  10.75%  4/15/2016   7,250,000    7,121,670    7,322,500    2.0%   62.3%
                                   
Total Senior Secured Notes        $79,817,941   $77,191,605   $78,611,993           
                                   
Equity/Warrants                               
Prestige Industries LLC  Business Services  Warrants to purchase 0.63% of the outstanding common units  1/31/2017   N/A   $151,855   $-    0.0%   N/A 
BayDelta Maritime LLC  Cargo Transport  Warrants to purchase 10% of the outstanding equity  6/30/2016   N/A    25,000    313,581    0.1%   N/A 
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Warrants to purchase 20%  of the outstanding equity  9/30/2014   N/A    68,433    1,276,520    0.4%   N/A 
Meridian Behavioral Health LLC  Healthcare, Education and Childcare  Warrants to purchase 8% of the outstanding membership units  11/14/2016   N/A    536,296    802,641    0.2%   N/A 
Modern VideoFilm, Inc.  Leisure, Amusement, Motion Pictures, Entertainment  Warrants to purchase 3.4% of the outstanding equity  9/25/2017   N/A    336,000    336,000    0.1%   N/A
U.S. Well Services LLC  Oil and Gas  Warrants to purchase 2.85% of the outstanding common membership interests  2/15/2017   N/A    11,017    -    0.0%   N/A 
Total Equity/Warrants             $1,128,601   $2,728,742           
                                   
Sub Total Non-controlled/Non-affiliated Investments        $516,457,229   $513,307,380   $512,260,768           
                                   
Affiliated Investments - 2.3% (3)                               
Senior Secured First Lien Term Loans                               
Cymax Stores, Inc.  Home and Office Furnishings, Housewares, and Durable Consumer Products  15.00% (10% Cash, 5% PIK)  8/1/2015  $8,671,004   $8,146,656   $7,760,538    2.1%   56.2%
                                   
Equity/Warrants                                
Cymax Stores, Inc.  Home and Office Furnishings, Housewares, and Durable Consumer Products  190 Class B Common Units (6)  -   N/A   $678,154   $673,154    0.2%   N/A 
                                   
Sub Total Affiliated Investments        $8,671,004   $8,824,810   $8,433,692           
                                   
Total Investments - 143.1% (3)        $525,128,233   $522,132,190   $520,694,460           

 

______________________________________

(1) All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada.

(2) Par amount includes accumulated PIK interest and is net of repayments.

(3) Percentage is based on net assets of $363,747,895 as of December 31, 2012.

(4) Investment is held via participation agreements with affiliated entities (See note 7).

(5) Loan to value ratio ("LTV") is the amount of total net debt in the portfolio company’s capital structure that is ahead of and through our loan divided by the enterprise value of the portfolio company.

(6) 190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.

(7) Fee note is a zero coupon note, due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.

(8) The entire commitment was unfunded at December 31, 2012. As such, no interest is being earned on this investment. 

 

 

See accompanying notes to consolidated financial statements.

 

F-5
 

  

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

September 30, 2012

 

Company (1)   Industry   Interest   Maturity     Par Amount (2)     Cost     Fair Value     % of
Net Assets (3)
    LTV (5)
(unaudited)
 
                                             
Non-controlled/Non-affiliated Investments - 136.1% (3)                                                        
Senior Secured First Lien Term Loans                                                        
Revstone Aero LLC   Aerospace & Defense   15.46% (LIBOR + 12.00% Cash, 3.00% PIK)     6/30/2017     $ 15,117,806     $ 14,901,459     $ 14,901,459       5.2 %     63.4 %
Revstone Aero LLC (fee note) (7)   Aerospace & Defense   17.38% (7)     6/30/2017       500,000       233,561       233,561       0.1 %     63.4 %
Welocalize, Inc. (term loan A) (8)   Business Services   10.00% (LIBOR + 8.00%, 2.00% LIBOR Floor)     11/19/2015       4,716,740       4,716,740       4,716,740       1.6 %     32.5 %
Welocalize, Inc. (term loan B) (8)   Business Services   12.25% (LIBOR + 9.00%, 2.00% LIBOR Floor, 1.25% PIK)     11/19/2015       5,478,728       5,478,728       5,478,728       1.9 %     32.5 %
BayDelta Maritime LLC (term loan)   Cargo Transport   13.75%
(11.25% Cash, 2.50% Deferred)
    6/30/2016       6,669,293       6,547,553       6,669,293       2.3 %     28.6 %
BayDelta Maritime LLC (fee note) (7)   Cargo Transport   14.88% (7)     6/30/2016       250,000       148,611       148,611       0.1 %     28.6 %
Hilex Poly Co.   Chemicals, Plastics and Rubber   11.25% (LIBOR + 9.25%, 2.00% LIBOR Floor)     11/19/2015       1,533,848       1,533,848       1,533,848       0.5 %     33.2 %
Bennu Glass, Inc.   Containers, Packaging and Glass   15.00%     4/30/2013       10,000,000       10,062,296       10,000,000       3.4 %     27.1 %
Flexera Software LLC   Electronics   7.50% (LIBOR + 6.25%,
1.25% LIBOR Floor)
    9/30/2017       3,920,000       3,920,000       3,920,000       1.3 %     36.9 %
Velum Global Credit Management LLC   Finance   15.00%     3/31/2014       10,000,000       10,106,822       10,000,000       3.5 %     23.1 %
Water Capital USA, Inc. (8)   Finance   14.00% (7.00% Cash, 7.00% PIK)     1/3/2013       23,437,803       23,437,803       23,437,803       8.1 %     35.6 %
The Great Atlantic & Pacific Tea Company, Inc. (8)   Grocery   11.00% (LIBOR + 9.00%, 2.00% LIBOR Floor)     3/13/2017       7,960,000       7,960,000       7,960,000       2.8 %     15.5 %
Calloway Laboratories, Inc.   Healthcare, Education and Childcare   12.00% (10.00% Cash , 2.00% PIK)     9/30/2014       19,034,912       18,971,013       18,736,889       6.5 %     84.3 %
Calloway Laboratories, Inc.   Healthcare, Education and Childcare   12.00% (10.00% Cash , 2.00% PIK)     9/30/2014       1,006,117       1,002,739       1,006,117       0.3 %     84.3 %
Meridian Behavioral Health LLC (term loan A)   Healthcare, Education and Childcare   14.00%
(12.00% Cash, 2.00% PIK)
    11/14/2016       6,107,870       5,635,807       6,199,931       2.1 %     38.7 %
Meridian Behavioral Health LLC (term loan B)   Healthcare, Education and Childcare   12.00%     11/14/2016       3,000,000       3,000,000       2,830,434       1.0 %     38.7 %
Renaissance Learning LLC   Healthcare, Education and Childcare   7.75% (LIBOR + 6.25%,
1.50% LIBOR Floor)
    10/19/2017       2,970,000       2,865,919       2,865,919       1.0 %     31.9 %
American Gaming Systems LLC   Hotels, Motels, Inns and Gaming   11.50% (LIBOR + 10.00%, 1.50% LIBOR Floor)     8/15/2016       9,509,615       9,509,615       9,509,615       3.3 %     68.0 %
Modern VideoFilm, Inc. (8)   Leisure, Amusement, Motion Pictures, Entertainment   13.50% (LIBOR + 9% Cash, 3% PIK, 1.50% LIBOR Floor)     9/25/2017       16,000,000       15,522,547       15,522,547       5.4 %     58.3 %
Strike Holdings LLC   Leisure, Amusement, Motion Pictures, Entertainment   13.00% (LIBOR + 10.0% Cash, 2.0% PIK, 1.0% LIBOR Floor)     8/31/2017       15,777,126       15,777,126       15,777,126       5.4 %     50.6 %
Brantley Transportation LLC   Oil and Gas   14.00% ('LIBOR + 10.0% Cash, 2.5% PIK, 1.5% LIBOR Floor)     8/2/2017       10,920,360       10,920,360       10,920,360       3.8 %     70.3 %
Geneva Wood Fuels LLC (4)   Personal and Nondurable Consumer Products (Manufacturing Only)   15.50% (LIBOR + 13.00%, 2.50% LIBOR Floor)     12/31/2012       7,500,000       7,500,000       6,937,502       2.4 %     60.5 %
Total Senior Secured First Lien Term Loans               $ 181,410,218     $ 179,752,547     $ 179,306,483                  
                                                         
Senior Secured Second Lien Term Loans                                                        
Aurora Flight Sciences Corporation   Aerospace & Defense   13.25%
(11.25% Cash, 2.00% PIK)
    3/16/2014     $ 15,490,782     $ 15,490,782     $ 15,490,782       5.3 %     28.3 %
Kelley Amerit Holdings, Inc.   Business Services   12.20%
(LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)
    12/22/2016       9,242,940       9,242,940       9,242,940       3.2 %     48.9 %
Prestige Industries LLC   Business Services   13.00% (10.00% Cash, 3.00% PIK)     1/31/2017       5,849,374       5,709,063       5,537,365       1.9 %     72.3 %
YRCW Receivables LLC   Cargo Transport   11.25% (LIBOR + 9.75%, 1.50% LIBOR Floor)     9/30/2014       4,897,519       4,768,454       4,824,064       1.7 %     75.2 %
RCS Management Corporation & Specialized Medical Services, Inc.   Diversified/Conglomerate Service   13.00% ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)     9/23/2015       19,346,687       19,346,687       19,346,687       6.7 %     49.3 %
Flexera Software LLC   Electronics   11.00% (LIBOR + 9.75%,
1.25% LIBOR Floor)
    9/30/2018       6,000,000       6,000,000       5,819,983       2.0 %     53.1 %
Renaissance Learning LLC   Healthcare, Education and Childcare   12.00% (LIBOR + 10.50%,
1.50% LIBOR Floor)
    10/19/2018       2,000,000       1,927,002       1,927,002       0.7 %     46.8 %
Sequel Youth and Family Services LLC   Healthcare, Education and Childcare   14.00%     12/23/2014       10,500,000       10,500,000       10,500,000       3.6 %     42.6 %
Caregiver Services, Inc.   Healthcare, Education and Childcare   14.45% (12.45% Cash, 2.00% PIK)     12/29/2017       15,053,384       15,053,384       15,053,384       5.2 %     61.7 %
Gulf Coast Asphalt Company, Inc. (8)   Oil and Gas   15.50% (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 3.5% PIK)     6/14/2017       11,180,191       11,180,191       11,180,191       3.9 %     48.3 %
Santa Cruz Nutritional (8)   Personal and Nondurable Consumer Products (Manufacturing Only)   14.50%     5/25/2015       15,000,000       15,000,000       15,000,000       5.2 %     48.6 %
Hoffmaster Group, Inc.   Personal and Nondurable Consumer Products (Manufacturing Only)   11.00%
(1.50% Base + 9.50% Spread)
    1/3/2019       6,000,000       6,000,000       5,935,052       2.0 %     63.3 %
Hoffmaster Group, Inc.   Personal and Nondurable Consumer Products (Manufacturing Only)   10.25% (LIBOR + 9.0% Cash, 1.25% LIBOR Floor)     1/3/2019       2,000,000       1,980,714       1,913,402       0.7 %     63.3 %
Insight Pharmaceuticals LLC   Personal, Food and Miscellaneous Services   13.25% (LIBOR + 11.75%, 1.50% LIBOR Floor)     8/25/2017       10,000,000       10,000,000       10,000,000       3.4 %     62.2 %
United Road Towing Inc.   Personal, Food and Miscellaneous Services   15.00%
(11.50% Cash, 3.50% PIK)
    10/21/2016       15,421,293       15,421,293       14,997,196       5.2 %     80.5 %
United Restaurant Group L.P.   Restaurant & Franchise   15.24% (LIBOR + 11.50% Cash, 3.50% PIK)     12/31/2016       10,455,664       10,455,664       10,246,510       3.5 %     64.6 %
Total Senior Secured Second Lien Term Loans               $ 158,437,834     $ 158,076,174     $ 157,014,558                  
                                                         
Senior Secured Notes                                                        
Tower International, Inc. (8)   Automobile   10.625%     9/1/2017     $ 6,101,000     $ 6,216,917     $ 6,216,916       2.1 %     48.3 %
Exide Technologies (8)   Machinery (Nonagriculture, Nonconstruction, Nonelectric)   8.625%     2/1/2018       10,000,000       8,669,210       8,662,500       3.0 %     49.0 %
Tempel Steel Company (8)   Mining, Steel, Iron and Nonprecious Metals   12.00%     8/15/2016       12,000,000       11,781,691       11,879,995       4.1 %     66.1 %
Atkore International, Inc. (8)   Mining, Steel, Iron and Nonprecious Metals   9.875%     1/1/2018       5,000,000       4,825,086       4,875,000       1.7 %     61.1 %
U.S. Well Services LLC (8)   Oil and Gas   14.50% (14.50% PIK until 8/15/12, 14.50%  cash therafter)     2/15/2017       13,393,941       13,244,727       13,244,727       4.6 %     49.0 %
Sizzling Platter LLC (8)   Restaurant & Franchise   12.25%     4/15/2016       3,630,000       3,529,636       3,757,050       1.3 %     55.8 %
Integra Telecom, Inc. (8)   Telecommunications   10.75%     4/15/2016       7,250,000       7,113,784       7,113,784       2.5 %     61.7 %
Total Senior Secured Notes                   $ 57,374,941     $ 55,381,051     $ 55,749,972                  
                                                         
Equity/Warrants                                                        
Prestige Industries LLC   Business Services   Warrants to purchase 3.04% of the outstanding common units     1/31/2017       N/A     $ 151,855     $ 119,406       0.0 %     N/A  
BayDelta Maritime LLC   Cargo Transport   Warrants to purchase 10%
of the outstanding equity
    6/30/2016       N/A       25,000       216,387       0.1 %     N/A  
Calloway Laboratories, Inc.   Healthcare, Education and Childcare   Warrants to purchase 2.4%
of the outstanding equity
    9/30/2014       N/A       68,433       68,433       0.0 %     N/A  
Meridian Behavioral Health LLC   Healthcare, Education and Childcare   Warrants to purchase 8%
of the outstanding membership units
    11/14/2016       N/A       536,296       786,118       0.3 %     N/A  
Modern VideoFilm, Inc.   Leisure, Amusement, Motion Pictures, Entertainment   Warrants to purchase 5%
of the outstanding equity
    9/25/2017       N/A       480,000       480,000       0.2 %     N/A  
U.S. Well Services LLC (8)   Oil and Gas   Warrants to purchase 2.29% of the outstanding common membership interests     2/15/2017       N/A       10,697       -       0.0 %     N/A  
Total Equity/Warrants                           $ 1,272,281     $ 1,670,344                  
                                                         
Sub Total Non-controlled/Non-affiliated Investments               $ 397,222,993     $ 394,482,053     $ 393,741,357                  
                                                         
Affiliated Investments - 2.8% (3)                                                        
Senior Secured First Lien Term Loans                                                        
Cymax Stores, Inc.   Home and Office Furnishings, Housewares, and Durable Consumer Products   15.00% (10% Cash, 5% PIK)     8/1/2015     $ 8,562,329     $ 8,000,442     $ 7,534,852       2.6 %     45.4 %
                                                         
Equity/Warrants                                                        
Cymax Stores, Inc.   Home and Office Furnishings, Housewares, and Durable Consumer Products   190 Class B Common Units (6)     -       N/A     $ 678,154     $ 673,154       0.2 %     N/A  
                                                         
Sub Total Affiliated Investments                   $ 8,562,329     $ 8,678,596     $ 8,208,006                  
                                                         
Total Investments - 138.9% (3)                   $ 405,785,322     $ 403,160,649     $ 401,949,363                  

 

 

 

 

 

  (1) All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada.
  (2) Par amount includes accumulated PIK interest and is net of repayments.
  (3) Percentage is based on net assets of $289,339,231 as of September 30, 2012.
  (4) Investment is held via participation agreements with affiliated entities (See note 7).
  (5) Loan to value ratio ("LTV") is the amount of total net debt in the portfolio company’s capital structure that is ahead of and through our loan divided by the enterprise value of the portfolio company.
  (6) 190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.
  (7) Fee note is a zero coupon note, due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.
  (8) An affiliated fund that is managed by an affiliate of MCC Advisors LLC also holds an investment in this security.

 

See accompanying notes to consolidated financial statements.

F-6
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2012

(unaudited)

 

Note 1. Organization

 

Medley Capital Corporation (the “Company”, “we” and “us”) is a non-diversified closed end management investment company incorporated in Delaware that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We completed our initial public offering (“IPO”) and commenced operations on January 20, 2011. The Company has elected and qualified to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We are externally managed and advised by our investment adviser, MCC Advisors LLC (“MCC Advisors”) a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to an investment management agreement.

 

Medley Capital BDC LLC (the “LLC”), a Delaware limited liability company, was formed on April 23, 2010. On January 18, 2011, the LLC, in accordance with Delaware law, converted into Medley Capital Corporation, a Delaware corporation, and on January 20, 2011, the Company filed an election to be regulated as a BDC under the 1940 Act.

 

On January 20, 2011, the Company consummated its IPO, sold 11,111,112 shares of common stock at $12.00 per share and commenced its operations and investment activities. On February 24, 2011, an additional 450,000 shares of common stock were issued at a price of $12.00 per share pursuant to the partial exercise of the underwriters’ over-allotment option. Net of underwriting fees and offering costs, the Company received total cash proceeds of approximately $129.6 million.

 

On January 20, 2011, the Company’s shares began trading on the New York Stock Exchange (“NYSE”) under the symbol “MCC.”

 

Prior to the consummation of our IPO, Medley Opportunity Fund LP (“MOF LP”), a Delaware limited partnership, and Medley Opportunity Fund, Ltd. (“MOF LTD”), a Cayman Islands exempted limited liability company, which are managed by an affiliate of MCC Advisors, transferred all of their respective interests in six loan participations in secured loans to middle market companies with a combined fair value, plus payment-in-kind interest and accrued interest thereon, of approximately $84.95 million (the “Loan Assets”) to MOF I BDC LLC (“MOF I BDC”), a Delaware limited liability company in exchange for membership interests in MOF I BDC. As a result, MOF LTD owned approximately 90% of the outstanding MOF I BDC membership interests and MOF LP owned approximately 10% of the outstanding MOF I BDC membership interests.

 

On January 18, 2011, each of MOF LTD and MOF LP contributed their respective MOF I BDC membership interests to the LLC in exchange for LLC membership interests. As a result, MOF I BDC became a wholly-owned subsidiary of the LLC. As a result of the LLC’s conversion noted above, MOF LTD and MOF LP’s LLC membership interests were exchanged for 5,759,356 shares of the Company’s common stock at $14.75 per share.

 

The Company’s investment objective is to generate current income and capital appreciation by lending directly and indirectly to privately-held small and middle market companies to help these companies fund acquisitions, growth or refinancing. The portfolio will generally consist of senior secured first lien loans and senior secured second lien loans. In many of our investments, we will receive warrants or other equity participation features which we believe will increase the total investment returns.

F-7
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, MOF I BDC and Medley SBIC LP. We have applied to the Small Business Administration for a license for Medley SBIC LP to operate as a small business investment company under Section 301(c) of the Small Business Investment Company Act of 1958. Currently Medley SBIC LP has no operations. All references made to the “Company,” “we,” and “us” herein include Medley Capital Corporation and its consolidated subsidiaries, except as stated otherwise. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended September 30, 2012, which was filed with the U.S. Securities and Exchange Commission on December 10, 2012. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2013.

 

Cash and Cash Equivalents

 

The Company considers cash equivalents to be highly liquid investments with original maturities of three months or less. Cash and cash equivalents include deposits in a money market account. The Company deposits its cash in a financial institution and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Organizational Expenses

 

Organizational expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and have been expensed as incurred.

 

Deferred Offering Costs

 

Deferred offering costs consist of fees and expenses incurred in connection with the public offering and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement.

 

Deferred Financing Costs

 

Financing costs, incurred in connection with our credit facilities and senior notes, are deferred and amortized using the straight line method over the life of the respective facility.

 

Indemnification

 

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

 

Revenue Recognition

 

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis.

F-8
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Origination, amendment, closing and/or commitment fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three months ended December 31, 2012 and 2011 was $2.9 million and $1.1 million, respectively.

 

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

 

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three months ended December 31, 2012 and 2011, the Company earned $2.2 million and $0.8 million in PIK interest, respectively.

 

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

 

Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

 

Investment Classification

 

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, we would be deemed to “control” a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. We refer to such investments in portfolio companies that we “control” as “Control Investments.” Under the 1940 Act, we would be deemed to be an “Affiliated Person” of a portfolio company if we own between 5% and 25% of the portfolio company’s outstanding voting securities or we are under common control with such portfolio company. We refer to such investments in Affiliated Persons as “Affiliated Investments.”

 

Valuation of Investments

 

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.

F-9
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on information obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market discount yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company's assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.

 

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

  our quarterly valuation process begins with each portfolio investment being initially valued by the investment professionals responsible for monitoring the portfolio investment;

 

  preliminary valuation conclusions are then documented and discussed with senior management; and

 

  an independent valuation firm engaged by our board of directors reviews approximately one third of these preliminary valuations each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by independent valuation firms at least twice per annum when combined with the fiscal year end review of all the investments by independent valuation firms.

 

In addition, all of our investments are subject to the following valuation process:

 

  review management’s preliminary valuations and their own independent assessment;

 

  the audit committee of our board of directors reviews the preliminary valuations of the investment professionals, senior management and independent valuation firms; and

 

  our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of MCC Advisors, the respective independent valuation firms and the audit committee.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

F-10
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

 

Fair Value of Financial Instruments

 

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long-term obligations are discussed in Note 5.

 

Federal Income Taxes

  

The Company has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

 

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the calendar year ended December 31, 2011, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and subsequently paid $35,501 in federal excise taxes. There is no provision for federal excise tax for 2012 accrued at December 31, 2012. 

 

ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

   

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. There were no material uncertain income tax positions at December 31, 2012. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

 

F-11
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Segments

 

The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Company’s financial statements. See Note 3 for further information.

 

Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk

 

MCC Advisors has broad discretion in making investments for the Company. Investments will generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.

 

The value of the Company’s investments in loans may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as our borrowers, and those for which market yields are observable increase materially. MCC Advisors may attempt to minimize this risk by maintaining low loan-to-liquidation values with each loan and the collateral underlying the loan.

 

The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

 

Note 3. Investments

 

The composition of our investments as of December 31, 2012 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Investments at
Amortized
Cost
   Percentage   Investments at
Fair Value
   Percentage 
Senior Secured First Lien Term Loans  $264,198    50.6%  $260,654    50.1%
Senior Secured Second Lien Term Loans   178,935    34.3    178,026    34.2 
Senior Secured Notes   77,192    14.8    78,612    15.1 
Equity/Warrants   1,807    0.3    3,402    0.6 
Total  $522,132    100.0%  $520,694    100.0%

 

The composition of our investments as of September 30, 2012 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Investments at
Amortized
Cost
   Percentage   Investments at
Fair Value
   Percentage 
Senior Secured First Lien Term Loans  $187,753    46.6%  $186,841    46.5%
Senior Secured Second Lien Term Loans   158,076    39.2    157,015    39.0 
Senior Secured Notes   55,381    13.7    55,750    13.9 
Equity/Warrants   1,951    0.5    2,343    0.6 
Total  $403,161    100.0%  $401,949    100.0%

 

F-12
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued) 

 

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage of
Total Portfolio
 
Healthcare, Education and Childcare  $57,236    11.0%
Personal and Nondurable Consumer Products (Manufacturing Only)   49,492    9.5 
Mining, Steel, Iron and Nonprecious Metals   48,767    9.4 
Personal, Food and Miscellaneous Services   42,869    8.2 
Oil and Gas   42,078    8.1 
Business Services   38,730    7.4 
Finance   34,275    6.6 
Aerospace & Defense   30,839    5.9 
Leisure, Amusement, Motion Pictures, Entertainment   27,197    5.2 
Diversified/Conglomerate Service   25,378    4.9 
Restaurant & Franchise   15,896    3.1 
Electronics   14,450    2.8 
Cargo Transport   11,973    2.3 
Retail Stores   11,500    2.2 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   10,656    2.1 
Hotels, Motels, Inns and Gaming   10,130    1.9 
Containers, Packaging and Glass   10,000    1.9 
Diversified / Conglomerate Manufacturing   9,009    1.7 
Home and Office Furnishings, Housewares, and Durable Consumer Products   8,434    1.6 
Grocery   7,940    1.5 
Telecommunications   7,323    1.4 
Automobile   6,522    1.3 
Total  $520,694    100.0%

 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage of
Total Portfolio
 
Healthcare, Education and Childcare  $59,974    14.9%
Oil and Gas   35,345    8.8 
Finance   33,438    8.3 
Leisure, Amusement, Motion Pictures, Entertainment   31,780    7.9 
Aerospace & Defense   30,626    7.6 
Personal and Nondurable Consumer Products (Manufacturing Only)   29,786    7.4 
Business Services   25,095    6.2 
Personal, Food and Miscellaneous Services   24,997    6.2 
Diversified/Conglomerate Service   19,347    4.8 
Mining, Steel, Iron and Nonprecious Metals   16,755    4.2 
Restaurant & Franchise   14,003    3.5 
Cargo Transport   11,858    3.0 
Containers, Packaging and Glass   10,000    2.5 
Electronics   9,740    2.4 
Hotels, Motels, Inns and Gaming   9,510    2.4 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   8,662    2.2 
Home and Office Furnishings, Housewares, and Durable Consumer Products   8,208    2.0 
Grocery   7,960    2.0 
Telecommunications   7,114    1.8 
Automobile   6,217    1.5 
Chemicals, Plastics and Rubber   1,534    0.4 
Total  $401,949    100.0%

 

F-13
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The Company invests in portfolio companies principally located in North America. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business. The following table shows the portfolio composition by geographic location at fair value at December 31, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage of
Total Portfolio
 
Midwest  $143,175    27.5%
West   138,557    26.6 
Southwest   82,433    15.9 
Mid-Atlantic   57,225    11.0 
Northeast   50,034    9.6 
Southeast   40,836    7.8 
International   8,434    1.6 
Total  $520,694    100.0%

 

The following table shows the portfolio composition by geographic location at fair value at September 30, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage of
Total Portfolio
 
Midwest  $119,473    29.7%
West   101,098    25.2 
Mid-Atlantic   59,549    14.8 
Northeast   42,526    10.6 
Southeast   35,750    8.9 
Southwest   35,345    8.8 
International   8,208    2.0 
Total  $401,949    100.0%

 

Transactions With Affiliated Companies

 

During the three months ended December 31, 2012, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

Name of Investment  Fair Value at
September 30, 2012
   Purchases (Sales) of/Advances (Distributions) to
Affiliates
   Transfers
In/(Out) of Affiliates
   Income
Received
   Fair Value at
December 31, 2012
   Capital Loss 
Non-Controlled Affiliates                        
Cymax Stores, Inc.  $8,208,006   $   $   $368,536   $8,433,692   $ 
Total Non-Controlled Affiliates  $8,208,006   $   $   $368,536   $8,433,692   $ 

 

During the three months ended December 31, 2011, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

 

Name of Investment  Fair Value at
September 30, 2011
   Purchase  (Sales) of/Advances (Distributions) to
Affiliates
   Transfers In/(Out) of Affiliates   Income
Received
   Fair Value at
December 31, 2011
   Capital Loss 
Non-Controlled Affiliates                        
Allied Cash Holdings LLC  $20,000,000   $   $   $756,676   $20,000,000   $ 
Applied Natural Gas Fuels, Inc.   15,663,762            443,242    15,663,761     
Bennu Glass, Inc.   10,157,220            354,153    10,133,291     
Total Non-Controlled Affiliates  $45,820,982   $   $   $1,554,071   $45,797,052   $ 

  

Purchases (sales) of/advances (distributions) to affiliates are included in the purchases and sales presented on the consolidated statements of cash flows for the three months ended December 31, 2012 and December 31, 2011, respectively. Transfers in/(out) of affiliates represents the fair value for the month an investment became or was removed as an affiliated investment. Income received from affiliates is included in total investment income on the consolidated statements of operations for the three months ended December 31, 2012 and December 31, 2011, respectively.

F-14
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

  

Note 4. Fair Value Measurements

 

The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

 

  · Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

 

  · Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.

 

  · Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and is based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

 

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of December 31, 2012 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $   $   $260,654   $260,654 
Senior Secured Second Lien Term Loans           178,026    178,026 
Senior Secured Notes       16,000    62,612    78,612 
Equity/Warrants           3,402    3,402 
Total  $   $16,000   $504,694   $520,694 

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2012 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $   $   $186,841   $186,841 
Senior Secured Second Lien Term Loans           157,015    157,015 
Senior Secured Notes       13,537    42,213    55,750 
Equity/Warrants           2,343    2,343 
Total  $   $13,537   $388,412   $401,949 

 

F-15
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended December 31, 2012 (dollars in thousands):

 

   Senior
Secured First
Lien Loans
   Senior
Secured Second
Lien Loans
   Senior
Secured
Notes
   Equities /
Warrants
   Total 
Balance as of September 30, 2012  $186,841   $157,015   $42,213   $2,343   $388,412 
Purchases and other adjustments to cost   13,105    5,194    22,718        41,017 
Originations   94,485    20,000            114,485 
Sales   (26,669)       (3,052)   (144)   (29,865)
Settlements   (4,574)   (4,407)           (8,981)
Net realized gains (losses) from investments   97    72    53        222 
Net change in unrealized gains (losses)   (2,631)   152    680    1,203    (596)
Balance as of December 31, 2012  $260,654   $178,026   $62,612   $3,402   $504,694 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended December 31, 2011 (dollars in thousands):

 

   Senior
Secured
First
Lien Loans
   Senior
Secured
Second
Lien Loans
   Senior
Secured
Notes
   Equities /
Warrants
   Total 
Balance as of September 30, 2011  $107,255   $79,415   $11,832   $705   $199,207 
Purchases and other adjustments to cost   7,310    8,207    8,129        23,646 
Issuance   5,464    19,000        536    25,000 
Sales                    
Settlements   (28)   (18)   (3,370)       (3,416)
Net realized gains (losses) from investments   1        111        112 
Net change in unrealized gains (losses)   (291)   (418)   (61)   257    (513)
Balance as of December 31, 2011  $119,711   $106,186   $16,641   $1,498   $244,036 

 

Net change in unrealized loss included in earnings related to investments still held at reporting date, December 31, 2012 and 2011, was approximately $0.4 million and $0.4 million, respectively.

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

 

Sales represent net proceeds received from investments sold.

 

Settlements represent principal paydowns received.

 

No transfers between levels have occurred during the periods presented.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur.

F-16
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of December 31, 2012 (dollars in thousands):

 

   Fair value   Valuation techniques  Unobservable input  Range (weighted average) 
Senior Secured First Lien Term Loans  $260,654   Market approach  Market yield   7.5% - 20.6% (13.7%) 
                 
Senior Secured Second Lien Term Loans  $178,026   Market approach  Market yield   11.0% - 16.2% (13.7%) 
                 
Senior Secured Notes  $62,612   Market approach  Market yield   9.4% - 14.8% (12.6%) 
                 
Equity/Warrants  $3,402   Enterprise valuation analysis  EBITDA multiple (1)   0.2x – 7.8x (5.1x) 
                 
Total  $504,694            

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of September 30, 2012 (dollars in thousands):

 

   Fair value   Valuation techniques  Unobservable input  Range (weighted average) 
Senior secured first lien term loan  $186,841   Market approach  Market yield   7.5% - 21.0% (14.1%) 
                 
Senior secured second lien term loan  $157,015   Market approach  Market yield   11.3% - 16.0% (13.9%) 
                 
Senior secured notes  $42,213   Market approach  Market yield   10.1% - 14.9% (12.5%) 
                 
Equity/Warrants  $2,343   Enterprise valuation analysis  EBITDA multiple (1)   0.2x – 6.0x (4.0x) 
                 
Total  $388,412            

 

(1) Represents amounts used when the Company has determined that market participants would use such multiples when measuring the fair value of these investments.

 

The significant unobservable inputs used in the fair value measurement of the Company’s debt investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.

 

The significant unobservable inputs used in the fair value measurement of the Company’s equity/warrants investments are comparable company EBITDA multiples. Significant increases in EBITDA multiples in isolation would result in significantly higher fair value measurements.

 

Note 5. Borrowings

 

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

 

On March 21, 2012, the Company issued $40.0 million in aggregate principal amount of 7.125% senior notes that mature on March 30, 2019 (the "Notes"). The Notes may be redeemed in whole or in part at any time or from time to time at the Company's option on or after March 30, 2015. The Notes bear interest at a rate of 7.125% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2012. The Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol "MCQ".

 

On August 31, 2012, we entered into Amendment No. 1 to the senior secured revolving credit facility (the “Revolving Facility”), and entered into a new senior secured term loan credit facility, (the “Term Loan Facility”), and together with the Revolving Facility (the “Facilities”) with ING Capital LLC.

 

Amendment No. 1 to the Revolving Facility revised the Senior Secured Revolving Credit Agreement, dated August 4, 2011, to, among other things, increase the amount available for borrowing from $125.0 million to $132.5 million; permit the Term Loan Facility; and extend the maturity date from August 4, 2015 to August 31, 2016. Amendment No. 1 to the Revolving Facility also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR + 3.75% per annum, with a 1% LIBOR floor, to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, LIBOR plus 3.75% per annum, with no LIBOR floor, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, LIBOR plus 3.25% per annum, with no LIBOR floor, and (b) alternative base rate loans based, or ABR, on 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5%, LIBOR for a period of three months plus 1% or the ABR Floor of 2% to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, 2.25% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%. In addition to the stated interest expense, the Company is required to pay a commitment fee of between 0.50% and 1.00% depending on the usage level on any unused portion of the Revolving Facility. A significant percentage of our total assets have been pledged under the Revolving Facility to secure our obligations thereunder. The Revolving Facility contains commercially reasonable limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Revolving Facility also includes certain commercially reasonable requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder.

F-17
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Each of the Facilities includes an accordion feature permitting the Company to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $300.0 million.

 

On September 25, 2012, the Company closed $5.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $137.5 million.

 

On December 7, 2012, we entered into Amendment No. 2 to the Revolving Facility, and entered into Amendment No. 1 to the Term Loan Facility.

 

Amendment No. 2 to the Revolving Facility revised the Senior Secured Revolving Credit Agreement, dated August 4, 2011, as amended by Amendment No. 1 to Senior Secured Revolving Credit Agreement, dated as of August 31, 2012, to, among other things, increase the amount available for borrowing from $137.5 million to $182.0 million.

 

Amendment No. 1 to the Term Loan Facility revised the Senior Secured Term Loan Credit Agreement, dated August 31, 2012, to, among other things, increase the amount available for borrowing from $55.0 million to $80.5 million. The Term Loan Facility matures on August 31, 2017 and bears interest at LIBOR plus 4.00% (with no LIBOR Floor, rounded upwards, if necessary, to the next 1/16 of 1%).

 

At December 31, 2012, the carrying amount of our Facilities borrowings approximated the fair value. At December 31, 2012, the carrying amount and fair value of the Notes was $40.0 million and $41.3 million, respectively. The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of our Facilities borrowings are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The fair value of the Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. At December 31, 2012 the Notes and the Facilities would be deemed to be level 1 and level 3, respectively, as defined in Note 4.

 

As of December 31, 2012, $3.3 million of financing costs related to the Revolving Facility, $1.5 million of financing costs related to the Notes and $1.7 million of financing costs related to the Term Loan Facility have been capitalized and are being amortized over their respective terms. For the three months ended December 31, 2012, we recorded $2.3 million of interest and financing expenses, of which $0.3 million was attributable to interest related to the Revolving Facility, $0.3 million to commitment fees related to the Revolving Facility, $0.7 million to interest related to the Notes, $0.7 million to interest related to the Term Loan Facility and $0.3 million of amortization of deferred financing costs. As of December 31, 2012, there was $44.0 million outstanding under the Revolving Facility, $80.5 million outstanding under the Term Loan Facility and $40.0 million in aggregate principal amount of the Notes were outstanding. For the three months ended December 31, 2012, our weighted average outstanding debt balance and our weighted average stated interest rate was $134.9 million and 5.10%, respectively. This weighted average stated interest rate reflects the average interest rate for all outstanding borrowings. As of December 31, 2011, $1.3 million of financing costs related to the Facility have been capitalized and are being amortized over the term of the Facility. For the three months ended December 31, 2011, we recorded $0.2 million of interest expense and $0.1 million of amortization of deferred financing costs related to the Facility. As of December 31, 2011, there was $32.6 million outstanding under the Facility.

F-18
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Note 6. Agreements

 

Investment Management Agreement

 

On January 19, 2011, the Company entered into an investment management agreement (the “Management Agreement”) with MCC Advisors. Pursuant to the Management Agreement, MCC Advisors implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. MCC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay MCC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

 

The base management fee will be calculated at an annual rate of 1.75% of our gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. For the first quarter of our operations, the base management fee was calculated based on the initial value of our gross assets. Subsequently, the base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters. MCC Advisors agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through December 31, 2011.

 

The incentive fee consists of the following two parts:

 

The first, payable quarterly in arrears is based on our pre-incentive fee net investment income for the immediately preceding calendar quarter and will be 20.0% of the amount, if any, by which our pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate, measured as a percentage value of the preceding calendar quarter’s net assets and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MCC Advisers receives no incentive fee until our net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment adviser will receive 20% of our pre-incentive fee net investment income as if the hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation, unrealized capital depreciation or excise tax expense. Since the hurdle rate is fixed, as interest rates rise, it will be easier for the MCC Advisors to surpass the hurdle rate and receive an incentive fee based on net investment income.

 

The second component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Management Agreement, as of the termination date) and equals 20.0% of our cumulative aggregate realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments are previously made to MCC Advisers.

 

The Company calculates incentive fee as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. Accordingly, the Company accrues a provisional incentive fee taking into account any unrealized gains. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional incentive fee accrued at a reporting date may vary from the incentive fee that is ultimately paid, and the differences could be material.

 

F-19
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

For the three months ended December 31, 2012 and 2011, the Company incurred net base management fees payable to MCC Advisors of $2.1 million and $1.0 million, respectively. For the three months ended December 31, 2012 and 2011, we incurred $2.4 million and $1.2 million in incentive fees related to pre-incentive fee net investment income, respectively.

 

Administration Agreement

 

On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. Pursuant to this agreement, MCC Advisors furnishes us with office facilities and equipment, clerical, bookkeeping, recordkeeping and other administrative services related to the operations of the Company. We reimburse MCC Advisors for our allocable portion of overhead and other expenses incurred by our administrator in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of certain of our officers and their respective staff. From time to time, our administrator may pay amounts owed by us to third-party service providers and we will subsequently reimburse our administrator for such amounts paid on our behalf. For the three months ended December 31, 2012 and 2011, we incurred $0.5 million and $0.3 million in administrator expenses, respectively.

 

Note 7. Related Party Transactions

 

Loan Participations

 

As discussed in Note 1, the Loan Assets contributed to the Company by MOF LP and MOF LTD upon consummation of the Company’s IPO were in the form of loan participations with an affiliated entity managed by affiliates of MCC Advisors. On June 30, 2011, the Company cancelled its participation agreements with an affiliate and executed loan assignment agreements for its investments in Bennu Glass, Inc., Velum Global Credit Management LLC and Water Capital USA, Inc. The Company is now a direct lender of record to these borrowers.

 

The Company holds its investment in Geneva Wood Fuels LLC through a participation agreement with an affiliated entity, which represents 1.2% of the Company’s investments as of December 31, 2012. By virtue of owning loans through a participation agreement, the Company has a contractual relationship with the affiliate, not the borrower. As a result, the Company is subject to the credit risk of the affiliate as well as that of the borrower. As of December 31, 2012, the principal amount related to this loan participation was $7.5 million and for the three months ended December 31, 2012 and December 31, 2011, total investment income related to this loan participation was $0.3 million and $0.3 million, respectively.

 

Due to Affiliate

 

Due to affiliate consists of certain general and administrative expenses paid by an affiliate on behalf of the Company.

 

Other Related Party Transactions

 

Certain affiliates of MCC Advisors, Medley Capital LLC, their respective affiliates and some of their employees purchased in the IPO an aggregate of 833,333 shares of common stock at the initial public offering price per share of $12.00. The Company received the full proceeds from the sale of these shares, and no underwriting discounts or commissions were paid in respect of these shares.

 

On February 23, 2012, MOF LTD and MOF LP sold 4,406,301 shares of common stock at a price of $11.13 per share. The Company did not receive any of the proceeds of the sale of these shares. In April and May 2012, MOF LTD and MOF LP distributed the remaining 946,293 shares of common stock to their investors and as of June 30, 2012, MOF LTD and MOF LP collectively no longer own shares of our common stock.

 

Employees of Medley Capital LLC, an affiliate of the Company, serve as a board member, managing member or senior corporate officer of Bennu Glass, Inc. and Velum Global Credit Management LLC.

F-20
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Note 8. Commitments and Contingencies

 

As of December 31, 2012, we had commitments under loan and financing agreements to fund up to $9.4 million to five portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. As of September 30, 2012, we had commitments under loan and financing agreements to fund up to $17.3 million to six portfolio companies. These commitments are primarily composed of senior secured term loans and preferred equity. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.

 

Note 9. Directors Fees

 

The independent directors receive an annual fee of $35,000. They also receive $7,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $25,000 and the chairman of each other committee receives an annual fee of $10,000 for their additional services in these capacities. In addition, other members of the audit committee receive an annual fee of $12,500 and other members of each other committee receive an annual fee of $6,000. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three months ended December 31, 2012 and 2011, we accrued $0.1 million and $0.1 million for directors’ fees expense, respectively.

 

Note 10. Earnings Per Share

 

In accordance with the provisions of ASC Topic 260 – Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three months ended December 31, 2012 and 2011 (dollars in thousands except share and per share amounts):

 

Basic and diluted  Three months ended
December 31, 2012
   Three months ended
December 31, 2011
 
Net increase in net assets from operations  $9,613   $4,389 
Weighted average common shares outstanding   24,767,375    17,320,468 
Earnings per common share-basic and diluted  $0.39   $0.25 

 

F-21
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued) 

 

Note 11. Financial Highlights

 

The following is a schedule of financial highlights for the three months ended December 31, 2012 and 2011:

 

   For the three months ended 
   December 31, 2012   December 31, 2011 
Per share data:        
Net asset value per share at beginning of period  $12.52   $12.57 
           
Issuance of common stock, net of underwriting costs   0.13    - 
Shares issued pursuant to dividend reinvestment plan   0.00    - 
Offering cost   (0.01)   - 
Net investment income (1)   0.39    0.28 
Net realized gains on investments   0.01    0.00 
Net unrealized appreciation/(depreciation) on investments   (0.01)   (0.03)
Other (2)   0.02    0.00 
Net increase in net assets   0.53    0.25 
           
Distributions declared from net investment income   (0.36)   (0.25)
Distributions declared from net realized capital gains   -    - 
Total distributions to stockholders   (0.36)   (0.25)
           
Net asset value at end of period  $12.69   $12.57 
Net assets at end of period  $363,747,895   $217,711,796 
Shares outstanding at end of period   28,662,049    17,320,468 
           
Per share market value at end of period  $14.56   $10.40 
Total return based on market value (3)   6.32%   5.62%
Total return based on net asset value (4)   4.14%   2.37%
Portfolio turnover rate    3.84%   1.57%

 

The following is a schedule of ratios and supplemental data for the three months ended December 31, 2012 and 2011:

 

    For the three months ended  
    December 31, 2012     December 31, 2011  
Ratios: (5) (6)                
Ratio of net investment income net of management fee waiver to average net assets     14.00 %     8.75 %
Ratio of incentive fees to average net assets     3.50 %     2.20 %
Ratio of total expenses net of management fee waiver to average net assets     11.80 %     6.21 %
                 
Supplemental Data:                
Ratio of operating expenses net of management fee waiver to average net assets     4.92 %     3.50 %
Ratio of credit facility related expenses to average net assets     3.37 %     0.52 %
Average debt outstanding (7)   $ 134,852,174     $ -  
Average debt outstanding per common share   $ 5.44     $ -  
Asset coverage ratio per unit (8)     3,211       7,678  
Average market value per unit (9)                
Facilities     n/a     n/a
Senior notes   $ 26.05       n/a  

 

  (1) Net investment income based on total weighted average common stock outstanding equals $0.39 per share for the three months ended December 31, 2012 and net investment income excluding management fee waiver based on total weighted average common stock outstanding equals $0.27 per share for the three months ended December 31, 2011. MCC Advisors agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through December 31, 2011.
  (2) Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
  (3) Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.
  (4) Total annual return is historical and assumes changes in net assets value, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.
  (5) Ratios are annualized.
  (6) For the three months ended December 31, 2012, excluding the management fee waiver, the ratio of net investment income, operating expenses, incentive fees, credit facility related expenses and total expenses to average net assets is 14.00%, 4.92%, 3.50%, 3.37% and 11.80%, respectively. For the three months ended December 31, 2011, excluding the management fee waiver, the ratio of net investment income, operating expenses, incentive fees, credit facility related expenses and total expenses to average net assets is 8.74%, 3.57%, 2.20% 0.52% and 6.29%, respectively.
  (7) Based on daily weighted average balance of debt outstanding during the period.
  (8) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
  (9) The Facilities are not registered for public trading.

 

F-22
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

 

Note 12. Dividends

 

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by our board of directors.

 

We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend or other distribution, each stockholder that has not “opted out” of our dividend reinvestment plan will have its dividends automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.

 

The following table summarizes the Company’s dividend declarations and distributions during the three months ended December 31, 2012 and 2011:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
           
For the three months ended December 31, 2012          
11/1/2012  11/23/2012  12/14/2012   0.36 
         $0.36 

 

 

Date Declared  Record Date  Payment Date  Amount Per Share 
           
For the three months ended December 31, 2011          
11/29/2011  12/15/2011  12/30/2011   0.25 
         $0.25 

 

Note 13. Subsequent Events

 

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the Consolidated Financial Statements as of and for the three months ended December 31, 2012, except as disclosed below.

  

In January 2013, the Company closed on a $3.3 million investment in the senior secured notes of Interface Security Systems Holdings, Inc. Headquartered in St. Louis, Missouri, Interface Security Systems Holdings, Inc. is a national provider of physical security and secured managed network services to primarily large, commercial multi-site customers and provides the most comprehensive IP technology-enabled managed security solution in the market. The notes have a fixed coupon of 9.25% cash, with principal due at maturity in January 2018.

 

In January 2013, the Company invested an additional $5.6 million in the senior secured notes of Sizzling Platter, LLC. The additional investment has a fixed coupon of 12.25% cash, with principal due at maturity in April 2016.

 

In January 2013, the Company invested an additional $5.0 million in the senior secured notes of U.S. Well Services LLC. The additional investment has a fixed coupon of 14.50% cash, with principal due at maturity in February 2017.

 

On January 23, 2013, the company closed an additional $37.5 million of commitments to its senior secured revolving credit facility and senior secured term loan credit facility. Total commitments to the Facilities are $300 million, comprised of $200 million committed to the Revolving Facility and $100 million committed to the Term Loan Facility. With these additional commitments the Company has exercised the aggregate accordion feature permitting subsequent increases to the Facilities up to an aggregate maximum amount of $300 million.

  

On January 30, 2013, the Company’s board of directors declared a quarterly dividend of $0.36 per share payable on March 15, 2013, to stockholders of record at the close of business on February 27, 2013.

F-23
 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.

 

Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refer to Medley Capital Corporation.

 

Forward-Looking Statements

 

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

 

  · the introduction, withdrawal, success and timing of business initiatives and strategies;

 

  · changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes in the value of our assets;

 

  · the relative and absolute investment performance and operations of MCC Advisors;

 

  · the impact of increased competition;

 

  · the impact of future acquisitions and divestitures;

 

  · our business prospects and the prospects of our portfolio companies;

  

  · the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or MCC Advisors;

 

  · our contractual arrangements and relationships with third parties;

 

  · any future financings by us;

 

  · the ability of MCC Advisors to attract and retain highly talented professionals;

 

  · fluctuations in foreign currency exchange rates;

 

  · the impact of changes to tax legislation and, generally, our tax position; and

 

  · the unfavorable resolution of legal proceedings.

 

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward looking statements contained in this quarterly report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” and elsewhere in this quarterly report on Form 10-Q.

 

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.

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Overview

 

We are an externally-managed, non-diversified closed-end management investment company that filed an election to be regulated as a BDC under the 1940 Act. In addition, we have elected and qualified to be treated for U.S. federal income tax purposes as a RIC under subchapter M of the Code.

 

We commenced operations and completed our initial public offering on January 20, 2011. Our investment activities are managed by MCC Advisors and supervised by our board of directors, of which a majority of the members are independent of us.

 

Our investment objective is to generate current income and capital appreciation by lending directly and indirectly to privately-held middle market companies to help these companies fund acquisitions, growth or refinancing. Our portfolio generally consists of senior secured first lien term loans and senior secured second lien term loans. In many of our investments, we receive warrants or other equity participation features which we believe will increase the total investment returns.

 

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing, with certain limited exceptions. To maintain our RIC status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

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Revenues

 

We generate revenue in the form of interest income on the debt that we hold and capital gains, if any, on warrants or other equity interests that we may acquire in portfolio companies. We invest our assets primarily in privately held companies with enterprise or asset values between $25 million and $250 million and focus on investment sizes of $10 million to $50 million.