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EX-31.1 - EXHIBIT 31.1 - PhenixFIN Corpv366538_ex31-1.htm
EX-32 - EXHIBIT 32 - PhenixFIN Corpv366538_ex32.htm
EX-31.2 - EXHIBIT 31.2 - PhenixFIN Corpv366538_ex31-2.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, 2013

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

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)

 

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, 2014, the Registrant had 46,199,813 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, 2013 (unaudited) and September 30, 2013   F-1
         
    Consolidated Statements of Operations for the three months ended  December 31, 2013 and 2012 (unaudited)   F-2
         
    Consolidated Statements of Changes in Net Assets for the three months ended  December 31, 2013 and 2012 (unaudited)   F-3
         
    Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012 (unaudited)   F-4
         
    Consolidated Schedules of Investments as of  December 31, 2013 (unaudited) and September 30, 2013   F-5
         
    Notes to Consolidated Financial Statements (unaudited)   F-12
         
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   1
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   13
         
Item 4.   Controls and Procedures   13
         
Part II.   Other Information   13
         
Item 1.   Legal Proceedings   13
         
Item 1A.   Risk Factors   14
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   14
         
Item 3.   Defaults Upon Senior Securities   14
         
Item 4.   Mine Safety Disclosures   14
         
Item 5.   Other Information   14
         
Item 6.   Exhibits   14
         
SIGNATURES   15

 

 
 

 

Medley Capital Corporation

 

Consolidated Statements of Assets and Liabilities

 

   As of 
   December 31, 2013   September 30, 2013 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-controlled/non-affiliated investments (amortized cost of $820,250,368 and $748,405,904, respectively)  $809,125,056   $740,097,249 
Affiliated investments (amortized cost of $9,442,829 and $9,283,640, respectively)   9,332,842    9,139,377 
Total investments at fair value   818,457,898    749,236,626 
Cash and cash equivalents   46,141,687    8,557,899 
Interest receivable   9,051,975    9,607,539 
Deferred financing costs, net   8,874,652    8,523,291 
Other assets   293,760    249,388 
Receivable for paydown of investments   2,186,043    - 
Deferred offering costs   355,319    218,681 
Total assets  $885,361,334   $776,393,424 
           
LIABILITIES          
Revolving credit facility payable  $95,900,000   $2,500,000 
Term loan payable   120,000,000    120,000,000 
Notes payable   103,500,000    103,500,000 
SBA debentures payable   44,000,000    30,000,000 
Payable for investments originated and purchased   -    54,013 
Management and incentive fees payable, net   7,922,681    6,899,653 
Accounts payable and accrued expenses   1,630,027    1,305,361 
Administrator expenses payable   671,996    701,208 
Deferred revenue   324,480    255,922 
Interest and fees payable   1,402,455    1,155,524 
Due to affiliate   4,000    82,083 
Offering costs payable   110,000    105,205 
Total liabilities  $375,465,639   $266,558,969 
           
Commitments and contingencies (See note 8)          
           
NET ASSETS          
Common stock, par value $.001 per share, 100,000,000 common shares authorized,
40,199,813 and 40,152,904 common shares issued and outstanding, respectively
  $40,200   $40,153 
Capital in excess of par value   506,686,886    506,062,597 
Accumulated undistributed net investment income   14,358,908    12,184,623 
Accumulated undistributed net realized gain/(loss) from investments   45,000    - 
Net unrealized appreciation/(depreciation) on investments   (11,235,299)   (8,452,918)
Total net assets   509,895,695    509,834,455 
Total liabilities and net assets  $885,361,334   $776,393,424 
           
NET ASSET VALUE PER SHARE  $12.68   $12.70 

 

See accompanying notes to consolidated financial statements.

 

F-1
 

 

Medley Capital Corporation

 

Consolidated Statements of Operations

 

   For the three months 
   ended December 31 
   2013   2012 
   (unaudited)   (unaudited) 
INVESTMENT INCOME          
Interest from investments          
Non-controlled/Non-affiliated investments  $24,689,890   $14,470,967 
Affiliated investments   393,046    368,536 
Total interest income   25,082,936    14,839,503 
Interest from cash and cash equivalents   1,954    1,103 
Other fee income (See note 9)   6,583,348    2,878,876 
Total investment income   31,668,238    17,719,482 
           
EXPENSES          
Base management fees   3,664,966    2,095,956 
Incentive fees   4,257,715    2,404,282 
Interest and financing expenses   4,540,246    2,317,286 
Administrator expenses   671,996    522,044 
Professional fees   614,323    292,113 
Directors fees   151,125    112,536 
Insurance   139,565    67,436 
General and administrative   597,443    290,702 
Total expenses   14,637,379    8,102,355 
NET INVESTMENT INCOME   17,030,859    9,617,127 
           
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:          
Net realized gain/(loss) from investments   45,000    221,920 
Net unrealized appreciation/(depreciation) on investments   (2,782,381)   (226,444)
Net gain/(loss) on investments   (2,737,381)   (4,524)
           
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS  $14,293,478   $9,612,603 
           
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.36   $0.39 
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE  $0.42   $0.39 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED (SEE NOTE 11)   40,162,592    24,767,375 
           
DIVIDENDS DECLARED PER COMMON SHARE  $0.37   $0.36 

 

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 
   2013   2012 
   (unaudited)   (unaudited) 
INCREASE FROM OPERATIONS:          
Net investment income  $17,030,859   $9,617,127 
Net realized gain/(loss) from investments   45,000    221,920 
Net unrealized appreciation/(depreciation) on investments   (2,782,381)   (226,444)
Net increase/(decrease) in net assets from operations   14,293,478    9,612,603 
SHAREHOLDER DISTRIBUTIONS:          
Distributions declared from net investment income   (14,856,574)   (8,319,687)
Net decrease in net assets from shareholder distributions   (14,856,574)   (8,319,687)
CAPITAL SHARE TRANSACTIONS:          
Issuance of common stock, net of underwriting costs (0 and 5,495,263 shares, respectively)   -    72,537,472 
Offering costs   -    (164,090)
Issuance of common stock under dividend reinvestment plan (46,909 and 56,544 shares, respectively)   624,336    742,366 
Net increase in net assets from common share transactions   624,336    73,115,748 
Total increase/(decrease) in net assets   61,240    74,408,664 
Net assets at beginning of period   509,834,455    289,339,231 
Net assets at end of period including accumulated undistributed net investment
income of $14,358,908 and $6,857,075, respectively
  $509,895,695   $363,747,895 
           
Net asset value per common share  $12.68   $12.69 
Common shares outstanding at end of period   40,199,813    28,662,049 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

 

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

   For the three months ended December 31 
   2013   2012 
   (unaudited)   (unaudited) 
Cash flows from operating activities          
NET INCREASE IN NET ASSETS FROM OPERATIONS  $14,293,478   $9,612,603 
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:
          
Investment increases due to paid-in-kind interest   (3,197,006)   (2,157,838)
Net amortization of premium/(discount) on investments   (107,987)   (177,148)
Amortization of deferred financing costs   495,788    266,601 
Net realized (gain)/loss from investments   (45,000)   (221,920)
Net unrealized (appreciation)/depreciation on investments   2,782,381    226,444 
Proceeds from sale and settlements of investments   110,806,727    38,845,811 
Purchases and originations   (179,460,387)   (155,260,446)
(Increase)/decrease in operating assets:          
Interest receivable   555,564    (2,139,102)
Other assets   (44,372)   (309,215)
Receivable for paydown of investments   (2,186,043)   - 
Increase (decrease)/in operating liabilities:          
Payable for investments purchased   (54,013)   (10,212,300)
Accounts payable and accrued expenses   324,666    (148,756)
Management and incentive fees payable, net   1,023,028    985,466 
Administrator expenses payable   (29,212)   56,632 
Interest and fees payable   246,931    (755,711)
Deferred revenue   68,558    (10,463)
Due to affiliate   (78,083)   (12,978)
NET CASH USED BY OPERATING ACTIVITIES   (54,604,982)   (121,412,320)
           
Cash flows from financing activities          
Proceeds from issuance of common stock, net of underwriting costs   624,336    73,279,838 
Offering cost paid   (131,843)   (134,250)
Borrowings on debt   115,100,000    113,200,000 
Paydowns on debt   (7,700,000)   (58,700,000)
Financing cost paid   (847,149)   (1,140,596)
Payments of cash dividends   (14,856,574)   (8,319,687)
NET CASH PROVIDED BY FINANCING ACTIVITIES   92,188,770    118,185,305 
           
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS   37,583,788    (3,227,015)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   8,557,899    4,893,616 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $46,141,687   $1,666,601 
           
Supplemental Information:          
Interest paid during the period  $3,778,184   $2,787,493 
Supplemental non-cash information          
Paid-in-kind interest income  $2,741,715   $2,157,838 
Net amortization of premium/(discount) on investments  $107,987   $177,148 
Amortization of deferred financing costs  $(495,788)  $(266,601)
Issuance of common stock in connection with dividend reinvestment plan  $624,336   $742,366 

 

See accompanying notes to consolidated financial statements.

 

F-4
 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

December 31, 2013

(unaudited)

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost (14)   Fair Value   % of
Net Assets (3)
 
                              
Non-Controlled/ Non-Affiliated Investments:                       
                              
Accupac, Inc.  Containers, Packaging and Glass  Senior Secured Second Lien Term Loan (12.29%)  11/10/2018   10,000,000    10,000,000    10,067,600    2.0%
             10,000,000    10,000,000    10,067,600      
                              
Aderant North America, Inc.  Electronics  Senior Secured Second Lien Term Loan (LIBOR + 8.75% , 1.25% LIBOR Floor)  6/20/2019   4,550,000    4,550,000    4,589,039    0.9%
             4,550,000    4,550,000    4,589,039      
                              
Albertville Quality Foods, Inc. (12)  Beverage, Food and Tobacco  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor, 3.00% LIBOR Cap)  10/31/2018   17,452,830    17,452,830    17,452,830    3.4%
             17,452,830    17,452,830    17,452,830      
                              
Allen Edmonds Corporation  Retail Stores  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)  5/27/2019   20,000,000    20,000,000    20,000,000    3.9%
             20,000,000    20,000,000    20,000,000      
                              
Alora Pharmaceuticals LLC (12)  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)  9/13/2018   13,825,000    13,825,000    13,825,000    2.7%
             13,825,000    13,825,000    13,825,000      
                              
AM3 Pinnacle Corporation  Telecommunications  Senior Secured First Lien Term Loan (10.00%)  10/22/2018   8,000,000    8,000,000    8,000,000    1.6%
             8,000,000    8,000,000    8,000,000      
                              
American Apparel, Inc.(8)  Retail Stores  Senior Secured Note (13.00%)  4/15/2020   13,000,000    12,635,751    11,960,000    2.3%
             13,000,000    12,635,751    11,960,000      
                              
Amerit Fleet Services, Inc.  Business Services  Senior Secured Second Lien Term Loan
(LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)
  12/21/2016   8,821,071    8,821,071    8,806,428    1.7%
             8,821,071    8,821,071    8,806,428      
                              
ARBOC Specialty Vehicles LLC  Automobile  Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)  3/21/2018   24,062,500    24,062,500    24,099,556    4.7%
             24,062,500    24,062,500    24,099,556      
                              
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan
(11.25% Cash, 2.00% PIK)
  3/16/2016   15,888,769    15,888,769    16,047,657    3.1%
             15,888,769    15,888,769    16,047,657      
                              
BayDelta Maritime LLC  Cargo Transport  Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)  6/30/2016   6,669,292    6,581,096    6,698,770    1.3%
      Fee Note (14.88%)(6)  6/30/2016   250,000    176,790    176,790    0.0%
      Warrants to purchase 10% of the outstanding equity  6/30/2016   -    25,000    579,349    0.1%
             6,919,292    6,782,886    7,454,909      
                              
Be Green Manufacturing and Distribution Centers LLC (10)  Containers, Packaging and Glass  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor)  12/13/2018   5,000,000    5,000,000    5,000,000    1.0%
      Senior Secured First Lien Delayed Draw (LIBOR + 10.00%, 1.00% LIBOR Floor)(7)  12/13/2018   -    -    -      
      Revolver (LIBOR + 10.00%, 1.00% LIBOR Floor)(7)  12/13/2018   -    -    -      
      1.74% Partnership Interest in RCAF VI CIV XXIII, L.P.      -    416,250    416,250    0.1%
             5,000,000    5,416,250    5,416,250      
                              
Brantley Transportation LLC (12)  Oil and Gas  Senior Secured First Lien Term Loan (12.00%)  8/2/2017   9,862,500    10,037,489    9,895,539    1.9%
             9,862,500    10,037,489    9,895,539      
                              
California Products Corporation  Chemicals, Plastics and Rubber  Senior Secured Second Lien Term Loan (13.00%)  5/27/2019   13,750,000    13,750,000    13,750,000    2.7%
             13,750,000    13,750,000    13,750,000      
                              
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (17.00% PIK)  9/30/2014   26,452,896    25,545,395    17,175,279    3.4%
      Warrants to purchase 15.00% of the outstanding equity  9/30/2014   -    68,433    -    0.0%
             26,452,896    25,613,828    17,175,279      
                              
Dispensing Dynamics International(8)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Note (12.50%)  1/1/2018   4,800,000    4,718,586    4,850,928    0.9%
             4,800,000    4,718,586    4,850,928      
                              
DLR Restaurants LLC (10) (12) (13)  Restaurant & Franchise  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)  4/18/2018   17,622,755    17,622,755    17,622,755    3.5%
      Unsecured Debt (12.00% Cash, 4.00% PIK)  4/18/2018   257,257    257,257    257,257    0.1%
             17,880,012    17,880,012    17,880,012      

 

F-5
 

 

DreamFinders Homes LLC (10) (13)  Buildings and Real Estate  Senior Secured First Lien Term Loan A (LIBOR + 10.00% Cash)  4/30/2014   12,500,000    12,500,000    12,500,000    2.5%
      Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)  9/13/2018   7,028,942    6,856,835    6,790,166    1.3%
      Warrants to purchase 5% of outstanding equity  9/13/2018    N/A    180,000    540,129    0.1%
             19,528,942    19,536,835    19,830,295      
                              
Exide Technologies (9)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured Note (8.63%)  2/1/2018   11,000,000    9,006,908    7,796,250    1.5%
             11,000,000    9,006,908    7,796,250      
                              
FC Operating LLC  Retail Stores  Senior Secured First Lien Term Loan (LIBOR + 10.75% Cash, 1.25% LIBOR Floor)  11/14/2017   10,637,500    10,637,500    10,615,480    2.1%
             10,637,500    10,637,500    10,615,480      
                              
Geneva Wood Fuels LLC (4)(11)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (4.50% Cash, 10.50% PIK)  12/31/2014   8,199,184    8,143,385    4,090,000    0.8%
             8,199,184    8,143,385    4,090,000      
                              
GSG Fasteners LLC (12)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)  11/18/2018   9,000,000    9,000,000    9,000,000    1.8%
             9,000,000    9,000,000    9,000,000      
                              
Harrison Gypsum LLC (12)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)  12/21/2017   23,638,857    23,638,857    23,712,846    4.7%
             23,638,857    23,638,857    23,712,846      
                              
HD Vest, Inc.  Finance  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.25% LIBOR Floor)  6/18/2019   8,750,000    8,750,000    8,822,975    1.7%
             8,750,000    8,750,000    8,822,975      
                              
Help/Systems LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)  6/28/2020   15,000,000    15,000,000    15,141,600    3.0%
             15,000,000    15,000,000    15,141,600      
                              
HGDS Acquisition LLC  Business Services  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)  3/28/2018   11,827,427    11,827,427    11,804,837    2.3%
             11,827,427    11,827,427    11,804,837      
                              
Hoffmaster Group, Inc.  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan
(LIBOR + 9.50% Cash, 1.50% LIBOR Floor)
  1/3/2019   6,000,000    6,000,000    6,006,660    1.2%
      Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)  1/3/2019   2,000,000    1,983,622    1,946,640    0.4%
             8,000,000    7,983,622    7,953,300      
                              
Ingenio Acquisition LLC  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (12.75%)  5/9/2018   24,843,750    24,843,750    24,947,100    4.9%
             24,843,750    24,843,750    24,947,100      
                              
Insight Pharmaceuticals LLC  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)  8/25/2017   7,724,138    7,724,138    7,754,030    1.5%
             7,724,138    7,724,138    7,754,030      
                              
Integra Telecom  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)  2/22/2020   12,132,000    12,157,355    12,374,640    2.4%
             12,132,000    12,157,355    12,374,640      
                              
Interface Security Systems(8)  Electronics  Senior Secured Note (9.25%)  1/15/2018   3,333,000    3,333,000    3,406,693    0.7%
             3,333,000    3,333,000    3,406,693      
                              
JD Norman Industries, Inc.  Diversified/Conglomerate Manufacturing  Senior Secured Second Lien Term Loan (13.50%)  1/28/2019   12,500,000    12,500,000    12,592,750    2.5%
             12,500,000    12,500,000    12,592,750      
                              
Lexmark Carpet Mills, Inc.  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor, 2.50% LIBOR Cap)  9/30/2018   31,000,000    31,000,000    31,000,000    6.1%
             31,000,000    31,000,000    31,000,000      
                              
Linc Energy Finance (USA), Inc.(8)  Oil and Gas  Senior Secured Note (12.50%)  10/31/2017   3,500,000    3,397,196    3,821,475    0.7%
             3,500,000    3,397,196    3,821,475      
                              
Lucky Strike Entertainment LLC  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured Second Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 2.00% PIK)  12/24/2018   11,500,000    11,500,000    11,500,000    2.3%
             11,500,000    11,500,000    11,500,000      
                              
Lydell Jewelry Design Studio LLC (10) (12)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (LIBOR + 10.50%, 1.50% LIBOR Floor)  9/13/2018   13,072,000    13,072,000    13,072,000    2.6%
      Warrants to purchase 13.3% of the outstanding membership units  9/13/2018   -    -    246,784    0.0%
             13,072,000    13,072,000    13,318,784      
                              
Marine Accessories Corporation  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 1.00% PIK)  11/26/2018   10,001,389    10,001,389    10,001,389    2.0%
             10,001,389    10,001,389    10,001,389      
                              
Meridian Behavioral Health LLC  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan A (LIBOR + 11.50%, 2.50% LIBOR Floor)  11/14/2016   10,289,141    9,926,128    10,312,291    2.0%
      Senior Secured First Lien Term Loan B (LIBOR + 11.50%, 2.50% LIBOR Floor)  11/14/2016   850,000    850,000    850,000    0.2%
      Warrants to purchase 8% of the outstanding equity  11/14/2016   -    536,296    1,111,349    0.2%
             11,139,141    11,312,424    12,273,640      

 

F-6
 

 

Modern VideoFilm, Inc.  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor, 3.00% PIK)  9/25/2017   12,282,285    11,983,901    10,501,354    2.1%
      Warrants to purchase 4.5%
of the outstanding equity
  9/25/2017   -    339,573    -    0.0%
             12,282,285    12,323,474    10,501,354      
                              
NCM Demolition and Remediation LP  Buildings and Real Estate  Senior Secured First Lien Term Loan (LIBOR + 11.50%, 1.00% LIBOR Floor)  8/29/2018   19,291,000    19,291,000    19,291,000    3.8%
             19,291,000    19,291,000    19,291,000      
                              
Physicians Care Alliance LLC (10)(12)(13)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)  12/28/2017   15,894,578    15,894,578    15,855,318    3.1%
      Revolving Credit Facility (10.50%)(7)  12/28/2017   -    -    (1,896)     
             15,894,578    15,894,578    15,853,422      
                              
Prestige Industries LLC  Business Services  Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)  1/31/2017   6,076,141    5,968,071    5,612,471    1.1%
      Warrants to purchase 0.63% of the outstanding common units  1/31/2017   -    151,855    -    0.0%
             6,076,141    6,119,926    5,612,471      
                              
Prince Mineral Holding Corp.(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (11.50%)  12/15/2019   6,800,000    6,728,471    7,426,552    1.5%
             6,800,000    6,728,471    7,426,552      
                              
RCS Management Corporation & Specialized Medical Services, Inc.  Diversified/Conglomerate Service  Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)  9/23/2015   25,507,289    25,507,289    25,544,785    5.0%
             25,507,289    25,507,289    25,544,785      
                              
Red Skye Wireless LLC (10)(13)  Retail Stores  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)  6/27/2017   14,405,433    14,405,433    14,469,537    2.8%
             14,405,433    14,405,433    14,469,537      
                              
Reddy Ice Corporation  Beverage, Food and Tobacco  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)  10/1/2019   17,000,000    17,000,000    16,510,910    3.2%
             17,000,000    17,000,000    16,510,910      
                              
Revstone Aero LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 15.50% Cash, 3.00% PIK)  11/1/2013   13,305,392    13,161,557    13,305,392    2.6%
      Fee Note  11/1/2013   500,000    285,444    500,000    0.1%
             13,805,392    13,447,001    13,805,392      
                              
SESAC HOLDCO II  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.75%, 1.25% LIBOR Floor)  7/12/2019   3,500,000    3,494,965    3,578,610    0.7%
             3,500,000    3,494,965    3,578,610      
                              
Sizzling Platter, LLC(8)  Restaurant & Franchise  Senior Secured Note (12.25% )  4/15/2016   10,867,000    11,039,803    11,581,288    2.3%
             10,867,000    11,039,803    11,581,288      
                              
Taylored Freight Services LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)  11/1/2017   14,310,353    14,310,353    14,045,897    2.7%
             14,310,353    14,310,353    14,045,897      
                              
Tempel Steel Company(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (12.00%)  8/15/2016   12,000,000    11,840,599    11,687,040    2.3%
             12,000,000    11,840,599    11,687,040      
                              
Tenere Acquisition Corp.(10)(13)  Diversified/Conglomerate Manufacturing  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  12/15/2017   10,965,187    10,965,187    11,236,938    2.2%
             10,965,187    10,965,187    11,236,938      
                              
The Great Atlantic & Pacific Tea Company, Inc.  Grocery  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 2.00% LIBOR Floor)  3/13/2017   7,852,350    7,852,350    8,016,857    1.6%
             7,852,350    7,852,350    8,016,857      
                              
Transtelco Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor)  11/19/2017   19,200,000    19,200,000    19,200,000    3.8%
             19,200,000    19,200,000    19,200,000      
                              
Travelclick, Inc.  Hotels, Motels, Inns and Gaming  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)  3/26/2018   15,000,000    15,000,000    15,263,700    3.0%
             15,000,000    15,000,000    15,263,700      
                              
U.S. Well Services LLC (9)  Oil and Gas  Senior Secured Note (14.50%)  2/15/2017   23,558,808    23,419,001    23,654,457    4.6%
      Warrants to purchase 3.48% of the outstanding common membership interests  2/15/2017   -    11,370    625,696    0.1%
             23,558,808    23,430,371    24,280,153      
                              
UELS LLC  Oil and Gas  Senior Secured Second Lien Term Loan (LIBOR + 10.50% Cash, 1.50% LIBOR Floor)  12/5/2018   20,430,000    20,430,000    20,430,000    4.0%
             20,430,000    20,430,000    20,430,000      
                              
United Road Towing Inc. (12)  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan
(10.00% Cash, 5.00% PIK)
  6/30/2014   21,282,858    20,907,646    20,432,821    4.0%
             21,282,858    20,907,646    20,432,821      
                              
Velum Global Credit Management LLC  Finance  Senior Secured First Lien Term Loan (15.00%)  3/31/2014   8,300,000    8,315,928    8,300,000    1.6%
             8,300,000    8,315,928    8,300,000      

 

F-7
 

 

Water Capital USA, Inc.  Finance  Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)  1/3/2015   26,043,797    26,043,797    26,043,797    5.1%
             26,043,797    26,043,797    26,043,797      
                              
Wheels Up Partners LLC (10) (12)  Aerospace & Defense  Senior Secured First Lien Delayed Draw (LIBOR + 8.55% Cash, 1.00% LIBOR Floor)  7/15/2020   8,118,000    8,118,000    8,118,000    1.6%
             8,118,000    8,118,000    8,118,000      
                              
YRCW Receivables LLC  Cargo Transport  Senior Secured Second Lien Term Loan (LIBOR + 10.25% Cash, 1.50% LIBOR Floor)  9/30/2014   4,835,681    4,783,439    4,865,421    1.0%
             4,835,681    4,783,439    4,865,421      
                              
Subtotal Non-Controlled / Non-Affiliated Investments     $823,918,350   $820,250,368   $809,125,056      
                              
Affiliated Investments:                             
Cymax Stores, Inc.(9)  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)  8/1/2015   9,120,934    8,764,675    8,659,688    1.7%
      190 Class B Common Units (5)      -    678,154    673,154    0.1%
                              
Subtotal Affiliated Investments           $9,120,934   $9,442,829   $9,332,842      
                              
Total Investments, December 31, 2013           $833,039,284   $829,693,197   $818,457,898    160.5%

 

 

 

(1)All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada and denominated in USD.
(2)Par amount includes accumulated PIK interest and is net of repayments.
(3)Percentage is based on net assets of $509,895,695 as of December 31, 2013.
(4)Investment is held via participation agreements with affiliated entities (See note 7).
(5)190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.
(6)Fee note is a zero coupon note, due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.
(7)The entire commitment was unfunded at December 31, 2013. As such, no interest is being earned on this investment.
(8)Securities were issued in a transaction exempt from registration under Rule 144A under the Securities Act of 1933. These securities represent a fair value of $54.7 million and 10.7% of net assets as of December 31, 2013 and are considered restricted.
(9)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.
(10)The investment has an unfunded commitment as of December 31, 2013 (See note 8).
(11)The investment was on non-accrual status as of December 31, 2013.
(12)A portion of this investment was sold via a participation agreement (See note 3).
(13)Includes an analysis of the value of any unfunded loan commitments.
(14)Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $20.3 million, $17.3 million and $3.0 million, respectively. The tax cost of investments is $815.4 million.

 

See accompanying notes to consolidated financial statements.

 

F-8
 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

September 30, 2013

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost (14)   Fair Value   % of
Net Assets (3)
 
                          
Non-Controlled/ Non-Affiliated Investments:                          
                              
Accupac, Inc.  Containers, Packaging and Glass  Senior Secured Second Lien Term Loan (12.29%)  11/10/2018   12,000,000    12,000,000    12,000,000    2.4%
             12,000,000    12,000,000    12,000,000      
                              
Aderant North America, Inc.  Electronics  Senior Secured Second Lien Term Loan (LIBOR + 8.75% , 1.25% LIBOR Floor)  6/20/2019   4,550,000    4,550,000    4,550,000    0.9%
             4,550,000    4,550,000    4,550,000      
                              
Alora Pharmaceuticals LLC(13)  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)  9/13/2018   14,000,000    14,000,000    14,000,000    2.7%
             14,000,000    14,000,000    14,000,000      
                              
American Apparel, Inc.(8)  Retail Stores  Senior Secured Note (13.00%)  4/15/2020   13,000,000    12,626,748    13,259,927    2.6%
             13,000,000    12,626,748    13,259,927      
                              
American Gaming Systems LLC(13)  Hotels, Motels, Inns and Gaming  Senior Secured First Lien Term Loan (LIBOR + 10.00% , 1.50% LIBOR Floor)  8/15/2016   10,750,000    10,750,000    10,848,660    2.1%
             10,750,000    10,750,000    10,848,660      
                              
Amerit Fleet Services, Inc. (12)  Business Services  Senior Secured Second Lien Term Loan
(LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)
  12/21/2016   8,906,159    8,906,159    8,870,534    1.7%
             8,906,159    8,906,159    8,870,534      
                              
ARBOC Specialty Vehicles LLC  Automobile  Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)  3/21/2018   24,687,500    24,687,500    24,647,996    4.8%
             24,687,500    24,687,500    24,647,996      
                              
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan
(11.25% Cash, 2.00% PIK)
  3/16/2014   15,807,836    15,807,836    15,863,600    3.1%
             15,807,836    15,807,836    15,863,600      
                              
BayDelta Maritime LLC  Cargo Transport  Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)  6/30/2016   6,669,292    6,573,846    6,680,885    1.3%
      Fee Note (14.88%)(6)  6/30/2016   250,000    170,717    170,717    0.0%
      Warrants to purchase 10% of the outstanding equity  6/30/2016   -    25,000    594,346    0.1%
             6,919,292    6,769,563    7,445,948      
                              
Brantley Transportation LLC(13)  Oil and Gas  Senior Secured First Lien Term Loan (12.00%)  8/2/2017   10,162,500    10,346,975    10,162,500    2.0%
             10,162,500    10,346,975    10,162,500      
                              
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (12.00% PIK)  9/30/2014   24,869,263    24,388,179    19,666,360    3.9%
      Warrants to purchase 15.00% of the outstanding equity  9/30/2014   -    68,433    -    0.0%
             24,869,263    24,456,612    19,666,360      
                              
Caregiver Services, Inc.  Healthcare, Education and Childcare  Senior Secured Second Lien Term Loan (12.45% Cash, 2.00% PIK)  12/29/2017   15,361,486    15,361,486    15,361,486    3.0%
             15,361,486    15,361,486    15,361,486      
                              
Cenegenics LLC(13)  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (10.00% Cash, 2.25% PIK)  12/20/2017   19,414,099    19,414,099    19,899,452    3.9%
             19,414,099    19,414,099    19,899,452      
                              
Dispensing Dynamics International(8)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Note (12.50%)  1/1/2018   4,800,000    4,714,770    4,825,840    0.9%
             4,800,000    4,714,770    4,825,840      
                              
DLR Restaurants LLC (10) (13)  Restaurant & Franchise  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)  4/18/2018   9,683,644    9,683,644    9,683,644    1.9%
      Unsecured Debt (12.00% Cash, 4.00% PIK)  4/18/2018   254,645    254,645    254,645    0.0%
             9,938,289    9,938,289    9,938,289      
                              
DreamFinders Homes LLC (10)  Buildings and Real Estate  Senior Secured First Lien Term Loan A (LIBOR + 10.00% Cash)  4/30/2014   10,000,000    10,000,000    10,000,000    2.0%
      Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)  9/13/2018   7,277,199    7,098,472    7,098,472    1.4%
      Warrants to purchase 5% of outstanding equity  9/13/2018   -    180,000    180,000    0.0%
             17,277,199    17,278,472    17,278,472      
                              
Exide Technologies (9)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured Note (8.63%)  2/1/2018   11,000,000    9,006,908    8,002,435    1.6%
             11,000,000    9,006,908    8,002,435      
                              
FC Operating LLC  Retail Stores  Senior Secured First Lien Term Loan (LIBOR + 10.75% Cash, 1.25% LIBOR Floor)  11/14/2017   10,925,000    10,925,000    10,860,657    2.1%
             10,925,000    10,925,000    10,860,657      
                              
Geneva Wood Fuels LLC (4) (11)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (4.50% Cash, 10.50% PIK)  12/31/2014   8,199,184    8,143,385    4,090,000    0.8%
             8,199,184    8,143,385    4,090,000      
                              
Harrison Gypsum LLC(13)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)  12/21/2017   23,885,299    23,885,299    23,885,299    4.7%
             23,885,299    23,885,299    23,885,299      

 

F-9
 

 

HD Vest, Inc.  Finance  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.25% LIBOR Floor)  6/18/2019   8,750,000    8,750,000    8,750,000    1.7%
             8,750,000    8,750,000    8,750,000      
                              
Help/Systems LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)  6/28/2020   15,000,000    15,000,000    15,000,000    3.0%
             15,000,000    15,000,000    15,000,000      
                              
HGDS Acquisition LLC  Business Services  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)  3/28/2018   13,066,264    13,066,264    13,000,932    2.6%
             13,066,264    13,066,264    13,000,932      
                              
Hoffmaster Group, Inc.  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan
(LIBOR + 9.50% Cash, 1.50% LIBOR Floor)
  1/3/2019   6,000,000    6,000,000    5,951,856    1.2%
      Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)  1/3/2019   2,000,000    1,983,005    1,926,637    0.4%
             8,000,000    7,983,005    7,878,493      
                              
Ingenio Acquisition LLC  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (12.75%)  5/9/2018   25,000,000    25,000,000    25,000,000    4.9%
             25,000,000    25,000,000    25,000,000      
                              
Insight Pharmaceuticals LLC  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)  8/25/2017   7,724,138    7,724,138    7,748,867    1.5%
             7,724,138    7,724,138    7,748,867      
                              
Integra Telecom  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)  2/22/2020   12,132,000    12,158,115    12,329,145    2.4%
             12,132,000    12,158,115    12,329,145      
                              
Interface Security Systems (8)  Electronics  Senior Secured Note (9.25%)  1/15/2018   3,333,000    3,333,000    3,427,030    0.7%
             3,333,000    3,333,000    3,427,030      
                              
JD Norman Industries, Inc.  Diversified/Conglomerate Manufacturing  Senior Secured Second Lien Term Loan (13.50%)  1/28/2019   12,500,000    12,500,000    12,500,000    2.5%
             12,500,000    12,500,000    12,500,000      
                              
Lexmark Carpet Mills, Inc.  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor, 2.50% LIBOR Cap)  9/30/2018   31,000,000    31,000,000    31,000,000    6.1%
             31,000,000    31,000,000    31,000,000      
                              
Linc Energy Finance (USA), Inc.(8)  Oil and Gas  Senior Secured Note (12.50%)  10/31/2017   3,500,000    3,392,153    3,823,750    0.7%
             3,500,000    3,392,153    3,823,750      
                              
Lydell Jewelry Design Studio LLC (10)(13)  Personal and Nondurable Consumer Products (Manufacturing Only)  Senior Secured First Lien Term Loan (LIBOR + 10.50%, 1.50% LIBOR Floor)  9/13/2018   13,072,000    13,072,000    13,072,000    2.6%
      Revolver (LIBOR + 10.50%, 1.50% LIBOR Floor)  9/13/2018   2,250,000    2,250,000    2,250,000    0.4%
      Warrants to purchase 13.3% of the outstanding membership units  9/13/2018   -    -    -    0.0%
             15,322,000    15,322,000    15,322,000      
                              
Meridian Behavioral Health LLC  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan A (LIBOR + 11.50% , 2.50% LIBOR Floor)  11/14/2016   10,289,141    9,902,304    10,289,141    2.0%
      Senior Secured First Lien Term Loan B (LIBOR + 11.50% , 2.50% LIBOR Floor)  11/14/2016   3,750,000    3,750,000    3,750,000    0.7%
      Warrants to purchase 8% of the outstanding equity  11/14/2016   -    536,296    1,071,347    0.2%
             14,039,141    14,188,600    15,110,488      
                              
Modern VideoFilm, Inc.  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 3.00% PIK, 1.50% LIBOR Floor)  9/25/2017   11,868,109    11,583,071    9,791,187    1.9%
      Warrants to purchase 4.5% of the outstanding equity  9/25/2017   -    339,573    -    0.0%
             11,868,109    11,922,644    9,791,187      
                              
NCM Demolition and Remediation LP  Buildings and Real Estate  Senior Secured First Lien Term Loan (LIBOR + 11.50%, 1.00% LIBOR Floor)  8/29/2018   19,291,000    19,291,000    19,291,000    3.8%
             19,291,000    19,291,000    19,291,000      
                              
Physicians Care Alliance LLC (10) (13)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)  12/28/2017   15,854,027    15,854,027    15,900,559    3.1%
      Revolving Credit Facility (10.50%)(7)  12/28/2017   -    -    -    0.0%
             15,854,027    15,854,027    15,900,559      
                              
Prestige Industries LLC  Business Services  Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)  1/31/2017   6,029,795    5,914,778    5,506,459    1.1%
      Warrants to purchase 0.63% of the outstanding common units  1/31/2017   -    151,855    -    0.0%
             6,029,795    6,066,633    5,506,459      
                              
Prince Mineral Holdings Corp.(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (11.50%)  12/15/2019   6,800,000    6,726,424    7,242,000    1.4%
             6,800,000    6,726,424    7,242,000      
                              
RCS Management Corporation & Specialized Medical Services, Inc.  Diversified/Conglomerate Service  Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 0.50% PIK, 1.50% LIBOR Floor)  9/23/2015   25,474,725    25,474,725    25,336,272    5.0%
             25,474,725    25,474,725    25,336,272      
                              
Red Skye Wireless LLC (10)  Retail Stores  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)  6/27/2017   15,080,145    15,080,145    15,075,802    3.0%
             15,080,145    15,080,145    15,075,802      
                              
Reddy Ice Corporation  Beverage, Food and Tobacco  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)  10/1/2019   17,000,000    17,000,000    16,863,027    3.3%
             17,000,000    17,000,000    16,863,027      
                              
Revstone Aero LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 15.50% Cash, 3.00% PIK)  11/1/2013   13,203,903    13,051,823    13,203,780    2.6%
      Fee Note  11/1/2013   500,000    274,147    500,000    0.1%
             13,703,903    13,325,970    13,703,780      

 

F-10
 

 

SESAC HOLDCO II  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.75%, 1.25% LIBOR Floor)  7/12/2019   3,500,000    3,494,828    3,561,527    0.7%
             3,500,000    3,494,828    3,561,527      
                              
Sizzling Platter LLC(8)  Restaurant & Franchise  Senior Secured Note (12.25% )  4/15/2016   10,867,000    11,066,638    11,500,444    2.3%
             10,867,000    11,066,638    11,500,444      
                              
Taylored Freight Services LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)  11/1/2017   14,239,039    14,239,039    13,992,136    2.8%
             14,239,039    14,239,039    13,992,136      
                              
Tempel Steel Company(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (12.00%)  8/15/2016   12,000,000    11,828,051    11,616,000    2.3%
             12,000,000    11,828,051    11,616,000      
                              
Tenere Acquisition Corp.(10)  Diversified/Conglomerate Manufacturing  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  12/15/2017   10,909,333    10,909,333    11,107,612    2.2%
             10,909,333    10,909,333    11,107,612      
                              
The Great Atlantic & Pacific Tea Company, Inc.  Grocery  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 2.00% LIBOR Floor)  3/13/2017   7,874,921    7,874,921    7,968,817    1.6%
             7,874,921    7,874,921    7,968,817      
                              
Travelclick, Inc.  Hotels, Motels, Inns and Gaming  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)  3/26/2018   15,000,000    15,000,000    15,169,312    3.0%
             15,000,000    15,000,000    15,169,312      
                              
U.S. Well Services LLC (9)  Oil and Gas  Senior Secured Note (14.50%)  2/15/2017   21,558,808    21,430,696    21,564,270    4.2%
      Warrants to purchase 3.48% of the outstanding common membership interests  2/15/2017   -    11,370    436,137    0.1%
             21,558,808    21,442,066    22,000,407      
                              
United Restaurant Group L.P.  Restaurant & Franchise  Senior Secured Second Lien Term Loan (LIBOR + 11.50% Cash, 3.50% PIK)  12/31/2016   10,832,789    10,832,789    10,809,818    2.1%
             10,832,789    10,832,789    10,809,818      
                              
United Road Towing Inc. (13)  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan
(10.00% Cash, 5.00% PIK)
  6/30/2014   21,016,117    20,653,191    19,937,991    3.9%
             21,016,117    20,653,191    19,937,991      
                              
Velum Global Credit Management LLC  Finance  Senior Secured First Lien Term Loan (15.00%)  3/31/2014   8,300,000    8,331,636    8,290,332    1.6%
             8,300,000    8,331,636    8,290,332      
                              
Water Capital USA, Inc.  Finance  Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)  1/3/2015   25,141,230    25,141,230    25,141,230    4.9%
             25,141,230    25,141,230    25,141,230      
                              
Westport Axle Corp.(13)  Automobile  Senior Secured First Lien Term Loan (11.50% Cash, 1.50% PIK)  11/17/2018   19,084,847    19,084,847    19,084,847    3.7%
             19,084,847    19,084,847    19,084,847      
                              
YRCW Receivables LLC  Cargo Transport  Senior Secured Second Lien Term Loan (LIBOR + 9.75% Cash, 1.50% LIBOR Floor)  9/30/2014   4,848,049    4,779,391    4,858,530    1.0%
             4,848,049    4,779,391    4,858,530      
                              
Subtotal Non-Controlled / Non-Affiliated Investments         $752,093,486   $748,405,904   $740,097,249      
                              
Affiliated Investments:                             
Cymax Stores, Inc.(9)  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)  8/1/2015   9,006,620    8,605,486    8,466,223    1.7%
      190 Class B Common Units (5)      -    678,154    673,154    0.1%
                              
Subtotal Affiliated Investments           $9,006,620   $9,283,640   $9,139,377      
                              
Total Investments, September 30, 2013           $761,100,106   $757,689,544   $749,236,626    147.0%

 

 

(1)All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada and denominated in USD.
(2)Par amount includes accumulated PIK interest and is net of repayments.
(3)Percentage is based on net assets of $509,834,455 as of September 30, 2013.
(4)Investment is held via participation agreements with affiliated entities (See note 7).
(5)190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.
(6)Fee note is a zero coupon note, due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.
(7)The entire commitment was unfunded at September 30, 2013. As such, no interest is being earned on this investment.
(8)Securities were issued in a transaction exempt from registration under Rule 144A under the Securities Act of 1933. These securities represent a fair value of $55.7 million and 10.9% of net assets as of September 30, 2013 and are considered restricted.
(9)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.
(10)The investment has an unfunded commitment as of September 30, 2013 (See note 8).
(11)The investment was on PIK non-accrual status as of September 30, 2013.
(12)Investment changed its name from Kelley Amerit Holdings, Inc. during FY 2013.
(13)A portion of this investment was sold via a participation agreement (See note 3).
(14) Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $17.1 million, $13.1 million and $4.0 million, respectively. The tax cost of investments is $745.3 million.

 

See accompanying notes to consolidated financial statements.

 

F-11
 

 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

December 31, 2013

 

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 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’ option to purchase additional shares. 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. On February 23, 2012, MOF LTD and MOF LP collectively sold 4,406,301 shares of common stock in an underwritten public offering.  See Note 7 for further information.

 

On March 26, 2013, our wholly-owned subsidiary, Medley SBIC LP (“SBIC LP”), a Delaware limited partnership, received a license from Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958.

 

On August 27, 2013 we formed a wholly-owned subsidiary, MCC Investment Holdings LLC, a Delaware limited liability company, which holds certain of our portfolio equity investments. The subsidiary is consolidated with the Company for accounting purposes and the portfolio investments held by the subsidiary are included in the Company’s consolidated financial statements. All significant intercompany balances and transactions have been eliminated.

 

The Company’s investment objective is to generate current income and capital appreciation by lending directly to privately-held middle market companies to help these companies fund acquisitions, growth or refinancing. The portfolio generally consists 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.

 

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, MCC Investment Holdings LLC and SBIC LP. 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 may be 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, 2013, which was filed with the U.S. Securities and Exchange Commission on December 10, 2013. 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, 2014.

 

F-12
 

 

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.

 

Offerings

 

On December 3, 2012, we completed a public offering of 5,000,000 shares of our common stock at a public offering price of $13.75 per share, raising approximately $66.0 million in net proceeds. On December 19, 2012, we sold an additional 495,263 shares of our common stock at a public offering price of $13.75 per share, raising approximately $6.5 million in net proceeds, pursuant to the underwriters’ partial exercise of the over-allotment option.

 

On April 12, 2013, we completed a public offering of 4,000,000 shares of our common stock and an additional 492,271 shares of our common stock pursuant to the underwriters’ partial exercise of the over-allotment option at a public offering price of $14.70 per share, raising approximately $63.4 million in net proceeds.

 

On September 9, 2013, we completed a public offering of 6,000,000 shares of our common stock and an additional 900,000 shares of our common stock pursuant to the underwriters’ partial exercise of the over-allotment option at a public offering price of $13.00 per share, raising approximately $86.6 million in net proceeds.

 

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, unsecured notes and SBA debentures are deferred and amortized over the life of the respective facility or instrument.

 

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.

 

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to such fees. Other fee income for the three months ended December 31, 2013 and 2012 was approximately $6.6 million and $2.9 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.

 

Administrative agent fees received by the Company are capitalized as deferred revenue and recorded as income when the services are rendered.

 

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, 2013 and 2012, the Company earned approximately $2.7 million and $2.2 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.

 

F-13
 

 

Management reviews all loans that become 90 days or more past due on principal or 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. At December 31, 2013, one portfolio company was on non-accrual status with a fair value of approximately $4.1 million, or 0.5% of the fair value of our portfolio.

 

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.

 

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 market data 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 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 prepares an independent valuation report for approximately one third of the portfolio investments 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.

 

F-14
 

 

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

 

  Management reviews preliminary valuations and their own independent assessment;

 

  The audit committee of our board of directors reviews the preliminary valuations of 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 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.

 

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 2013 accrued at December 31, 2013 and September 30, 2013.

 

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, 2013 or September 30, 2013. 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-15
 

 

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, 2013 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  $450,478    54.3%  $437,669    53.5%
Senior Secured Second Lien Term Loans   290,432    35.0    290,154    35.4 
Senior Secured Notes   86,119    10.4    86,185    10.5 
Unsecured Debt   257    0.1    257    0.1 
Equity/Warrants   2,407    0.2    4,193    0.5 
Total  $829,693    100.0%  $818,458    100.0%

 

The composition of our investments as of September 30, 2013 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  $418,109    55.2%  $408,802    54.5%
Senior Secured Second Lien Term Loans   253,210    33.4    251,963    33.6 
Senior Secured Notes   84,125    11.1    85,262    11.4 
Unsecured Debt   255    0.1    255    0.1 
Equity/Warrants   1,991    0.2    2,955    0.4 
Total  $757,690    100.0%  $749,237    100.0%

 

F-16
 

 

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2013 (dollars in thousands):

 

   Investments at     
   Fair Value   Percentage 
Personal and Nondurable Consumer Products (Manufacturing Only)  $65,068   8.0%
Business Services   58,990    7.2 
Oil and Gas   58,427    7.1 
Retail Stores   57,045    7.0 
Personal, Food and Miscellaneous Services   53,134    6.5 
Healthcare, Education and Childcare   43,274    5.3 
Finance   43,167    5.3 
Mining, Steel, Iron and Nonprecious Metals   42,826    5.2 
Home and Office Furnishings, Housewares, and Durable Consumer Products   40,333    4.9 
Telecommunications   39,575    4.8 
Buildings and Real Estate   39,121    4.8 
Aerospace & Defense   37,971    4.6 
Beverage, Food, and Tobacco   33,964    4.1 
Restaurant & Franchise   29,461    3.6 
Diversified/Conglomerate Service   25,545    3.1 
Automobile   24,099    2.9 
Diversified/Conglomerate Manufacturing   23,830    2.9 
Leisure, Amusement, Motion Pictures, Entertainment   22,001    2.7 
Containers, Packaging and Glass   15,484    1.9 
Hotels, Motels, Inns and Gaming   15,264    1.9 
Chemicals,  Plastics and Rubber   13,750    1.7 
Cargo Transport   12,320    1.5 
Grocery   8,017    1.0 
Electronics   7,996    1.0 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   7,796    1.0 
Total  $818,458    100.0%

 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2013 (dollars in thousands):

 

   Investments at     
   Fair Value   Percentage 
Personal, Food and Miscellaneous Services  $72,586   9.7%
Healthcare, Education and Childcare   64,138    8.6 
Business Services   59,932    8.0 
Personal and Nondurable Consumer Products (Manufacturing Only)   48,017    6.4 
Automobile   43,733    5.8 
Mining, Steel, Iron and Nonprecious Metals   42,743    5.7 
Finance   42,182    5.6 
Home and Office Furnishings, Housewares, and Durable Consumer Products   40,139    5.4 
Retail Stores   39,196    5.2 
Buildings and Real Estate   36,570    4.9 
Oil and Gas   35,987    4.8 
Restaurant & Franchise   32,249    4.3 
Aerospace & Defense   29,567    3.9 
Hotels, Motels, Inns and Gaming   26,018    3.5 
Diversified/Conglomerate Service   25,336    3.4 
Diversified/Conglomerate Manufacturing   23,608    3.2 
Beverage, Food and Tobacco   16,863    2.2 
Telecommunications   12,329    1.6 
Cargo Transport   12,305    1.6 
Containers, Packaging and Glass   12,000    1.6 
Leisure, Amusement, Motion Pictures, Entertainment   9,791    1.3 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   8,002    1.1 
Electronics   7,977    1.1 
Grocery   7,969    1.1 
Total  $749,237    100.0%

 

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, 2013 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Midwest  $236,230    28.9%
West   189,204    23.1 
Southeast   134,953    16.5 
Southwest   122,097    14.9 
Northeast   79,142    9.7 
Mid-Atlantic   47,499    5.8 
International   9,333    1.1 
Total  $818,458    100.0%

 

F-17
 

 

The following table shows the portfolio composition by geographic location at fair value at September 30, 2013 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Midwest  $231,437    30.9%
West   182,195    24.3 
Southeast   103,692    13.9 
Southwest   101,386    13.5 
Northeast   61,490    8.2 
Mid-Atlantic   59,898    8.0 
International   9,139    1.2 
Total  $749,237    100.0%

 

Transactions With Affiliated Companies

 

During the three months ended December 31, 2013 and 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, 2013
   Purchases (Sales)
of/Advances
(Distributions) to
Affiliates
   Transfers
In/(Out) of
Affiliates
   Income
Earned
   Fair Value at
December 31,
2013
   Capital Loss 
Non-Controlled Affiliates                              
Cymax Stores, Inc.  $9,139,377   $-   $-   $393,046   $9,332,842   $- 
Total Non-Controlled Affiliates  $9,139,377   $-   $-   $393,046   $9,332,842   $- 

  

Name of Investment  Fair Value at
September 30, 2012
   Purchases (Sales)
of/Advances
(Distributions) to
Affiliates
   Transfers
In/(Out) of
Affiliates
   Income
Earned
   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   $- 

 

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, 2013 and 2012, 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, 2013 and 2012, respectively.

 

Loan Participation Sales

 

Since inception, the Company has sold portions of thirteen investments via participation agreements to a managed account, managed by an affiliate and non-affiliate of the Company in an aggregate amount of approximately $75.3 million. At December 31, 2013, the aggregate fair value of the loans sold on participation was $149.2 million. Such investments where the Company has retained a proportionate interest are included in the consolidated schedule of investments. All of these investments are classified within Level 3 of the fair value hierarchy, as defined in Note 4.

 

During the three months ended December 31, 2013 and 2012, the Company made interest and (principal) payments to the sub-participant in the aggregate amount of $22.5 million and $0.4 million. Under the terms of the participation agreements, the Company will make periodic payments to the sub-participant equal to the sub-participant's proportionate share of any principal and interest payments received by the Company from the underlying investee companies.

 

F-18
 

 

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 are 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, 2013 (dollars in thousands): 

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $-   $-   $437,669   $437,669 
Senior Secured Second Lien Term Loans   -    -    290,154    290,154 
Senior Secured Notes   -    7,797    78,388    86,185 
Unsecured Debt   -    -    257    257 
Equity/Warrants   -    -    4,193    4,193 
Total  $-   $7,797   $810,661   $818,458 
                     

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2013 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $-   $-   $408,802   $408,802 
Senior Secured Second Lien Term Loans   -    -    251,963    251,963 
Senior Secured Notes   -    8,003    77,259    85,262 
Unsecured Debt   -    -    255    255 
Equity/Warrants   -    -    2,955    2,955 
Total  $-   $8,003   $741,234   $749,237 

 

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, 2013 (dollars in thousands):

 

   Senior   Senior                 
   Secured   Secured                 
   First   Second   Senior             
   Lien Term   Lien Term   Secured   Unsecured   Equities/     
   Loans   Loans   Notes   Debt   Warrants   Total 
Balance as of September 30, 2013  $408,802   $251,963   $77,259   $255   $2,955   $741,234 
Purchases and other adjustments to cost   21,704    785    4,934    2    -    27,425 
Originations   70,426    65,680    -    -    417    136,523 
Sales   -    -    (2,985)   -    -    (2,985)
Settlements   (59,761)   (29,242)   -    -    -    (89,003)
Net realized gains (losses) from investments   -    -    45    -    -    45 
Net unrealized gains (losses)   (3,502)   968    (865)   -    821    (2,578)
Balance as of December 31, 2013  $437,669   $290,154   $78,388   $257   $4,193   $810,661 

 

F-19
 

 

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 Term
Loans
   Senior
Secured 
Second
Lien Term
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 

 

Net change in unrealized loss related to investments still held as of December 31, 2013 and 2012, was approximately $2.0 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.

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of December 31, 2013 (dollars in thousands):

 

   Fair value   Valuation
techniques
  Unobservable input  Range (weighted
average)
 
Senior Secured First Lien Term Loans  $419,740   Market approach  Market yield   9.6% - 23.5%
               (12.7%)
                 
Senior Secured First Lien Term Loans  $17,252   Cost recovery  EV coverage   N/A 
                 
Senior Secured First Lien Term Loans - Fee Note  $677   Market approach  Market yield   0.0% - 14.9%
               (3.9%)
                 
Senior Secured Second Lien Term Loans  $290,154   Market approach  Market yield   9.1% - 25.5%
               (12.7%)
                 
Senior Secured Notes  $78,388   Market approach  Market yield   8.6% - 15.1%
               (12.4%)
                 
Unsecured Debt  $257   Market approach  Market yield   16.0%
                 
Equity/Warrants  $4,193   Enterprise valuation analysis  EBITDA multiple  (1)   0.2x –16.2x (5.9x)
                 
Total  $810,661            

 

F-20
 

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of September 30, 2013 (dollars in thousands):

 

   Fair value   Valuation
techniques
  Unobservable input  Range (weighted
average)
 
Senior Secured First Lien Term Loans  $404,041   Market approach  Market yield   10.0% - 50.6%
               (14.4%)
                 
Senior Secured First Lien Term Loans  $4,090   Cost recovery  EV coverage   N/A 
                 
Senior Secured First Lien Term Loans - Fee Note  $671   Market approach  Market yield   0.0% - 14.9%
               (3.8%)
                 
Senior Secured Second Lien Term Loans  $251,963   Market approach  Market yield   9.3% - 20.7%
               (12.6%)
                 
Senior Secured Notes  $77,259   Market approach  Market yield   8.4% - 14.5%
               (12.2%)
                 
Unsecured Debt  $255   Market approach  Market yield   16.0%
                 
Equity/Warrants  $2,955   Enterprise valuation analysis  EBITDA multiple(1)   0.2x – 6.5x (4.1x)
                 
Total  $741,234            

 

(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. Increases in market yields would result in 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. Increases in EBITDA multiples in isolation would result in 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 November 16, 2012, we obtained exemptive relief from the SEC to permit us to exclude the debt of the SBIC LP guaranteed by the SBA from our 200% asset coverage test under the 1940 Act. The exemptive relief provides us with increased flexibility under the 200% asset coverage test by permitting it to borrow up to $150 million more than it would otherwise be able to absent the receipt of this exemptive relief.

 

F-21
 

 

Credit Facility

 

On September 25, 2013, the Company closed $15.0 million of additional commitment to the revolving credit facility (the “Revolving Facility”) resulting in total commitments to the Revolving Facility of $245.0 million and $5.0 million of additional commitment to the term loan credit facility (the “Term Loan Facility,” and together with the Revolving Facility the “Facilities”) resulting in total commitments to the Term Facility of $120.0 million.

 

As of December 31, 2013 and 2012, the carrying amount of our borrowings under the Facilities approximated the fair value of our debt obligations. 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 borrowings under the Facilities are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At December 31, 2013 and 2012, the Facilities would be deemed to be level 3, as defined in Note 4.

 

F-22
 

 

As of December 31, 2013, $3.8 million of financing costs related to the Revolving Facility and $2.1 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, 2013, we recorded $2.5 million of interest and financing expenses related to the Facilities, of which $0.4 million was attributable to interest related to the Revolving Facility, $0.5 million to commitment fees related to the Revolving Facility, $1.3 million to interest related to the Term Loan Facility and $0.3 million of amortization of deferred financing costs related to the Facilities. As of December 31, 2013, there was $95.9 million and $120.0 million outstanding under the Revolving Facility and Term Loan Facility, respectively. For the three months ended December 31, 2013, our weighted average outstanding debt balance and our weighted average stated interest rate on the Facilities were $162.3 million and 4.0%, respectively. As of December 31, 2012, $3.3 million of financing costs related to the Revolving Facility and $1.7 million of financing costs related to the Term Loan Facility had been capitalized and are being amortized over their respective terms. For the three months ended December 31, 2012, we recorded $1.5 million of interest and financing expenses related to the Facilities, 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 Term Loan Facility and $0.2 million of amortization of deferred financing costs related to the Facilities. As of December 31, 2012, there was $44.0 million outstanding under the Revolving Facility and $80.5 million outstanding under the Term Loan Facility. For the three months ended December 31, 2012, our weighted average outstanding debt balance and our weighted average stated interest rate on the Facilities were $94.9 million and 4.3%, respectively.

 

Unsecured Notes

 

On March 21, 2012, the Company issued $40.0 million in aggregate principal amount of 7.125% unsecured notes that mature on March 30, 2019 (the "2019 Notes"). The 2019 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 2019 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 2019 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol "MCQ".

 

On March 18, 2013, the Company issued $60.0 million in aggregate principal amount of 6.125% unsecured notes that mature on March 30, 2023 (the "2023 Notes," and together with the 2019 Notes, the “Unsecured Notes”). The 2023 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, 2016. The 2023 Notes bear interest at a rate of 6.125% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2013. The 2023 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol "MCV".

 

On March 26, 2013, the Company closed an additional $3.5 million in aggregate principal amount of the 2023 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes.

 

As of December 31, 2013, the carrying amount and fair value of the 2019 Notes was $40.0 million and $40.6 million, respectively. The carrying amount and fair value of the 2023 Notes was $63.5 million and $56.8 million, respectively. As of December 31, 2012, the carrying amount and fair value of the 2019 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 the Unsecured Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. At December 31, 2013, and 2012, the Unsecured Notes would be deemed to be level 1, as defined in Note 4.

 

As of December 31, 2013, $1.5 million of financing costs related to the 2019 Notes and $2.1 million of financing costs related to the 2023 Notes have been deferred and are being amortized over their respective terms. For the three months ended December 31, 2013, we recorded $1.8 million of interest and financing expenses related to the Unsecured Notes, of which $0.7 million to interest related to the 2019 Notes, $1.0 million to interest related to the 2023 Notes and $0.1 million of amortization of deferred financing costs related to the Unsecured Notes. As of December 31, 2013, $40.0 million and $63.5 million in aggregate principal amount of the 2019 Notes and the 2023 notes were outstanding, respectively. For the three months ended December 31, 2013, our weighted average outstanding debt balance and our weighted average stated interest rate on the Unsecured Notes were $103.4 million and 6.5%, respectively. As of December 31, 2012, $1.5 million of financing costs related to the 2019 Notes had been capitalized and are being amortized over their respective terms. For the three months ended December 31, 2012, we recorded $0.7 million of interest expense and $0.1 million of amortization of deferred financing costs related to the Unsecured Notes. As of December 31, 2012, $40.0 million in aggregate principal amount of the 2019 Notes were outstanding. For the three months ended December 31, 2012, our weighted average outstanding debt balance and our weighted average stated interest rate on the Unsecured Notes were $40.0 million and 7.1%, respectively.

 

SBA Debentures

 

On March 26, 2013, SBIC LP received an SBIC license from the SBA.

 

The SBIC license allows the SBIC LP to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC LP’s assets over our stockholders in the event we liquidate the SBIC LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC LP upon an event of default.

 

F-23
 

 

SBA regulations currently limit the amount that the SBIC LP may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing.

 

As of December 31, 2013, SBIC LP had $50.0 million in regulatory capital and had $44.0 million SBA-guaranteed debentures outstanding. The interest rate on $5.0 million of outstanding debentures is fixed at an average annualized rate of 4.4%. The annualized interim financing rate on the remaining $39.0 million of outstanding debentures was 1.4% as of December 31, 2013. The interest rate on the $39.0 million of interim outstanding debentures will be fixed at the next pooling date, which is March 26, 2014.

 

As of December 31, 2013, the carrying amount of the SBA-guaranteed debentures approximated the fair value of our debt obligations. The fair values of the SBA-guaranteed debentures 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 the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At December 31, 2013, the SBA-guaranteed debentures would be deemed to be level 3, as defined in Note 4.

 

For the three months ended December 31, 2013, we recorded $237,033 of interest and financing expenses related to the SBA guaranteed debenture, of which $172,219 was attributable to interest expense and $64,814 of amortization of commitment fee and upfront fees. As of December 31, 2013, the weighted average outstanding debt balance and the weighted average stated interest rate for all SBA-guaranteed debentures was $36.5 million and 1.9%, respectively.

 

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. This waiver does not extend to periods subsequent to December 31, 2011.

 

The incentive fee consists of the following two parts:

 

The first, calculated and payable quarterly in arrears is based on our pre-incentive fee net investment income earned during the calendar quarter for which the Incentive Fee is being calculated. 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 or unrealized capital appreciation or depreciation.

 

Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets calculated as of the end of the calendar quarter immediately preceding the calendar quarter for which the incentive fee is being calculated, will be compared to a “hurdle rate” of 2.00% per quarter (8.0% annualized). We will pay the Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

(1) no incentive fee for any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;

 

(2) 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 2.50% (10.0% annualized) in any calendar quarter; and

 

(3) 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.5% (10.0% annualized) in any calendar quarter.

 

F-24
 

 

 

The second part of the incentive fee (the “Capital Gains 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 is calculated at the end of each applicable year by subtracting (1) the sum of our cumulative realized capital losses and unrealized capital depreciation from (2) our cumulative aggregate realized capital gains. If the amount so calculated is positive, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the aggregate amount of Capital Gains Fee paid in all prior years. If such amount is negative, then no Capital Gains Fee will be payable for such year. If this Agreement is terminated as of a date that is not a calendar year end, the termination date shall be treated as though it were a calendar year end for purposes of calculating and paying a Capital Gains Fee.

 

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.

 

For the three months ended December 31, 2013 and 2012, the Company incurred base management fees to MCC Advisors of $3.7 million and $2.1 million, respectively. For the three months ended December 31, 2013 and 2012, we incurred $4.3 million and $2.4 million in incentive fees related to pre-incentive fee net investment income, respectively.

 

As of December 31, 2013 and September 30, 2013, $7.9 million and $6.9 million were included in “management and incentive fees payable,” in the accompanying consolidated statements of assets and liabilities.

 

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, 2013 and 2012, we incurred $0.7 million and $0.5 million in administrator expenses, respectively.

 

Note 7. Related Party Transactions

 

Investment in 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 Allied Cash Holdings LLC, Applied Natural Gas Fuels, Inc., 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 0.5% of the Company’s investments as of December 31, 2013 and 0.6% as of September 30, 2013. 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, 2013 and September 30, 2013, the principal amount related to this loan participation was $8.2 million and $8.2 million, respectively. There was no investment income recorded related to this loan participation for the three months ended December 31, 2013, as it was on non-accrual status. For the three months ended December 31, 2012, total investment income related to this loan participation was $0.3 million.

 

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.

 

F-25
 

 

Certain employees of Medley Capital LLC, an affiliate of the Company, serve as senior corporate officers of Velum Global Credit Management LLC.

 

Note 8. Commitments and Contingencies

 

As of December 31, 2013, we had commitments under loan and financing agreements to fund up to $45.7 million to 8 portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. As of September 30, 2013, we had commitments under loan and financing agreements to fund up to $33.1 million to 6 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. A summary of the composition of the unfunded commitments as of December 31, 2013 and September 30, 2013 is shown in the table below (dollars in thousands):

 

   As of 
   December 31, 2013   September 30, 2013 
Red Skye Wireless LLC  $15,000   $15,000 
Wheels Up Partners LLC   11,882    - 
Lydell Jewelry Design Studio LLC   5,928    5,928 
Be Green Manufacturing and Distribution Centers LLC – Delayed Draw TL   4,167    - 
DreamFinders Homes - TLB   2,723    2,723 
DLR Restaurants LLC   2,437    4,177 
Tenere Acquisition Corp.   2,000    2,000 
Be Green Manufacturing and Distribution Centers LLC – Revolver   833    - 
Physicians Care Alliance LLC - Revolver   767    767 
DreamFinders Homes - TLA   -    2,500 
Total  $45,737   $33,095 

 

Note 9. Other fee income

 

The other fee income consists of origination/closing fee, amendment fee, prepayment penalty, administrative agent fee, transaction break-up fee and other miscellaneous fees. The following table summarizes the Company’s other fee income for the three months ended December 31, 2013 and 2012 (dollars in thousands):

 

   For the three months ended
December 31
 
   2013   2012 
Origination fee  $3,031   $2,028 
Prepayment fee   3,026    159 
Amendment fee   286    319 
Transaction break-up fee   100    - 
Administrative agent fee   114    61 
Other fees   26    312 
Other fee income  $6,583   $2,879 

 

Note 10. 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, 2013 and 2012, we accrued $0.2 million and $0.1 million for directors’ fees expense, respectively. Effective January 1, 2014, each independent director will receive an annual fee of $55,000. The other director fees described above will remain the same.

 

Note 11. 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.

 

F-26
 

 

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, 2013 and 2012 (dollars in thousands except share and per share amounts):

 

   For the three months ended
December 31
 
Basic and diluted  2013   2012 
Net increase in net assets from operations  $14,293   $9,613 
Weighted average common shares outstanding   40,162,592    24,767,375 
Earnings per common share-basic and diluted  $0.36   $0.39 

 

Note 12. Financial Highlights

 

The following is a schedule of financial highlights for the three months ended December 31, 2013 and 2012:

 

   For the three months ended
December 31
 
   2013   2012 
Per share data:          
Net asset value per share at beginning of year  $12.70   $12.52 
           
Net investment income (1)   0.42    0.39 
Net realized gains on investments   0.00    0.01 
Net unrealized appreciation/(depreciation) on investments   (0.07)   (0.01)
Net increase in net assets (2)   0.36    0.39 
           
Distributions declared from net investment income   (0.37)   (0.36)
Total distributions to stockholders   (0.37)   (0.36)
           
Issuance of common stock, net of underwriting costs   0.00    0.13 
Offering costs   0.00    (0.01)
Other (3)   -    0.02 
Total capital share transactions   -    0.14 
           
Net asset value at end of period  $12.68   $12.69 
Net assets at end of period  $509,895,695   $363,747,895 
Shares outstanding at end of period   40,199,813    28,662,049 
           
Per share market value at end of period  $13.85   $14.56 
Total return based on market value (4)   3.23%   6.32%
Total return based on net asset value (5)   2.62%   4.14%
Portfolio turnover rate   12.95%   3.84%

 

The following is a schedule of ratios and supplemental data for the three months ended December 31, 2013 and 2012:

 

   For the three months ended
December 31
 
   2013   2012 
Ratios: (6)          
Ratio of net investment income to average net assets   14.97%   14.00%
Ratio of total expenses to average net assets   12.87%   11.80%
Ratio of incentive fees to average net assets   3.74%   3.50%
           
Supplemental Data:          
Ratio of operating expenses and credit facility related expenses to average net assets   9.12%   8.29%
Average debt outstanding (7)  $302,306,522   $134,852,174 
Average debt outstanding per common share  $7.53   $5.44 
Asset coverage ratio per unit (8)   2,596    3,211 
Average market value per unit          
Facilities (9)   N/A    N/A 
SBA debentures (9)   N/A    N/A 
Notes due 2019  $25.76   $26.05 
Notes due 2023  $23.19    N/A 

 

(1)Net investment income based on total weighted average common stock outstanding was $0.42 per share and $0.39 per share for the three months ended December 31, 2013 and 2012, respectively.

(2)May not foot due to rounding.

 

F-27
 

 

(3)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.
(4)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.
(5)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.
(6)Ratios are annualized.
(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 and SBA debentures are not registered for public trading.

 

Note 13. 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, 2013 and 2012:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
For the three months ended December 31, 2013           
10/30/2013  11/22/2013  12/13/2013   0.37 
         $0.37 

 

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 

 

Note 14. 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, 2013, except as disclosed below.

 

On February 5, 2014, the Company completed a public offering of 6,00,000 share of its common stock at a public offering price of $14.00 per share, raising approximately $80.9 million in net proceeds after deducting discounts and commissions and estimated offering expenses.

 

On February 5, 2014, the Company’s board of directors declared a quarterly dividend of $0.37 per share payable on March 14, 2014, to stockholders of record at the close of business on February 26, 2014.

 

F-28
 

 

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.

 

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 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. We believe that pursuing opportunities of this size offers several benefits including reduced competition, a larger investment opportunity set and the ability to minimize the impact of financial intermediaries. We expect our debt investments to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either monthly or quarterly. In some cases our debt investments may provide for a portion of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned.

 

Expenses

 

Our primary operating expenses include the payment of management and incentive fees pursuant to the investment management agreement we have with MCC Advisors and overhead expenses, including our allocable portion of our administrator’s overhead under the administration agreement. Our management and incentive fees compensate MCC Advisors for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:

 

  · our organization and continued corporate existence;

 

  · calculating our NAV (including the cost and expenses of any independent valuation firms);

 

  · expenses incurred by MCC Advisors payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

  · interest payable on debt, if any, incurred to finance our investments;

 

  · the costs of all offerings of common stock and other securities, if any;

 

  · the base management fee and any incentive fee;

 

  · distributions on our shares;

 

  · administration fees payable under our administration agreement;

 

  · the allocated costs incurred by MCC Advisors in providing managerial assistance to those portfolio companies that request it;

 

  · amounts payable to third parties relating to, or associated with, making investments;

 

  · transfer agent and custodial fees;

 

  · registration fees and listing fees;

 

  · U.S. federal, state and local taxes;

 

  · independent director fees and expenses;

 

  · costs of preparing and filing reports or other documents with the SEC or other regulators;

 

  · the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

 

  · our fidelity bond;

 

  · directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

  · indemnification payments;

 

  · direct costs and expenses of administration, including audit and legal costs; and

 

  · all other expenses reasonably incurred by us or MCC Advisors in connection with administering our business, such as the allocable portion of overhead under our administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs (including travel expenses).

 

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Portfolio and Investment Activity

 

As of December 31, 2013, our portfolio consisted of investments in 63 portfolio companies with a fair value of approximately $818.5 million. During the three months ended December 31, 2013, we invested $147.6 million in 12 new portfolio companies and $13.0 million in 5 existing portfolio companies, and we had $92.0 million in aggregate amount of exits and repayments, resulting in net investments of $68.6 million for the period.

 

As of December 31, 2012, our portfolio consisted of investments in 46 portfolio companies with a fair value of approximately $520.7 million. During the three months ended December 31, 2012, we invested $117.2 million in 11 new portfolio companies and $16.0 million in 7 existing portfolio companies, and we had $16.8 million in aggregate amount of exits and repayments, resulting in net investments of $116.4 million for the period.

 

As of December 31, 2013, our average portfolio company investment and our largest portfolio company investment at amortized cost and fair value was approximately $13.2 million and $13.0 million, and $26.0 million and $26.0 million, respectively, and we had approximately $46.1 million of cash and cash equivalents. As of December 31, 2012, our average portfolio company investment and our largest portfolio company investment at amortized cost and fair value was approximately $11.4 million and $11.3 million, and $25.4 million and $25.4 million, respectively, and we had approximately $1.7 million of cash and cash equivalents.

 

The composition of our investments as of December 31, 2013 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  $450,478    54.3%  $437,669    53.5%
Senior Secured Second Lien Term Loans   290,432    35.0    290,154    35.4 
Senior Secured Notes   86,119    10.4    86,185    10.5 
Unsecured Debt   257    0.1    257    0.1 
Equity/Warrants   2,407    0.2    4,193    0.5 
Total  $829,693    100.0%  $818,458    100.0%

 

The composition of our investments as of September 30, 2013 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  $418,109    55.2%  $408,802    54.5%
Senior Secured Second Lien Term Loans   253,210    33.4    251,963    33.6 
Senior Secured Notes   84,125    11.1    85,262    11.4 
Unsecured Debt   255    0.1    255    0.1 
Equity/Warrants   1,991    0.2    2,955    0.4 
Total  $757,690    100.0%  $749,237    100.0%

 

As of December 31, 2013, the weighted average loan to value ratio (“LTV”) of our portfolio investments was approximately 56.0%. We believe that the LTV ratio for a portfolio investment is a useful indicator of the riskiness of the portfolio investment, or its likelihood of default. As part of our investment strategy, we seek to structure transactions with downside protection and seek LTVs of lower than 65%. We regularly evaluate the LTV of our portfolio investments and believe that LTV is a useful indicator for management and investors.

 

As of December 31, 2013, our income-bearing investment portfolio, which represented nearly 99.4% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 13.6%, and 60.2% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR, and 39.8% bore interest at fixed rates.

 

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MCC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on the following categories, which we refer to as MCC Advisors’ investment credit rating:

 

Credit
Rating
  Definition
     
1   Investments that are performing above expectations.
     
2   Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination.
     
    All new loans are rated ‘2’.
     
3   Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected.
     
    Companies rated ‘3’ may be out of compliance with financial covenants, however, loan payments are generally not past due.
     
4   Investments that are performing below expectations and for which risk has increased materially since origination.
     
    Some loss of interest or dividend is expected but no loss of principal.
     
    In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due).
     
5   Investments that are performing substantially below expectations and whose risks have increased substantially since origination.
     
    Most or all of the debt covenants are out of compliance and payments are substantially delinquent.
     
    Some loss of principal is expected.

 

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of December 31, 2013 (dollars in thousands):

 

Investment
Performance
Rating
  Investments at
Fair Value
   Percentage 
1  $34,888    4.3%
2   723,574    88.4 
3   48,110    5.9 
4   7,796    0.9 
5   4,090    0.5 
Total  $818,458    100.0%

 

 The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of September 30, 2013 (dollars in thousands):

 

Investment
Performance
Rating
  Investments at
Fair Value
   Percentage 
1  $37,618    5.0%
2   650,130    86.8 
3   49,396    6.6 
4   8,003    1.1 
5   4,090    0.5 
Total  $749,237    100.0%

 

Results of Operations

 

Operating results for the three months ended December 31, 2013 and 2012 are as follows (dollars in thousands):