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EX-31.1 - EXHIBIT 31.1 - PhenixFIN Corpv384086_ex31-1.htm
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EX-32.1 - EXHIBIT 32.1 - PhenixFIN Corpv384086_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2014

 

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)

 

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

 

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

Yes x No ¨

 

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

 

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

 

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

 

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

 

As of July 31, 2014, the Registrant had 52,283,712 shares of common stock, $0.001 par value, outstanding. 

 

 
 

 

TABLE OF CONTENTS

 

        Page
         
Part I.   Financial Information    
         
Item 1.   Financial Statements    
         
    Consolidated Statements of Assets and Liabilities as of  June 30, 2014 (unaudited) and September 30, 2013   F-1
         
    Consolidated Statements of Operations for the three and nine months ended  June 30, 2014 and 2013 (unaudited)   F-2
         
    Consolidated Statements of Changes in Net Assets for the nine months ended  June 30, 2014 and 2013 (unaudited)   F-3
         
    Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013 (unaudited)   F-4
         
    Consolidated Schedules of Investments as of  June 30, 2014 (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   14
         
Item 4.   Controls and Procedures   16
         
Part II.   Other Information   16
         
Item 1.   Legal Proceedings   16
         
Item 1A.   Risk Factors   16
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   17
         
Item 3.   Defaults Upon Senior Securities   17
         
Item 4.   Mine Safety Disclosures   17
         
Item 5.   Other Information   17
         
Item 6.   Exhibits   17
         
SIGNATURES   18

 

 
 

  

Medley Capital Corporation

 

Consolidated Statements of Assets and Liabilities

 

   As of 
   June 30, 2014   September 30, 2013 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-controlled/non-affiliated investments (amortized cost of $1,053,311,176
and $748,405,904, respectively)
  $1,033,051,922   $740,097,249 
Affiliated investments (amortized cost of $9,771,815 and $9,283,640, respectively)   9,997,575    9,139,377 
Total investments at fair value   1,043,049,497    749,236,626 
Cash   17,113,444    8,557,899 
Interest receivable   13,522,842    9,607,539 
Deferred financing costs, net   10,964,547    8,523,291 
Fees receivable   195,000    - 
Other assets   284,272    249,388 
Receivable for dispositions   15,175,048    - 
Deferred offering costs   295,368    218,681 
Total assets  $1,100,600,018   $776,393,424 
           
LIABILITIES          
Revolving credit facility payable  $85,582,886   $2,500,000 
Term loan payable   171,500,000    120,000,000 
Notes payable   103,500,000    103,500,000 
SBA debentures payable   48,000,000    30,000,000 
Payable for investments originated, purchased and participated   15,896,925    54,013 
Management and incentive fees payable, net   9,766,528    6,899,653 
Accounts payable and accrued expenses   2,217,605    1,305,361 
Interest and fees payable   1,347,018    1,155,524 
Administrator expenses payable   858,591    701,208 
Deferred revenue   311,678    255,922 
Deferred tax liability   386,545    - 
Due to affiliate   -    82,083 
Offering costs payable   -    105,205 
Total liabilities  $439,367,776   $266,558,969 
           
Commitments (See note 8)          
           
NET ASSETS          
Common stock, par value $.001 per share, 100,000,000 common shares authorized,
52,283,712 and 40,152,904 common shares issued and outstanding, respectively
  $52,284   $40,153 
Capital in excess of par value   665,419,750    506,062,597 
Accumulated undistributed net investment income   15,169,028    12,184,623 
Accumulated undistributed net realized gain/(loss) from investments   886,904    - 
Net unrealized appreciation/(depreciation) on investments   (20,295,724)   (8,452,918)
Total net assets   661,232,242    509,834,455 
Total liabilities and net assets  $1,100,600,018   $776,393,424 
           
NET ASSET VALUE PER SHARE  $12.65   $12.70 

 

See accompanying notes to consolidated financial statements.

 

F-1
 

  

Medley Capital Corporation

 

Consolidated Statements of Operations

 

   For the three months   For the nine months 
   ended June 30   ended June 30 
   2014   2013   2014   2013 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
INVESTMENT INCOME                    
Interest from investments                    
Non-controlled/Non-affiliated investments  $29,034,279   $19,572,407   $79,327,091   $50,383,033 
Affiliated investments   402,232    376,790    1,187,141    1,112,503 
Total interest income   29,436,511    19,949,197    80,514,232    51,495,536 
Interest from cash and cash equivalents   1,649    2,677    5,957    6,192 
Other fee income (See note 9)   8,633,572    3,639,234    20,617,806    10,016,301 
Total investment income   38,071,732    23,591,108    101,137,995    61,518,029 
                     
EXPENSES                    
Base management fees   4,593,080    2,977,097    12,336,267    7,606,894 
Incentive fees   5,173,449    3,007,559    13,569,971    8,010,952 
Interest and financing expenses   5,348,298    4,032,337    14,502,205    9,283,079 
Administrator expenses   858,591    681,924    2,371,153    1,773,348 
Professional fees   710,628    319,982    1,867,640    1,160,684 
Directors fees   194,304    71,125    535,554    314,786 
Insurance   150,214    69,758    426,499    210,517 
General and administrative   349,373    398,785    1,248,823    963,046 
Organizational expense   -    2,305    -    150,916 
Total expenses   17,377,937    11,560,872    46,858,112    29,474,222 
NET INVESTMENT INCOME   20,693,795    12,030,236    54,279,883    32,043,807 
                     
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:                    
Net realized gain/(loss) from investments   813,852    (136,914)   886,904    237,440 
Net unrealized appreciation/(depreciation) on investments   (4,820,079)   (8,736,445)   (11,580,576)   (7,988,618)
Net unrealized appreciation/(depreciation) on participations   (29,380)   -    124,315    - 
Provision for deferred taxes on unrealized gain on investments   (69,687)   -    (386,545)   - 
Net gain/(loss) on investments   (4,105,294)   (8,873,359)   (10,955,902)   (7,751,178)
                     
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS  $16,588,501   $3,156,877   $43,323,981   $24,292,629 
                     
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.33   $0.10   $0.97   $0.85 
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE  $0.41   $0.37   $1.21   $1.12 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED (SEE NOTE 11)   50,503,492    32,658,336    44,836,152    28,684,229 
                     
DIVIDENDS DECLARED PER COMMON SHARE  $0.37   $0.36   $1.11   $1.08 

 

See accompanying notes to consolidated financial statements.

 

F-2
 

  

Medley Capital Corporation

 

Consolidated Statements of Changes in Net Assets

 

   For the nine months ended June 30 
   2014   2013 
   (unaudited)   (unaudited) 
INCREASE FROM OPERATIONS:          
Net investment income  $54,279,883   $32,043,807 
Net realized gain/(loss) from investments   886,904    237,440 
Net unrealized appreciation/(depreciation) on investments   (11,580,576)   (7,988,618)
Net unrealized appreciation/(depreciation) on participations   124,315    - 
Provision for taxes on unrealized gain on investments   (386,545)   - 
Net increase/(decrease) in net assets from operations   43,323,981    24,292,629 
SHAREHOLDER DISTRIBUTIONS:          
Distributions declared from net investment income   (51,295,478)   (30,588,465)
Net decrease in net assets from shareholder distributions   (51,295,478)   (30,588,465)
CAPITAL SHARE TRANSACTIONS:          
Issuance of common stock, net of underwriting costs (12,000,000 and 9,987,534 shares, respectively)   157,976,250    135,932,400 
Offering costs   (300,133)   (493,875)
Issuance of common stock under dividend reinvestment plan (130,808 and 128,350 shares, respectively)   1,693,167    1,764,174 
Net increase in net assets from common share transactions   159,369,284    137,202,699 
Total increase/(decrease) in net assets   151,397,787    130,906,863 
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 $15,169,028 and $7,014,978, respectively  $661,232,242   $420,246,094 
           
Net asset value per common share  $12.65   $12.65 
Common shares outstanding at end of period   52,283,712    33,226,126 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

  

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

   For the nine months ended June 30 
   2014   2013 
   (unaudited)   (unaudited) 
Cash flows from operating activities          
NET INCREASE IN NET ASSETS FROM OPERATIONS  $43,323,981   $24,292,629 
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   (8,397,574)   (6,522,188)
Net amortization of premium/(discount) on investments   (490,301)   (565,649)
Amortization of deferred financing costs   1,592,209    1,029,597 
Net realized (gain)/loss from investments   (886,904)   (237,440)
Net deferred income taxes   386,545    - 
Net unrealized (appreciation)/depreciation on investments   11,580,576    7,988,618 
Net unrealized (appreciation)/depreciation on participations   (124,315)   - 
Proceeds from sale and settlements of investments   278,008,120    140,693,504 
Purchases, originations and participations   (573,502,473)   (425,782,387)
(Increase)/decrease in operating assets:          
Interest receivable   (3,915,303)   (6,000,916)
Fees receivable   (195,000)   (1,625,000)
Other assets   (34,884)   (112,964)
Receivable for investments sold   -    (4,568,652)
Receivable for paydown of investments   (15,175,048)   - 
Increase (decrease)/in operating liabilities:          
Payable for investments purchased, originated and participated   15,842,912    4,787,700 
Accounts payable and accrued expenses   912,244    711,660 
Management and incentive fees payable, net   2,866,875    2,469,883 
Administrator expenses payable   157,383    216,512 
Interest and fees payable   191,494    1,765,734 
Deferred revenue   55,756    7,688 
Due to affiliate   (82,083)   10,782 
NET CASH USED BY OPERATING ACTIVITIES   (247,885,790)   (261,440,889)
           
Cash flows from financing activities          
Proceeds from issuance of common stock, net of underwriting costs   159,669,417    137,696,574 
Offering cost paid   (482,025)   (628,734)
Borrowings on debt   378,300,000    335,300,000 
Paydowns on debt   (225,717,114)   (167,100,000)
Financing cost paid   (4,033,465)   (4,673,177)
Payments of cash dividends   (51,295,478)   (30,588,465)
NET CASH PROVIDED BY FINANCING ACTIVITIES   256,441,335    270,006,198 
           
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS   8,555,545    8,565,309 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   8,557,899    4,893,616 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $17,113,444   $13,458,925 
           
Supplemental Information:          
Interest paid during the period  $12,660,917   $6,437,602 
Supplemental non-cash information          
Paid-in-kind interest income  $8,404,029   $6,522,188 
Net amortization of premium/(discount) on investments  $490,301   $565,649 
Amortization of deferred financing costs  $(1,592,209)  $(1,029,597)
Issuance of common stock in connection with dividend reinvestment plan  $1,693,167   $1,764,174 

 

See accompanying notes to consolidated financial statements.

 

F-4
 

  

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

June 30, 2014

(unaudited)

  

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(15)   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    10,000,000    1.5%
             10,000,000    10,000,000    10,000,000      
                              
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    4,626,759    0.7%
             4,550,000    4,550,000    4,626,759      
                              
Albertville Quality Foods, Inc. (13)  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    17,650,745    2.7%
             17,452,830    17,452,830    17,650,745      
                              
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    20,152,800    3.0%
             20,000,000    20,000,000    20,152,800      
                              
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   13,475,000    13,475,000    13,678,877    2.1%
             13,475,000    13,475,000    13,678,877      
                              
AM3 Pinnacle Corporation  Telecommunications  Senior Secured First Lien Term Loan (10.00%)  10/22/2018   7,971,534    7,971,534    7,971,534    1.2%
             7,971,534    7,971,534    7,971,534      
                              
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   8,411,672    8,411,672    8,466,768    1.3%
             8,411,672    8,411,672    8,466,768      
                              
ARBOC Specialty Vehicles LLC  Automobile  Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)  3/21/2018   21,590,500    21,590,500    21,774,667    3.3%
             21,590,500    21,590,500    21,774,667      
                              
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan
(11.25% Cash, 2.00% PIK)
  3/16/2016   16,049,211    16,049,211    16,049,211    2.4%
             16,049,211    16,049,211    16,049,211      
Autosplice, Inc. (11)  Diversified/Conglomerate Manufacturing  Revolver (LIBOR + 11.50% Cash, 1.00% LIBOR Floor)  9/28/2014   2,156,134    2,156,134    2,156,134    0.3%
      Senior Secured First Lien Term Loan (LIBOR + 11.50% Cash, 1.00% LIBOR Floor)  6/30/2019   14,817,844    14,817,844    14,817,844    2.2%
             16,973,978    16,973,978    16,973,978      
                              
BayDelta Maritime LLC  Cargo Transport  Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)  6/30/2016   6,669,292    6,596,157    6,735,985    1.1%
      Fee Note (14.88%)(6)  6/30/2016   250,000    189,375    189,029    0.0%
      Warrants to purchase 10% of the outstanding equity  6/30/2016   -    25,000    587,000    0.1%
             6,919,292    6,810,532    7,512,014      
                              
Be Green Manufacturing and Distribution Centers LLC (11)(14)  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    5,062,850    0.8%
      Senior Secured First Lien Delayed Draw (LIBOR + 10.00%, 1.00% LIBOR Floor)  12/13/2018   1,250,000    1,250,000    1,308,846    0.2%
      Revolver (LIBOR + 10.00%, 1.00% LIBOR Floor)  12/13/2018   354,167    354,167    358,968    0.1%
      1.74% Partnership Interest in RCAF VI CIV XXIII, L.P.      -    416,250    374,848    0.1%
             6,604,167    7,020,417    7,105,512      
                              
Brantley Transportation LLC (13)  Oil and Gas  Senior Secured First Lien Term Loan (12.00%)  8/2/2017   9,487,500    9,642,988    9,487,500    1.4%
             9,487,500    9,642,988    9,487,500      
                              
California Products Corporation  Chemicals, Plastics and Rubber  Senior Secured Second Lien Term Loan (13.00%)  5/27/2019   13,750,000    13,750,000    13,954,875    2.1%
             13,750,000    13,750,000    13,954,875      
                              
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loans (17.00% PIK)  9/30/2014   29,989,991    28,093,477    17,150,668    2.6%
      Warrants to purchase 15.00% of the outstanding equity  9/30/2014   -    68,433    -    0.0%
             29,989,991    28,161,910    17,150,668      
                              
ConvergeOne Holdings Corp.  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)  6/17/2021   12,500,000    12,375,000    12,375,000    1.9%
             12,500,000    12,375,000    12,375,000      
                              
Cornerstone Research & Development, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)  4/28/2019   20,000,000    20,000,000    20,000,000    3.0%
      Warrants to purchase 1.96% of the outstanding equity           400,000    400,000    0.1%
             20,000,000    20,400,000    20,400,000      
                              
Dispensing Dynamics International(8)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Note (12.50%)  1/1/2018   4,800,000    4,726,600    4,892,976    0.7%
             4,800,000    4,726,600    4,892,976      
                              
DLR Restaurants LLC (13)   Restaurant & Franchise  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)  4/18/2018   20,304,018    20,304,018    20,710,098    3.1%
      Unsecured Debt (12.00% Cash, 4.00% PIK)  4/18/2018   262,474    262,474    262,474    0.0%
             20,566,492    20,566,492    20,972,572      
                              
DreamFinders Homes LLC (11) (14)  Buildings and Real Estate  Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)  10/1/2018   10,111,865    9,953,422    9,888,520    1.5%
      Warrants to purchase 5% of outstanding equity  10/1/2018   -    180,000    1,195,000    0.2%
             10,111,865    10,133,422    11,083,520      

  

F-5
 

 

Dynamic Energy Services International LLC  Oil and Gas  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)  3/6/2018   18,762,500    18,762,500    18,693,642    2.8%
             18,762,500    18,762,500    18,693,642      
                              
Essex Crane Rental Corp. (13)  Business Services  Senior Secured First Lien Term Loan (LIBOR + 10.50% Cash, 1.00% LIBOR Floor)  5/13/2019   20,000,000    20,000,000    20,000,000    3.0%
             20,000,000    20,000,000    20,000,000      
                              
Exide Technologies (10)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured Note (8.63%)  2/1/2018   11,000,000    9,006,908    6,325,000    1.0%
             11,000,000    9,006,908    6,325,000      
                              
FC Operating LLC  Retail Stores  Senior Secured First Lien Term Loan (LIBOR + 10.75% Cash, 1.25% LIBOR Floor)  11/14/2017   10,350,000    10,350,000    9,761,603    1.5%
             10,350,000    10,350,000    9,761,603      
                              
Geneva Wood Fuels LLC (4)(12)  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    4,000,000    0.6%
             8,199,184    8,143,385    4,000,000      
                              
GSG Fasteners, LLC (13)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)  11/18/2018   8,775,000    8,775,000    8,879,423    1.3%
             8,775,000    8,775,000    8,879,423      
                              
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   23,144,044    23,144,044    22,733,237    3.4%
             23,144,044    23,144,044    22,733,237      
                              
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    8,925,000    1.3%
             8,750,000    8,750,000    8,925,000      
                              
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    15,243,750    2.3%
             15,000,000    15,000,000    15,243,750      
                              
HGDS Acquisition LLC  Business Services  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)  3/28/2018   10,681,099    10,681,099    10,551,751    1.6%
             10,681,099    10,681,099    10,551,751      
                              
Ingenio Acquisition LLC  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (11.25%)  3/14/2019   23,712,665    23,712,665    23,712,665    3.6%
             23,712,665    23,712,665    23,712,665      
                              
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    7,878,621    1.2%
             7,724,138    7,724,138    7,878,621      
                              
Integra Telecom  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)  2/22/2020   12,132,000    12,155,807    12,374,640    1.9%
             12,132,000    12,155,807    12,374,640      
                              
Interface Security Systems(8)  Electronics  Senior Secured Note (9.25%)  1/15/2018   3,333,000    3,333,000    3,427,724    0.5%
             3,333,000    3,333,000    3,427,724      
                              
JD Norman Industries, Inc.  Diversified/Conglomerate Manufacturing  Senior Secured First Lien Term Loan (LIBOR + 10.25% Cash)  3/6/2019   24,000,000    24,000,000    24,317,040    3.7%
             24,000,000    24,000,000    24,317,040      
                              
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   29,875,880    29,875,880    30,519,406    4.6%
             29,875,880    29,875,880    30,519,406      
                              
Lighting Science Group Corporation (11)  Containers, Packaging and Glass  Senior Secured Second Lien Term (LIBOR + 10.00% Cash, 2.00% PIK)  2/19/2019   15,336,593    14,430,024    14,742,569    2.2%
      Warrants to purchase 2.41% of the outstanding equity      -    955,680    517,500    0.1%
             15,336,593    15,385,704    15,260,069      
                              
Linc Energy Finance (USA), Inc.(8)  Oil and Gas  Senior Secured Note (12.50%)  10/31/2017   3,500,000    3,407,805    3,844,155    0.6%
             3,500,000    3,407,805    3,844,155      
                              
Lucky Strike Entertainment, L.L.C.  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   11,504,472    11,504,472    11,633,322    1.8%
             11,504,472    11,504,472    11,633,322      
                              
Lydell Jewelry Design Studio LLC (11)(13)(14)  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    12,810,370    1.9%
      Warrants to purchase 13.3% of the outstanding membership units  9/13/2018   -    -    163,300    0.0%
             13,072,000    13,072,000    12,973,670      
                              
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   10,052,058    10,052,058    10,134,485    1.5%
             10,052,058    10,052,058    10,134,485      
                              
Merchant Cash and Capital LLC (11) (14)  Structure Finance Securities  Senior Secured First Lien Delayed Draw (LIBOR + 8.00% Cash, 3.00% LIBOR Floor)  3/4/2016   10,336,667    10,336,667    10,468,092    1.6%
      Senior Secured Second Lien Term Loan (12.00% Cash)  8/19/2016   10,000,000    10,000,000    10,000,000    1.5%
             20,336,667    20,336,667    20,468,092      
                              
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    9,976,039    10,392,032    1.6%
      Senior Secured First Lien Term Loan B (LIBOR + 11.50%, 2.50% LIBOR Floor)  11/14/2016   850,000    850,000    850,000    0.1%
      Warrants to purchase 8% of the outstanding equity  11/14/2016   -    536,296    1,100,914    0.2%
             11,139,141    11,362,335    12,342,946      
                              
Miratech Intermediate Holdings, Inc. (11) (13)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)  5/9/2019   16,000,000    16,000,000    16,000,000    2.4%
             16,000,000    16,000,000    16,000,000      

  

F-6
 

 

Modern VideoFilm, Inc. (12)  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   13,539,892    12,783,026    5,805,512    0.9%
      Warrants to purchase 4.5%
of the outstanding equity
  9/25/2017   -    339,573    -    0.0%
             13,539,892    13,122,599    5,805,512      
                              
Momentum Telecom, Inc. (11)  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)  3/10/2019   10,000,000    10,000,000    10,115,900    1.5%
      Revolver (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(7)  3/10/2019   -    -    -    0.0%
             10,000,000    10,000,000    10,115,900      
                              
NCM Group Holdings LLC  Buildings and Real Estate  Unsecured Debt (11.00% Cash)  10/24/2019   22,920,000    22,920,000    22,920,000    3.5%
             22,920,000    22,920,000    22,920,000      
                              
Omnivere LLC  Business Services  Senior Secured First Lien Term Loan A (LIBOR + 12.00% Cash, 1.00% PIK)  5/5/2019   18,362,373    17,508,455    17,699,491    2.7%
      Senior Secured First Lien Term Loan C (LIBOR + 12.00% Cash, 1.00% PIK)  5/5/2019   1,669,307    1,669,307    1,669,307    0.3%
      Warrants to purchase 12.50% of the outstanding equity           872,698    872,698    0.1%
             20,031,680    20,050,460    20,241,496      
                              
Physicians Care Alliance LLC (11)(13)(14)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)  12/28/2017   15,580,848    15,580,848    15,824,221    2.4%
      Revolving Credit Facility (10.50%)(7)  12/28/2017   -    -    11,987    0.0%
             15,580,848    15,580,848    15,836,208      
                              
The Plastics Group Acquisition Corp (11) (14)  Chemicals, Plastics and Rubber  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  2/28/2019   20,892,155    20,892,155    21,194,382    3.2%
      Delayed Draw Term Loan (11.00% Cash, 2.00% PIK)(7)  2/28/2019   -    -    -    0.0%
             20,892,155    20,892,155    21,194,382      
                              
Prestige Industries LLC  Business Services  Senior Secured Second Lien Term Loan (18.00% PIK)  1/31/2017   6,325,740    6,232,068    5,701,326    0.9%
      Warrants to purchase 0.63% of the outstanding common units  1/31/2017   -    151,855    -    0.0%
             6,325,740    6,383,923    5,701,326      
                              
Prince Mineral Holding Corp.(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (11.50%)  12/15/2019   6,800,000    6,732,747    7,405,540    1.1%
             6,800,000    6,732,747    7,405,540      
                              
RCS Capital Corporation  Finance  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)  4/29/2021   7,200,000    7,200,000    7,200,000    1.1%
             7,200,000    7,200,000    7,200,000      
                              
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)  4/30/2015   25,571,479    25,571,479    25,571,479    3.9%
             25,571,479    25,571,479    25,571,479      
                              
Red Skye Wireless LLC (11)(14)  Retail Stores  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)  6/27/2017   13,798,996    13,798,996    13,906,993    2.1%
             13,798,996    13,798,996    13,906,993      
                              
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    16,409,930    2.5%
             17,000,000    17,000,000    16,409,930      
                              
Response Team Holdings, LLC (11)  Buildings and Real Estate  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% PIK, 2.00% LIBOR Floor)  3/28/2019   18,551,972    18,551,972    18,823,758    2.8%
      Preferred Equity (12.00% PIK)  3/28/2019   4,776,422    4,347,409    4,470,635    0.7%
      Warrants to purchase 6.17% of the outstanding common units  3/28/2019   -    429,012    429,012      
             23,328,393    23,328,393    23,723,405      
                              
Revstone Aero LLC (9)  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.00% PIK)  11/1/2013   13,355,361    13,228,521    13,355,361    2.0%
      Fee Note  11/1/2013   500,000    309,051    500,000    0.1%
             13,855,361    13,537,572    13,855,361      
                              
Sendero Drilling Company LLC (11) (14)  Oil and Gas  Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash)  3/18/2019   17,042,500    16,282,553    15,857,386    2.4%
      Warrants to purchase 5.52% of the outstanding common units  3/18/2019   -    793,523    793,523    0.1%
             17,042,500    17,076,076    16,650,909      
                              
T. Residential Holdings LLC  Buildings and Real Estate  Senior Secured First Lien Term Loan (12.00%)  3/28/2019   20,000,000    20,000,000    20,140,600    3.0%
             20,000,000    20,000,000    20,140,600      
                              
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   14,455,657    14,455,657    13,165,056    2.0%
             14,455,657    14,455,657    13,165,056      
                              
Tempel Steel Company(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (12.00%)  8/15/2016   12,000,000    11,866,933    11,625,000    1.8%
             12,000,000    11,866,933    11,625,000      
                              
Tenere Acquisition Corp.(11)(14)  Diversified/Conglomerate Manufacturing  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  12/15/2017   11,075,911    11,075,911    11,468,187    1.7%
             11,075,911    11,075,911    11,468,187      
                              
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   7,807,209    7,807,209    7,946,021    1.2%
             7,807,209    7,807,209    7,946,021      
                              
Transtelco Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor)  11/19/2017   19,104,000    19,104,000    19,175,258    2.9%
             19,104,000    19,104,000    19,175,258      
                              
U.S. Well Services LLC (10)  Oil and Gas  Warrants to purchase 2.95% of the outstanding common membership interests  2/15/2017   -    11,370    4,342,520    0.7%
             -    11,370    4,342,520      
                              
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    20,805,095    3.1%
             20,430,000    20,430,000    20,805,095      

  

F-7
 

  

United Road Towing Inc. (16)  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan
(10.00% Cash, 5.00% PIK)
  6/30/2014   23,156,538    22,699,857    20,992,097    3.2%
            23,156,538    22,699,857    20,992,097      
                              
Untangle, Inc.  Business Services  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash)  4/18/2019   10,000,000    10,000,000    10,000,000    1.5%
            10,000,000    10,000,000    10,000,000      
                              
Velocity Pooling Vehicle LLC  Automobile  Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)  5/14/2022   24,000,000    20,648,811    20,640,000    3.1%
             24,000,000    20,648,811    20,640,000      
                              
Water Capital USA, Inc.  Finance  Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)  1/3/2015   26,504,627    26,504,627    22,717,116    3.4%
            26,504,627    26,504,627    22,717,116      
                              
Wheels Up Partners LLC (11) (13) (14)  Aerospace & Defense  Senior Secured First Lien Delayed Draw (LIBOR + 8.55% Cash, 1.00% LIBOR Floor)  4/15/2021   16,914,000    16,914,000    17,216,314    2.6%
             16,914,000    16,914,000    17,216,314      
                              
Window Products, Inc.  Buildings and Real Estate  Senior Secured Second Lien Term Loan (LIBOR + 10.75% Cash, 1.00% LIBOR Floor)  12/27/2019   14,000,000    14,000,000    14,000,000    2.1%
            14,000,000    14,000,000    14,000,000      
                              
Subtotal Non-Controlled / Non-Affiliated Investments          $1,060,919,459   $1,053,311,176   $1,033,051,922      
                             
Affiliated Investments:                             
Cymax Stores, Inc.(10)   Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)  8/1/2015   9,353,932    9,093,661    8,957,325    1.4%
      190 Class B Common Units (5)     -    678,154    1,040,250    0.2%
                              
Subtotal Affiliated Investments          $9,353,932   $9,771,815   $9,997,575      
                              
Total Investments, June 30, 2014          $1,070,273,391   $1,063,082,991   $1,043,049,497    157.7%

  

 

(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 $661,232,242 as of June 30, 2014.
(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 June 30, 2014. As such, no interest is being earned on this investment.
(8)Securities are exempt from registration under Rule 144a of the Securities Act of 1933. These securities represent a fair value of $31.2 million and 4.7% of net assets as of June 30, 2014 and are considered restricted.
(9)The term loan matured by its term on November 1, 2013. The company continues to make current interest payments.
(10)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.
(11)The investment has an unfunded commitment as of June 30, 2014 (See note 8).
(12)The investment was on non-accrual status as of June 30, 2014.
(13)A portion of this investment was sold via a participation agreement (See note 3).
(14)Includes an analysis of the value of any unfunded loan commitments.
(15)Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $30.4 million, $34.7 million and $4.3 million, respectively. The tax cost of investments is $1.0 billion.
(16)A portion of this investment was participated to third party with a par value of $1.3 million and a fair value of $1.2 million. Such amount has been presented on a gross basis in accordance with US GAAP.

 

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   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 Loans (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 17.5% 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 (14.00% )  11/14/2016   10,289,141    9,902,304    10,289,141    2.0%
      Senior Secured First Lien Term Loan B (14.00%)  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 + 12.00% 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 are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $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).

 

See accompanying notes to consolidated financial statements.

 

F-11
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

June 30, 2014

(unaudited)

 

Note 1. Organization

 

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

 

The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

 

F-12
 

 

The Company’s investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through directly originated transactions, 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, MCC Investment Holdings RT1 LLC, MCC Investment Holdings Sendero LLC, MCC Investment Holdings Omnivere 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.

 

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.

 

F-13
 

  

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.

 

On February 5, 2014, the Company completed a public offering of 6,000,000 shares of our common stock at a public offering price of $14.00 per share, raising approximately $81.1 million in net proceeds.

 

On April 28, 2014, the Company completed a public offering of 6,000,000 shares of our common stock at a public offering price of $13.25 per share, raising approximately $76.9 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 and nine months ended June 30, 2014 was approximately $8.6 million and $20.6 million, respectively. For the three and nine months ended June 30, 2013 other fee income was approximately $3.6 million and $10.0 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 and nine months ended June 30, 2014, the Company earned approximately $2.9 million and $8.4 million in PIK, respectively. For the three and nine months ended June 30, 2013, the Company earned approximately $2.4 million and $6.5 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-14
 

  

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. Interest Receivable is analyzed regularly and may be reserved against when deemed uncollectible. 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 June 30, 2014, two portfolio companies were on non-accrual status with a combined fair value of approximately $9.8 million, or 0.9% of the fair value of our portfolio. One portfolio company was on PIK non-accrual status at September 30, 2013.

 

Investment Classification

 

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

 

Valuation of Investments

 

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

 

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

 

F-15
 

  

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

New Accounting Pronouncements

 

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The amendments in ASU 2013-08 are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. We are currently evaluating the impact this accounting standards update will have on our financial statements.

 

F-16
 

 

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. There is no provision for federal excise tax for 2013 accrued at June 30, 2014.

 

The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. Such deferred tax liabilities amounted to $69,687 and $386,545 for the three and nine months ended June 30, 2014, respectively, and are recorded as deferred tax liability on the consolidated statements of assets and liabilities. The change in deferred tax liabilities is included as a component of net unrealized appreciation/(depreciation) on investments in the consolidated statement of operations. There were no deferred tax liabilities for the three and nine months ended June 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 June 30, 2014. 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-17
 

 

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 June 30, 2014 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  $663,884    62.4%  $641,244    61.5%
Senior Secured Second Lien Term Loans   326,737    30.7    324,815    31.1 
Senior Secured Notes   39,074    3.7    37,520    3.6 
Unsecured Debt   23,183    2.2    23,183    2.2 
Equity/Warrants   10,205    1.0    16,287    1.6 
Total  $1,063,083    100.0%  $1,043,049    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-18
 

 

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2014 (dollars in thousands):

 

   Investments at   Percentage of 
   Fair Value   Total Portfolio 
Business Services  $115,745    11.1%
Buildings and Real Estate   91,868    8.8 
Oil and Gas   73,824    7.1 
Healthcare, Education and Childcare   63,572    6.1 
Personal and Nondurable Consumer Products (Manufacturing Only)   56,717    5.4 
Diversified/Conglomerate Manufacturing   52,759    5.1 
Personal, Food and Miscellaneous Services   52,583    5.0 
Telecommunications   49,637    4.7 
Aerospace & Defense   47,121    4.5 
Retail Stores   43,821    4.2 
Automobile   42,415    4.1 
Mining, Steel, Iron and Nonprecious Metals   41,764    4.0 
Home and Office Furnishings, Housewares, and Durable Consumer Products   40,517    3.9 
Finance   38,842    3.7 
Chemicals, Plastics and Rubber   35,149    3.4 
Beverage, Food and Tobacco   34,061    3.3 
Containers, Packaging and Glass   32,366    3.1 
Diversified/Conglomerate Service   25,571    2.4 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   22,325    2.1 
Restaurant & Franchise   20,973    2.0 
Structure Finance Securities   20,468    2.0 
Leisure, Amusement, Motion Pictures, Entertainment   17,439    1.7 
Electronics   8,054    0.8 
Grocery   7,946    0.8 
Cargo Transport   7,512    0.7 
Total  $1,043,049    100.0%

  

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

 

F-19
 

 

   Investments at   Percentage of 
   Fair Value   Total Portfolio 
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 June 30, 2014 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Midwest  $313,974    30.1%
West   198,725    19.1 
Southeast   193,370    18.5 
Southwest   172,238    16.4 
Northeast   107,169    10.3 
Mid-Atlantic   47,575    4.6 
International   9,998    1.0 
Total  $1,043,049    100.0%

 

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%