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Table of Contents

 

 

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 September 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 814-00924

 

 

Sierra Income Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   45-2544432

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

375 Park Avenue, 33rd Floor

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   ¨
Non-accelerated filer   x  (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 November 1, 2013, the Registrant had 12,421,164 shares of common stock, $0.001 par value, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Part I.      Financial Information

 

Item 1.      Financial Statements

    F-1   
  

Consolidated Statements of Assets and Liabilities as of September 30, 2013 (unaudited) and December 31, 2012

    F-1   
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)

    F-2   
  

Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)

    F-3   
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)

    F-4   
  

Consolidated Schedules of Investments as of September 30, 2013 (unaudited) and December 31, 2012

    F-5   
  

Notes to 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

    16   

Item 4.      Controls and Procedures

    16   

Part II.    Other Information

 

Item 1.      Legal Proceedings

    17   

Item 1A.  Risk Factors

    17   

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

    18   

Item 3.      Defaults Upon Senior Securities

    18   

Item 4.      Mine Safety Disclosures

    19   

Item 5.      Other Information

    19   

Item 6.      Exhibits

    19   

SIGNATURES

    20   


Table of Contents

Sierra Income Corporation

Consolidated Statements of Assets and Liabilities

 

     As of  
     September 30, 2013     December 31, 2012  
     (unaudited)        

ASSETS

    

Non-Controlled/Non-Affiliated investments, at fair value (amortized cost of $104,157,445 and $30,599,349, respectively)

   $ 104,787,528      $ 30,580,211   

Cash and cash equivalents

     616,832        6,651,767   

Cash collateral on total return swap (Note 5)

     2,209,000        —     

Due from affiliate (Note 7)

     1,965,938        814,814   

Interest receivable

     1,911,357        784,637   

Prepaid expenses and other assets

     48,614        8,949   
  

 

 

   

 

 

 

Total assets

   $ 111,539,269      $ 38,840,378   
  

 

 

   

 

 

 

LIABILITIES

    

Due to prime broker

   $ 17,196,550      $ 17,345,794   

Unsettled trades payable

     2,730,400        —     

Accounts payable and accrued expenses

     678,307        464,361   

Management fee

     487,843        171,317   

Administrator fees

     143,509        128,459   

Directors fees

     62,994        40,081   

Repurchase of common shares payable

     33,253        —     

Unrealized depreciation on total return swap (Note 5)

     32,400        —     

Due to affiliate

     15,702        55,927   

Interest payable

     11,784        10,829   

Provisional incentive fee

     —          628   
  

 

 

   

 

 

 

Total liabilities

   $ 21,392,742      $ 18,217,396   
  

 

 

   

 

 

 

NET ASSETS

    

Common shares, par value $.001 per share, 250,000,000 common shares authorized, 9,862,017 and 2,300,573 common shares issued and outstanding, respectively

   $ 9,862      $ 2,301   

Capital in excess of par value

     89,926,943        20,436,709   

Accumulated net realized gain/(loss) from investments

     (716,092     —     

Accumulated undistributed net investment income

     328,131        203,132   

Net unrealized appreciation/(depreciation) on investments and total return swap

     597,683        (19,160
  

 

 

   

 

 

 

Total net assets

     90,146,527        20,622,982   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 111,539,269      $ 38,840,378   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

   $ 9.14      $ 8.96   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-1


Table of Contents

Sierra Income Corporation

Consolidated Statements of Operations

 

     Three Months Ended
September 30
    Nine months ended
September 30
 
     2013     2012     2013     2012  

INVESTMENT INCOME

        

Interest from Non-Controlled/Non-Affiliated investments

   $ 2,008,108      $ 393,867      $ 4,462,568      $ 560,584   

Other fee income

     21,523        —          150,983        —     

Interest from cash and cash equivalents

     —          49        441        248   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     2,029,631        393,916        4,613,992        560,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     487,843        111,770        1,091,731        148,212   

Organizational and offering costs reimbursed to an affiliate (Note 7)

     441,989        41,143        900,509        167,143   

Professional fees

     337,806        170,142        826,031        416,564   

Administrator expenses

     143,509        141,456        440,423        247,217   

General and administrative expenses

     169,506        15,094        392,222        161,466   

Directors fees

     41,646        40,112        127,286        111,242   

Interest and financing expenses

     41,960        16,407        107,455        20,390   

Insurance expense

     36,720        35,396        95,051        71,141   

Provisional incentive fee

     (34,108     13,125        —          14,485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross expenses

     1,666,871        584,645        3,980,708        1,357,860   

Expense support reimbursement (Note 7)

     (1,262,848     (437,303     (2,680,676     (893,537
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     404,023        147,342        1,300,032        464,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     1,625,608        246,574        3,313,960        96,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain/(loss) from investments

     (714,665     —          (605,457     25,065   

Net change in unrealized appreciation/(depreciation) on investments

     565,613        65,623        649,243        47,357   

Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)

     (32,400     —          (32,400     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain/(loss) on investments and total return swap

     (181,452     65,623        11,386        72,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 1,444,156      $ 312,197      $ 3,325,346      $ 168,931   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE — BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 0.18      $ 0.25      $ 0.61      $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE — BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE

   $ 0.21      $ 0.20      $ 0.61      $ 0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING — BASIC AND DILUTED

     7,896,446        1,231,625        5,441,473        721,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.20      $ 0.20      $ 0.60      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-2


Table of Contents

Sierra Income Corporation

Consolidated Statements of Changes in Net Assets

 

    For the nine months ended September 30,  
              2013                          2012             
    (unaudited)     (unaudited)  

INCREASE FROM OPERATIONS

   

Net investment income

  $ 3,313,960      $ 96,509   

Net realized gain/(loss) on investments

    (605,457     25,065   

Net change in unrealized appreciation/(depreciation) on investments and total return swap (Note 5)

    616,843        47,357   
 

 

 

   

 

 

 

Net increase in net assets resulting from operations

    3,325,346        168,931   
 

 

 

   

 

 

 

SHAREHOLDER DISTRIBUTIONS

   

Distributions from realized gains

    (110,635     —     

Distributions from net investment income

    (3,188,961     (168,931

Distributions from return of capital

    —          (77,643
 

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

    (3,299,596     (246,574
 

 

 

   

 

 

 

CAPITAL SHARE TRANSACTIONS

   

Issuance of common shares, net of underwriting costs

    68,523,071        13,063,446   

Issuance of common shares pursuant to distribution reinvestment plan

    1,007,977        3,262   

Repurchase of common shares

    (33,253     —     
 

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

    69,497,795        13,066,708   
 

 

 

   

 

 

 

Total increase in net assets

    69,523,545        12,989,065   

Net assets at beginning of period

    20,622,982        1,000   
 

 

 

   

 

 

 

Net assets at end of period (including accumulated undistributed net investment income/(loss) of $328,130 and $(125,000), respectively)

  $ 90,146,527      $ 12,990,065   
 

 

 

   

 

 

 

Net asset value per common share

  $ 9.14      $ 8.97   

Common shares outstanding, beginning of period

    2,300,573        —     

Issuance of common shares

    7,455,291        1,447,518   

Issuance of common shares pursuant to distribution reinvestment plan

    109,795        343   

Repurchase of common shares

    (3,642     —     
 

 

 

   

 

 

 

Common shares outstanding, end of period

    9,862,017        1,447,861   
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-3


Table of Contents

Sierra Income Corporation

Consolidated Statements of Cash Flows

 

    For the nine months ended September 30,  
            2013                     2012          
    (unaudited)     (unaudited)  

Cash flows from operating activities

   

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

  $ 3,325,346      $ 168,931   

ADJUSTMENT TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES

   

Paid-in-kind interest income

    (580     (2,213

Net amortization of premium on investments

    22,741        17,210   

Net realized (gain)/loss on investments

    605,457        (25,065

Net change in unrealized appreciation/(depreciation) on investments

    (649,243     (47,352

Net change in unrealized appreciation/(depreciation) on total return swap (Note 5)

    32,400        —     

Purchases of investments

    (95,326,340     (21,070,859

Proceeds from sale of investments

    21,140,648        2,985,348   

(Increase)/decrease in operating assets:

   

Interest receivable

    (1,126,720     (574,723

Prepaid expenses and other assets

    (39,665     (13,952

Due from affiliate

    (1,151,124     (539,764

Cash collateral on total return swap (Note 5)

    (2,209,000     —     

Increase/(decrease) in operating liabilities:

   

Unsettled trades payable

    2,730,400        1,585,394   

Management fee

    316,526        111,770   

Interest payable

    955        5,192   

Accounts payable and accrued expenses

    213,946        359,541   

Administrator fees

    15,050        141,456   

Due to affiliate

    (40,225     —     

Provisional incentive fee

    (628     14,485   

Directors fee

    22,913        11,246   
 

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

    (72,117,143     (16,873,355
 

 

 

   

 

 

 

Cash flows from financing activities

   

Borrowings under prime broker margin account

    (149,244     10,028,782   

Proceeds from issuance of common stock, net of underwriting costs

    68,489,819        1,448   

Payment of cash dividends

    (2,291,620     (150,622

Repurchase of common shares

    33,253        —     

Proceeds from additional paid in capital

    —          13,061,998   
 

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

    66,082,208        22,941,606   
 

 

 

   

 

 

 

TOTAL INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS

    (6,034,935     6,068,251   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    6,651,767        1,000   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 616,832      $ 6,069,251   
 

 

 

   

 

 

 

Supplemental Information

   

Cash paid during the period for interest

  $ 106,500      $ 20,390   

Supplemental non-cash information

   

Paid-in-kind interest income

  $ 580      $ 2,213   

Net amortization of premium on investments

  $ (22,741   $ (17,210

Issuance of common shares in connection with distribution reinvestment plan

  $ 1,007,977      $ 3,262   

See accompanying notes to the consolidated financial statements.

 

F-4


Table of Contents

Sierra Income Corporation

Consolidated Schedule of Investments

As of September 30, 2013

(unaudited)

 

Company(1)

  Industry  

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
    % of
Net Assets(2)
 

Non-controlled/non-affiliated
investments — 116.2%

           

Aderant North
America, Inc.

  Electronics   Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor(4)     6/20/2019      $ 450,000      $ 450,000      $ 450,000        0.5
       

 

 

   

 

 

   

 

 

   
          450,000        450,000        450,000     

Alcatel — Lucent
USA, Inc.

  Telecommunications   Senior Secured First Lien Term Loans LIBOR + 6.000%, 1.250% Floor     1/30/2019        992,500        987,983        996,222        1.1
       

 

 

   

 

 

   

 

 

   
          992,500        987,983        996,222     

ALG USA Holdings, Inc.

  Leisure,
Amusement, Motion
Pictures,
Entertainment
  Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.250% Floor     2/28/2020        2,000,000        1,962,062        1,987,340        2.2
       

 

 

   

 

 

   

 

 

   
          2,000,000        1,962,062        1,987,340     

American Apparel, Inc.

  Retail Stores   Senior Secured First Lien Notes 13.000%(3)(4)(5)     4/15/2020        2,500,000        2,459,399        2,550,000        2.8
       

 

 

   

 

 

   

 

 

   
          2,500,000        2,459,399        2,550,000     

Associated Asphalt Partners LLC

  Chemicals, Plastics,
and Rubber
  Senior Secured First Lien Notes 8.500%(3)(5)     2/15/2018        5,000,000        5,038,460        4,959,550        5.5
       

 

 

   

 

 

   

 

 

   
          5,000,000        5,038,460        4,959,550     

Atkore International, Inc.

  Mining, Steel, Iron,
and Nonprecious
Metals
  Senior Secured First Lien Notes 9.875%(5)     1/1/2018        750,000        735,014        812,813        0.9
       

 

 

   

 

 

   

 

 

   
          750,000        735,014        812,813     

Bon-Ton Stores, Inc.

  Retail Stores   Senior Secured Second Lien Notes 10.625%(5)     7/15/2017        1,698,000        1,618,859        1,684,093        1.9
       

 

 

   

 

 

   

 

 

   
          1,698,000        1,618,859        1,684,093     

Caesars Entertainment Operating Co., Inc.

  Hotels, Motels, Inns,
and Gaming
  Senior Secured First Lien Notes 11.250%(5)(6)     6/1/2017        3,000,000        3,162,790        3,045,000        3.4
       

 

 

   

 

 

   

 

 

   
          3,000,000        3,162,790        3,045,000     

Camp Systems International, Inc.

  Aerospace and
Defense
  Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor     11/30/2019        500,000        491,461        510,000        0.6
       

 

 

   

 

 

   

 

 

   
          500,000        491,461        510,000     

Checkers Drive-In Restaurants, Inc.

  Beverage, Food, and
Tobacco
  Senior Secured First Lien Notes 11.000%(3)(5)     12/1/2017        1,500,000        1,504,299        1,575,000        1.8
       

 

 

   

 

 

   

 

 

   
          1,500,000        1,504,299        1,575,000     

Clondalkin
Acquisitions B.V.

  Containers, Plastics,
and Glass
  Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor(6)     11/30/2020        2,000,000        1,961,265        1,970,000        2.2
       

 

 

   

 

 

   

 

 

   
          2,000,000        1,961,265        1,970,000     

Cornerstone Chemical Company

  Chemicals, Plastics,
and Rubber
  Senior Secured First Lien Notes 9.375%(5)     3/15/2018        2,000,000        2,000,000        2,110,360        2.3
    Senior Secured First Lien Notes 9.375%(3) (5)     3/15/2018        2,500,000        2,617,107        2,637,950        2.9
       

 

 

   

 

 

   

 

 

   
          4,500,000        4,617,107        4,748,310     

 

F-5


Table of Contents

Company(1)

  Industry  

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
    % of
Net Assets(2)
 

Deltek, Inc.

  Electronics   Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor     10/10/2019        3,000,000        2,977,138        3,007,500        3.3
       

 

 

   

 

 

   

 

 

   
          3,000,000        2,977,138        3,007,500     

Dispensing Dynamics International, Inc.

  Personal and Nondurable
Consumer Products
(Manufacturing Only)
  Senior Secured First Lien Notes 12.500%(3)(4)(5)     1/1/2018        2,200,000        2,178,104        2,211,836        2.5
       

 

 

   

 

 

   

 

 

   
          2,200,000        2,178,104        2,211,836     

EarthLink, Inc.

  Telecommunications   Senior Secured First Lien Notes 7.375%(3)(5)(6)     6/1/2020        2,450,000        2,437,116        2,391,812        2.7
       

 

 

   

 

 

   

 

 

   
          2,450,000        2,437,116        2,391,812     

Erickson Air-Crane, Inc.

  Aerospace and Defense   Senior Secured Second Lien Notes 8.250%(3)(5)     5/1/2020        1,953,000        1,967,540        1,911,499        2.1
       

 

 

   

 

 

   

 

 

   
          1,953,000        1,967,540        1,911,499     

Fifth and Pacific Companies, Inc.

  Retail Stores   Senior Secured First Lien Notes 10.500%(3)(5)(6)     4/15/2019        500,000        548,583        545,000        0.6
       

 

 

   

 

 

   

 

 

   
          500,000        548,583        545,000     

Gastar Exploration USA, Inc.

  Oil and Gas   Senior Secured First Lien Notes 8.625%(3)(5)     5/15/2018        3,000,000        3,000,000        2,907,000        3.2
       

 

 

   

 

 

   

 

 

   
          3,000,000        3,000,000        2,907,000     

Gibson Brands, Inc.

  Personal and Nondurable
Consumer Products
(Manufacturing Only)
  Senior Secured First Lien Notes 8.875%(3)(5)     8/1/2018        3,000,000        3,058,705        3,063,750        3.4
       

 

 

   

 

 

   

 

 

   
          3,000,000        3,058,705        3,063,750     

Great Atlantic & Pacific Tea Company

  Grocery   Senior Secured First Lien Term Loans LIBOR + 9.000%, 2.000% Floor(4)     3/13/2017        935,147        952,804        946,294        1.1
       

 

 

   

 

 

   

 

 

   
          935,147        952,804        946,294     

Green Field Energy Services, Inc.

  Oil and Gas   Senior Secured First Lien Notes 13.000%(3)(4)(5)     11/15/2016        724,000        713,208        579,200        0.6
       

 

 

   

 

 

   

 

 

   
          724,000        713,208        579,200     

Green Field Energy Services, Inc., Warrants, expires 11/15/21

  Oil and Gas   Warrants/Equity(4)(7)       709        29,000        22,241        0.0
       

 

 

   

 

 

   

 

 

   
          709        29,000        22,241     

Healogics, Inc.

  Healthcare, Education,
and Childcare
  Senior Secured Second Lien Term Loans LIBOR + 8.000%, 1.250% Floor     2/5/2020        1,500,000        1,486,045        1,526,250        1.7
       

 

 

   

 

 

   

 

 

   
          1,500,000        1,486,045        1,526,250     

Holland Acquisition Corp.

  Oil and Gas   Senior Secured First Lien Term Loans LIBOR + 9.000%, 1.000% Floor     5/29/2018        5,000,000        4,900,243        4,900,243        5.4
       

 

 

   

 

 

   

 

 

   
          5,000,000        4,900,243        4,900,243     

IDQ Holdings, Inc.

  Automobile   Senior Secured First Lien Notes 11.500%(3)(5)     4/1/2017        1,000,000        1,038,207        1,077,280        1.2
       

 

 

   

 

 

   

 

 

   
          1,000,000        1,038,207        1,077,280     

Ineos US Finance PLC

  Chemicals, Plastics, and
Rubber
  Senior Secured First Lien Notes 7.500%(3)(5)     5/1/2020        1,250,000        1,282,374        1,337,500        1.5
       

 

 

   

 

 

   

 

 

   
          1,250,000        1,282,374        1,337,500     

Integra Telecom, Inc.

  Telecommunications   Senior Secured Second Lien Term Loans LIBOR + 8.500%, 1.250% Floor(4)     2/22/2020        1,618,000        1,607,614        1,644,292        1.8
       

 

 

   

 

 

   

 

 

   
          1,618,000        1,607,614        1,644,292     

 

F-6


Table of Contents

Company(1)

  Industry  

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
    % of
Net Assets(2)
 

Interface Security Systems, Inc.

  Electronics   Senior Secured First Lien Notes 9.250%(3)(4)(5)     1/15/2018        3,417,000        3,479,190        3,513,394        3.9
       

 

 

   

 

 

   

 

 

   
          3,417,000        3,479,190        3,513,394     

IronGate Energy Services LLC

  Oil and Gas   Senior Secured First Lien Notes 11.000%(3)(5)     7/1/2018        3,000,000        2,945,091        2,970,000        3.3
       

 

 

   

 

 

   

 

 

   
          3,000,000        2,945,091        2,970,000     

KCG Holdings, Inc.

  Finance   Senior Secured Second Lien Notes 8.250%(3)(5)(6)     6/15/2018        3,000,000        3,000,000        2,940,000        3.3
       

 

 

   

 

 

   

 

 

   
    3,000,000        3,000,000        2,940,000     

Keystone Automotive Operations, Inc.

  Automobile   Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor     8/15/2020        5,000,000        5,000,000        5,000,000        5.6
       

 

 

   

 

 

   

 

 

   
    5,000,000        5,000,000        5,000,000     

Linc Energy Finance (USA), Inc.

  Oil and Gas   Senior Secured First Lien Notes 12.500%(3)(4)(5)     10/31/2017        500,000        498,374        546,250        0.6
    Senior Secured First Lien Notes 12.500%(4)(5)     10/31/2017        500,000        484,586        546,250        0.6
       

 

 

   

 

 

   

 

 

   
    1,000,000        982,960        1,092,500     

Liquidnet Holdings, Inc.

  Finance   Senior Secured First Lien Term Loans LIBOR + 8.000%, 1.250% Floor     5/7/2017        2,925,000        2,898,020        2,895,750        3.2
       

 

 

   

 

 

   

 

 

   
    2,925,000        2,898,020        2,895,750     

Livingston International, Inc.(8)

  Cargo Transport   Senior Secured Second Lien Term Loans LIBOR + 7.750%, 1.250% Floor(6)     4/18/2020        2,720,000        2,713,808        2,740,400        3.0
       

 

 

   

 

 

   

 

 

   
    2,720,000        2,713,808        2,740,400     

Maxim Crane Works Holdings, Inc.

  Oil and Gas   Senior Secured Second Lien Notes 12.250%(3)(5)     4/15/2015        1,500,000        1,523,112        1,546,875        1.7
       

 

 

   

 

 

   

 

 

   
    1,500,000        1,523,112        1,546,875     

Mohegan Tribal Gaming Authority

  Hotels, Motels, Inns,
and Gaming
  Senior Secured Second Lien Notes 11.500%(3)(5)     11/1/2017        1,000,000        1,038,600        1,126,250        1.3
       

 

 

   

 

 

   

 

 

   
    1,000,000        1,038,600        1,126,250     

Murray Energy Corp.

  Mining, Steel, Iron,
and Nonprecious
Metals
  Senior Secured Second Lien Notes 8.625%(3)(5)     6/15/2021        2,100,000        2,122,115        2,100,000        2.3
       

 

 

   

 

 

   

 

 

   
    2,100,000        2,122,115        2,100,000     

Prince Minerals Holding Corp.

  Mining, Steel, Iron,
and Nonprecious
Metals
  Senior Secured First Lien Notes 11.500%(3)(4)(5)     12/15/2019        1,200,000        1,186,557        1,278,000        1.4
       

 

 

   

 

 

   

 

 

   
    1,200,000        1,186,557        1,278,000     

Reddy Ice Group, Inc.

  Beverage, Food, and
Tobacco
  Senior Secured Second Lien Term Loans LIBOR + 9.500%, 1.250% Floor(4)     10/1/2019        2,000,000        2,000,000        1,983,886        2.2
       

 

 

   

 

 

   

 

 

   
    2,000,000        2,000,000        1,983,886     

Satmex Mexicanos, S.A. de C.V.

  Telecommunications   Senior Secured First Lien Notes 9.500%(3)(5)(6)     5/15/2017        1,000,000        1,030,252        1,081,250        1.2
       

 

 

   

 

 

   

 

 

   
    1,000,000        1,030,252        1,081,250     

School Specialty, Inc.

  Healthcare,
Education, and
Childcare
  Senior Secured First Lien Term Loans LIBOR + 8.500%, 1.000% Floor     6/11/2019        2,992,500        2,941,702        2,947,612        3.3
       

 

 

   

 

 

   

 

 

   
    2,992,500        2,941,702        2,947,612     

 

F-7


Table of Contents

Company(1)

  Industry  

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
    % of
Net Assets(2)
 

Securus Technologies, Inc.

  Telecommunications   Senior Secured Second Lien Term Loans LIBOR + 9.000%, 1.750% Floor     4/30/2021        2,000,000        1,980,796        1,965,000        2.2
       

 

 

   

 

 

   

 

 

   
    2,000,000        1,980,796        1,965,000     

Sesac Holdco II, Inc.

  Broadcasting and
Entertainment
  Senior Secured Second Lien Term Loans LIBOR + 8.750%, 1.250% Floor(4)     7/12/2019        2,250,000        2,295,345        2,289,555        2.5
       

 

 

   

 

 

   

 

 

   
          2,250,000        2,295,345        2,289,555     

Shale-Inland Holdings, Inc.

  Oil and Gas   Senior Secured First Lien Notes 8.750%(3)(5)     11/15/2019        1,000,000        994,037        1,012,970        1.1
       

 

 

   

 

 

   

 

 

   
          1,000,000        994,037        1,012,970     

Sizzling Platter, LLC

  Beverage, Food,

and Tobacco

  Senior Secured First Lien Notes 12.250%(3)(4)(5)     4/15/2016        2,063,000        2,131,310        2,183,252        2.4
       

 

 

   

 

 

   

 

 

   
          2,063,000        2,131,310        2,183,252     

Sorenson Communications

  Telecommunications   Senior Secured First Lien Term Loans LIBOR + 8.250%, 1.250% Floor     10/31/2014        2,987,500        2,987,500        2,994,969        3.3
       

 

 

   

 

 

   

 

 

   
          2,987,500        2,987,500        2,994,969     

Tempel Steel Company

  Mining, Steel, Iron,
and Nonprecious
Metals
  Senior Secured First Lien Notes 12.000%(3)(4)(5)     8/15/2016        1,115,000        1,105,076        1,079,320        1.2
       

 

 

   

 

 

   

 

 

   
          1,115,000        1,105,076        1,079,320     

True Religion Apparel, Inc.

  Personal and

Nondurable
Consumer Products
(Manufacturing Only)

  Senior Secured Second Lien Term Loans LIBOR + 10.000%, 1.000% Floor     1/30/2020        4,000,000        3,830,887        3,830,887        4.3
       

 

 

   

 

 

   

 

 

   
          4,000,000        3,830,887        3,830,887     

U.S. Well Services, LLC

  Oil and Gas   Senior Secured First Lien Notes 14.500%(3)(4)(5)     2/15/2017        2,816,605        2,805,534        2,817,309        3.1
       

 

 

   

 

 

   

 

 

   
          2,816,605        2,805,534        2,817,309     

U.S. Well Services, LLC, Warrants, expires 2/15/19

  Oil and Gas   Warrants/Equity(4)(7)       1,731        173        38,324        0.0
       

 

 

   

 

 

   

 

 

   
          1,731        173        38,324     

Total non-controlled/non-affiliated investments

        $ 104,157,445      $ 104,787,528        116.2
         

 

 

   

 

 

   
                        Notional
Amount
    Unrealized
Gain (Loss)
       

Derivative Instrument — Long Exposure

           

Total return swap (Note 5)

  Total return swap       $ 7,030,000      $ (32,400  
         

 

 

   

 

 

   
          $ 7,030,000      $ (32,400  
         

 

 

   

 

 

   

 

(1) All of our investments are domiciled in the United States except for Satmex Mexicanos, S.A. de C.V., Livingston International, Inc., and Clondalkin Acquisitions B.V., which are domiciled in Mexico, Canada and the Netherlands, respectively.
(2) Percentage is based on net assets of $90,146,527 as of September 30, 2013.
(3) Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $51,942,247 and 57.6% of net assets as of September 30, 2013 and are considered restricted.
(4) An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.
(5) Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at September 30, 2013 is $60,140,763.
(6) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.
(7) Security is non-income producing.
(8) Livingston International, Inc. is also held in the underlying portfolio of the total return swap with Citibank, N.A. (see Note 5). Sierra’s total committment to Livingston International, Inc. is $4,755,400 or 5.3% of Net Assets as of September 30, 2013.

 

F-8


Table of Contents

Sierra Income Corporation

Schedule of Investments

December 31, 2012(6)

 

Company(1)

 

Industry

 

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
     % of
Net Assets(2)
 

Non-Controlled/non-affiliated investments —148.3%

            

Aderant North America, Inc.

  Electronics   Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor(3)     6/20/2019      $ 450,000      $ 450,000      $ 450,000         2.2
       

 

 

   

 

 

   

 

 

    
          450,000        450,000        450,000      

Atkore International, Inc.

  Mining, Steel, Iron, and Nonprecious Metals   Senior Secured Notes 9.875%(3)(4)(5)     1/1/2018        750,000        733,129        801,600         3.9
       

 

 

   

 

 

   

 

 

    
          750,000        733,129        801,600      

Bon-Ton Stores, Inc.

  Retail Stores   Senior Secured Notes 10.625%(4)(5)     7/15/2017        1,000,000        914,795        951,200         4.6
       

 

 

   

 

 

   

 

 

    
          1,000,000        914,795        951,200      

Camp Systems International, Inc.

  Aerospace & Defense   Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor     11/30/2019        500,000        490,523        505,000         2.4
       

 

 

   

 

 

   

 

 

    
          500,000        490,523        505,000      

Cengage Learning, Inc.

  Healthcare, Education, and Childcare   Senior Secured Notes 11.500%(4)(5)     4/15/2020        1,250,000        1,348,108        1,062,500         5.2
       

 

 

   

 

 

   

 

 

    
          1,250,000        1,348,108        1,062,500      

Checkers Drive-In Restaurants, Inc.

  Restaurant & Franchise   Senior Secured Notes 11.000%(4)(5)     12/1/2017        1,500,000        1,504,956        1,504,956         7.3
       

 

 

   

 

 

   

 

 

    
          1,500,000        1,504,956        1,504,956      

Deltek, Inc.

  Software   Senior Secured Loans — Second Lien LIBOR + 8.75%, 1.25% Floor(3)     10/31/2019        1,000,000        985,343        985,343         4.8
       

 

 

   

 

 

   

 

 

    
          1,000,000        985,343        985,343      

Dispensing Dynamics International, Inc.

  Personal and Nondurable Consumer Products (Manufacturing Only)   Senior Secured Notes 12.500%(3)(4)(5)     1/1/2018        1,200,000        1,176,009        1,176,009         5.7
       

 

 

   

 

 

   

 

 

    
          1,200,000        1,176,009        1,176,009      

EarthLink, Inc.

  Telecommunications   Senior Secured Notes 10.500%(4)(5)     4/1/2016        900,000        950,574        957,420         4.6
       

 

 

   

 

 

   

 

 

    
          900,000        950,574        957,420      

Exide Technologies

  Machinery (Nonagriculture, Nonconstruction, Nonelectric)   Senior Secured Notes 8.625%(3)(4)(5)     2/1/2018        1,600,000        1,336,979        1,364,001         6.6
       

 

 

   

 

 

   

 

 

    
          1,600,000        1,336,979        1,364,001      

Fifth and Pacific Companies, Inc.

  Retail Stores   Senior Secured Notes 10.500%(4)(5)     4/15/2019        500,000        557,130        557,130         2.7
       

 

 

   

 

 

   

 

 

    
          500,000        557,130        557,130      

Great Atlantic & Pacific Tea Company

  Grocery   Senior Secured Loans — First Lien LIBOR + 9%, 2% Floor(3)     3/13/2017        942,875        964,535        964,535         4.7
       

 

 

   

 

 

   

 

 

    
          942,875        964,535        964,535      

Green Field Energy Services, Inc.

  Oil and Gas   Senior Secured Notes 13.000%(4)(5)     11/15/2016        512,000        494,791        494,791         2.4
   

Warrants/Equity

      20,000        20,000        15,115         0.1
       

 

 

   

 

 

   

 

 

    
          532,000        514,791        509,906      

 

F-9


Table of Contents

Company(1)

 

Industry

 

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
     % of
Net Assets(2)
 

IDQ Holdings, Inc.

  Automobile   Senior Secured Notes 11.500%(4)(5)     4/1/2017        1,000,000        1,044,468        1,078,200         5.2
       

 

 

   

 

 

   

 

 

    
          1,000,000        1,044,468        1,078,200      

Ineos Finance PLC

  Chemicals   Senior Secured Notes 7.500%(4)(5)     5/1/2020        1,250,000        1,285,207        1,285,207         6.2
       

 

 

   

 

 

   

 

 

    
          1,250,000        1,285,207        1,285,207      

Innovation Ventures, Inc.

  Retail   Senior Secured Notes 9.500%(4)(5)     8/1/2019        1,250,000        1,224,724        1,179,375         5.7
       

 

 

   

 

 

   

 

 

    
          1,250,000        1,224,724        1,179,375      

Integra Telecom, Inc.

  Telecommunications   Senior Secured Notes 10.750%(3)(4)(5)     4/15/2016        750,000        722,600        757,500         3.7
       

 

 

   

 

 

   

 

 

    
          750,000        722,600        757,500      

Linc Energy Finance (USA), Inc.

  Oil and Gas   Senior Secured Notes 12.500%(3)(4)(5)     10/31/2017        1,000,000        980,715        980,715         4.8
       

 

 

   

 

 

   

 

 

    
          1,000,000        980,715        980,715      

Maxim Crane Works Holdings, Inc.

  Industrial   Senior Secured Notes 12.250%(4)(5)     4/15/2015        1,000,000        1,010,037        1,029,400         5.0
       

 

 

   

 

 

   

 

 

    
          1,000,000        1,010,037        1,029,400      

Mohegan Tribal Gaming Authority

  Gaming   Senior Secured Notes 11.500%(4)(5)     11/1/2017        1,000,000        1,045,312        1,045,312         5.1
       

 

 

   

 

 

   

 

 

    
          1,000,000        1,045,312        1,045,312      

Pittsburgh Glass Works, LLC

  Automobile   Senior Secured Notes 8.500%(4)(5)     4/15/2016        1,425,000        1,325,728        1,311,000         6.4
       

 

 

   

 

 

   

 

 

    
          1,425,000        1,325,728        1,311,000      

Prince Minerals Holding Corp.

  Mining, Steel, Iron, and Nonprecious Metals   Senior Secured Notes 11.500%(3)(4)(5)     12/15/2019        1,200,000        1,186,001        1,248,000         6.1
       

 

 

   

 

 

   

 

 

    
          1,200,000        1,186,001        1,248,000      

Satmex Mexicanos, S.A. de C.V.

  Telecommunications   Senior Secured Notes 9.500%(4)(5)     5/15/2017        1,000,000        1,035,564        1,035,564         5.0
       

 

 

   

 

 

   

 

 

    
          1,000,000        1,035,564        1,035,564      

Securus Technologies, Inc.

  Telecommunications   Senior Secured Loans — Second Lien LIBOR + 9.00%, 1.75% Floor     5/31/2018        500,000        490,854        490,854         2.4
       

 

 

   

 

 

   

 

 

    
          500,000        490,854        490,854      

Shale-Inland Holdings, Inc.

  Energy   Senior Secured Notes 8.750%(4)(5)     11/15/2019        1,000,000        993,624        1,010,000         4.9
       

 

 

   

 

 

   

 

 

    
          1,000,000        993,624        1,010,000      

Sizzling Platter, LLC

  Restaurant & Franchise   Senior Secured Notes 12.250%(3)(4)(5)     4/15/2016        1,652,000        1,715,987        1,715,987         8.3
       

 

 

   

 

 

   

 

 

    
          1,652,000        1,715,987        1,715,987      

Tempel Steel Company

  Mining, Steel, Iron, and Nonprecious Metals   Senior Secured Notes 12.000%(3)(4)(5)     8/15/2016        1,115,000        1,102,986        1,090,024         5.3
       

 

 

   

 

 

   

 

 

    
          1,115,000        1,102,986        1,090,024      

Tower International, Inc.

  Automobile   Senior Secured Notes 10.625%(3)(4)(5)     9/1/2017        500,000        518,324        534,500         2.6
       

 

 

   

 

 

   

 

 

    
          500,000        518,324        534,500      

Travelport LLC

  Business Services   Senior Secured Loans — Second Lien LIBOR + 9.5%, 1.5% Floor     11/22/2015        500,000        487,178        497,050         2.4
       

 

 

   

 

 

   

 

 

    
          500,000        487,178        497,050      

US Well Services, Inc.

  Oil and Gas   Senior Secured Notes 14.500%(3)(4)(5)     2/15/2017        1,518,405        1,504,921        1,503,828         7.3
    Warrants/Equity(3)       1,518        152        —           0.0
       

 

 

   

 

 

   

 

 

    
          1,519,923        1,505,073        1,503,828      

 

F-10


Table of Contents

Company(1)

 

Industry

 

Type of Investment

  Maturity     Par
Amount
    Cost     Fair
Value
     % of
Net Assets(2)
 

WeLocalize, Inc.

  Business Services   Senior Secured Loans — First Lien LIBOR + 8%, 2% Floor(3)     11/19/2015        459,478        459,478        459,478         2.2
    Senior Secured Loans — First Lien LIBOR + 9%, 2% Floor, 1.25% PIK(3)     11/19/2015        538,617        538,617        538,617         2.6
       

 

 

   

 

 

   

 

 

    
          998,095        998,095        998,095      

Total non-controlled/
non-affiliated investments

          30,599,349        30,580,211         148.3
         

 

 

   

 

 

    

US Government
Treasuries — 29.1%

            

US Treasury Bill

    Government Securities 1.375%     1/15/2013        6,000,000.00        6,003,022        6,003,000         29.1
       

 

 

   

 

 

   

 

 

    

Total Investments and
US Government
Treasuries — 177.4%

        $ 36,602,371      $ 36,583,211         177.4
         

 

 

   

 

 

    

 

(1) 

All of our investments are domiciled in the United States except for Satmex Mexicanos S.A. de C.V., which is domiciled in Mexico.

(2) 

Percentage is based on net assets of $20,622,982 as of December 31, 2012.

(3) 

An affiliated fund that is managed by an affiliate of SIC Advisors LLC also holds an investment in this security.

(4) 

Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $25,674,219 and 124.6% of net assets as of December 31, 2012 and are considered restricted.

(5) 

Positions are held as collateral for margin borrowings from our prime broker. The fair value for collateral held at December 31, 2012 is $25,674,219.

(6) 

The December 31, 2012 presentation has been revised to conform to the current period presentation.

 

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Table of Contents

SIERRA INCOME CORPORATION

Notes to Consolidated Financial Statements

September 30, 2013

(unaudited)

Note 1. Organization

Sierra Income Corporation (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 13, 2011 and formally commenced operations on April 17, 2012. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is externally managed by SIC Advisors LLC (“SIC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Company has elected and intends to qualify 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”), commencing with its taxable year ended December 31, 2012, and intends to so qualify annually thereafter. The Company’s fiscal year-end is December 31st.

On August 15, 2013, the Company formed Arbor Funding LLC, a wholly-owned financing subsidiary.

On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. The Company’s offering period is currently scheduled to terminate two years after the initial offering date, or April 16, 2014, unless extended. Since commencing its operations, the Company has sold a total of 9,865,659 shares of common stock, which includes shares issued as part of the distribution reinvestment plan in Note 12, for total proceeds of $92,217,756, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows and are presented net of selling commissions and dealer manager fees.

The Company’s investment objective is to generate net investment income, and to a lesser extent, long-term capital appreciation. The Company intends to meet its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. The Company will originate transactions sourced through SIC Advisors’ direct origination network, and also expects to acquire debt securities through the secondary market. The Company may make equity investments in companies that it believes will generate appropriate risk adjusted returns, although it does not expect this to be a substantial portion of the portfolio.

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”). Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited 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. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending 2013. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

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Table of Contents

Cash and Cash Equivalents

The Company considers cash equivalents to be highly liquid investments or 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 which, at times, may be in excess of the Federal Deposit Insurance Corporation insurance limits.

Offering Costs

Offering costs incurred directly by the Company will be recorded in the period incurred. See Note 7 regarding offering costs paid for by SIC Advisors.

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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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. We record amortized or accreted discounts or premiums as interest income using the effective interest method. Dividend income, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.

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 fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three and nine months ended September 30, 2013 was $21,523 and $150,983, respectively.

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

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. 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 September 30, 2013 the Company earned $0 and $580 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 that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

 

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Table of Contents

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

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, it would be deemed to “control” a portfolio company if it 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. The Company refers to such investments in portfolio companies that it “controls” as “Control Investments.” Under the 1940 Act, the Company would be deemed to be an “Affiliated Person” of a portfolio company if it owns between 5% and 25% of the portfolio company’s outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as “Affiliated Investments.” As of September 30, 2013, the Company has no Controlled Investments or Affiliated Investments.

Valuation of Investments

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

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

The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate

 

F-14


Table of Contents

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.

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

 

   

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

 

   

conclusions are then documented and discussed with senior management; and

 

   

an independent valuation firm engaged by the Company’s board of directors prepares an independent valuation report for approximately one third of the portfolio investments each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm 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 the Company’s investments are subject to the following valuation process:

 

   

management reviews preliminary valuations and their own independent assessment;

 

   

the audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and

 

   

the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of SIC 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 the Company’s 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 the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature.

Federal Income Taxes

The Company has elected to be treated as a RIC under subchapter M of the Code and operate 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 its investment company taxable income (“ICTI”)

 

F-15


Table of Contents

including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of the Company’s 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 will be 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.

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 statements of operations. There were no material uncertain income tax positions at September 30, 2013. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s inception-to-date federal tax years for the Company remain subject to examination by the Internal Revenue Service.

 

F-16


Table of Contents

The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the nine months ended September 30, 2013, and the year ended December 31, 2012:

 

     Nine months ended September 30, 2013     Year Ended December 31, 2012  

Source of Distribution

   Distribution  Amount(1)      Percentage     Distribution Amount      Percentage  

Return of capital from offering proceeds

   $ —           —     $ —           —  

Return of capital from borrowings

   $ —           —     $ —           —  

Net investment income

   $ 3,299,596         100.0   $ 637,330         100.0

Return of capital (other)

   $ —           —     $ —           —  
  

 

 

    

 

 

   

 

 

    

 

 

 

Distributions on a tax basis:

   $ 3,299,596         100.0   $ 637,330         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

The Distribution Amount and Percentage reflected for September 30, 2013 are estimated figures. The actual source of distributions for the fiscal year ending 2013 will be calculated in connection with the Company’s year-end procedures.

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

SIC Advisors has broad discretion in making investments for the Company. Investments 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 fluctuates.

The value of the Company’s investments in loans and bonds 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 the Company’s borrowers, and those for which market yields are observable increase materially. SIC 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.

 

F-17


Table of Contents

Note 3. Investments

The following table shows the composition of the Company’s portfolio in debt and equity investments by industry classification at fair value at September 30, 2013:

 

     Fair Value      Percentage  

Oil and Gas

   $ 17,886,662         17.1

Telecommunications

     11,073,545         10.6

Chemicals, Plastics, and Rubber

     11,045,360         10.5

Personal and Nondurable Consumer Products (Manufacturing Only)

     9,106,473         8.7

Electronics

     6,970,894         6.6

Automobile

     6,077,280         5.8

Finance

     5,835,750         5.6

Beverage, Food and Tobacco

     5,742,138         5.5

Mining, Steel, Iron, and Nonprecious Metals

     5,270,133         5.0

Retail Stores

     4,779,093         4.5

Healthcare, Education, and Childcare

     4,473,862         4.3

Hotels, Motels, Inns, and Gaming

     4,171,250         4.0

Cargo Transport

     2,740,400         2.6

Aerospace and Defense

     2,421,499         2.3

Broadcasting and Entertainment

     2,289,555         2.2

Leisure, Amusement, Motion Pictures, Entertainment

     1,987,340         1.9

Containers, Plastics, and Glass

     1,970,000         1.9

Grocery

     946,294         0.9
  

 

 

    

 

 

 

Total

   $ 104,787,528         100.0
  

 

 

    

 

 

 

The following table shows the composition of the Company’s portfolio in debt and equity investments by industry classification at fair value at December 31, 2012:

 

     Fair Value      Percentage  

Telecommunications

     3,241,338         10.5

Restaurant & Franchise

     3,220,943         10.4

Mining, Steel, Iron, and Nonprecious Metals

     3,139,624         10.3

Oil and Gas

     2,994,449         9.8

Automobile

     2,923,700         9.6

Retail Stores

     1,508,330         4.9

Business Services

     1,495,145         4.9

Machinery (Nonagriculture, Nonconstruction, Nonelectric)

     1,364,001         4.5

Chemicals

     1,285,207         4.2

Retail

     1,179,375         3.9

Personal and Nondurable Consumer Products (Manufacturing Only)

     1,176,009         3.8

Healthcare, Education, and Childcare

     1,062,500         3.5

Gaming

     1,045,312         3.4

Industrial

     1,029,400         3.4

Energy

     1,010,000         3.3

Software

     985,343         3.2

Grocery

     964,535         3.2

Aerospace & Defense

     505,000         1.7

Electronics

     450,000         1.5
  

 

 

    

 

 

 

Total

   $ 30,580,211         100.0
  

 

 

    

 

 

 

 

F-18


Table of Contents

The following table summarizes the amortized cost and the fair value of the Company’s portfolio in debt and equity investments as of September 30, 2013:

 

     Amortized
Cost
     Percentage     Value      Percentage  

Senior secured first lien notes

   $ 48,433,373         46.6   $ 48,832,046         46.6

Senior secured second lien term loans

     28,756,421         27.6        28,905,110         27.6   

Senior secured first lien term loans

     15,668,252         15.0        15,681,090         15.0   

Senior secured second lien notes

     11,270,226         10.8        11,308,717         10.8   

Warrants/Equity

     29,173         0.0     60,565         0.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 104,157,445         100.0   $ 104,787,528         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s portfolio in debt and equity investments as of December 31, 2012:

 

    

 

Amortized

Cost

  

  

     Percentage        Fair Value         Percentage   

Senior secured notes

   $ 25,712,669         84.0   $ 25,674,219         84.0

Senior secured second lien term loans

     2,903,898         9.5        2,928,247         9.6   

Senior secured first lien term loans

     1,962,630         6.4        1,962,630         6.4   

Warrants/Equity

     20,152         0.1        15,115         0.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,599,349         100.0   $ 30,580,211         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the composition by of the Company’s portfolio in debt and equity investments geography classification at fair value at September 30, 2013:

 

Geography

   Fair Value      Percentage  

United States

   $ 98,995,878         94.5

Canada

     2,740,400         2.6   

Netherlands

     1,970,000         1.9   

Mexico

     1,081,250         1.0   
  

 

 

    

 

 

 

Total

   $ 104,787,528         100.0
  

 

 

    

 

 

 

The following table shows the portfolio composition by geography classification at fair value at December 31, 2012:

 

Geography

   Fair Value      Percentage  

United States

   $ 29,544,647         96.6

Mexico

     1,035,564         3.4   
  

 

 

    

 

 

 

Total

   $ 30,580,211         100.0
  

 

 

    

 

 

 

Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients, or affiliated funds. As a BDC, the Company is substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds unless it obtains an exemptive order from the SEC. The Company has applied for such an exemptive order, although there is no assurance that it will obtain the requested relief. Before receiving relief, the Company will only participate in co-investments that are allowed under existing regulatory guidance, such as syndicated loan transactions where price is the only negotiated term, which could limit the types of investments that the Company may make. Please refer to footnote 4 to the Schedule of Investments as of September 30, 2013 for disclosures regarding securities also held by affiliated funds.

 

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Note 4. Fair Value Measurements

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

 

   

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

 

   

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

 

   

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

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

The following table presents the fair value measurements of the Company’s investments, by major class according to the fair value hierarchy, as of September 30, 2013:

 

Type of Investment

   Level 1      Level 2      Level 3      Total  

Senior secured first lien notes

   $ —         $ 4,402,813       $ 44,429,233       $ 48,832,046   

Senior secured second lien term loans

     —           —           28,905,110         28,905,110   

Senior secured first lien term loans

     —           —           15,681,090         15,681,090   

Senior secured second lien notes

     —           —           11,308,717         11,308,717   

Warrants/Equity

     —           —           60,565         60,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,402,813       $ 100,384,715       $ 104,787,528   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Derivative Instrument

   Level 1      Level 2      Level 3     Total  

Liability

          

Total return swap

   $ —         $ —         $ (32,400   $ (32,400
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents the fair value measurements of the Company’s investments, by major class according to the fair value hierarchy, as of December 31, 2012:

 

     Level 1      Level 2      Level 3      Total  

Senior secured notes

   $ —         $ 3,123,021       $ 22,551,198       $ 25,674,219   

US Government Treasuries

     —           6,003,000         —           6,003,000   

Senior secured second lien term loans

     —           —           2,928,247         2,928,247   

Senior secured first lien term loans

     —           —           1,962,630         1,962,630   

Warrants/Equity

     —           —           15,115         15,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 9,126,021       $ 27,457,190       $ 36,583,211   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2013 based off of fair value hierarchy at September 30, 2013:

 

    Senior Secured
First Lien

Notes
    Senior Secured
Second Lien
Notes
    Senior Secured
First Lien
Term Loans
    Senior Secured
Second Lien
Term Loans
    Warrants/
Equity
    Total
Return
Swap
    Total  

Balance, December 31, 2012

  $ 18,214,286      $ 4,336,912      $ 1,962,630      $ 2,928,247      $ 15,115      $ —        $ 27,457,190   

Purchases

    31,515,291        8,413,823        15,305,409        27,693,371        9,021        —          82,936,915   

Sales

    (5,445,370     (1,770,313     (1,607,653     (1,850,000     —          —          (10,673,336

Transfers in

    —          1,659,221        —          —          —          —          1,659,221   

Transfers out

    —          (1,508,330     —          —          —          —          (1,508,330

Amortization of discount/ (premium)

    (57,877     9,785        (2,238     (2,980     —          —          (53,310

Paid-in-kind interest income

    —          —          580        —          —          —          580   

Net realized gains

    (421,615     133,764        9,524        12,132        —          —          (266,195

Net change in unrealized appreciation/ (depreciation)

    624,518        33,855        12,838        124,340        36,429        (32,400     799,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

  $ 44,429,233      $ 11,308,717      $ 15,681,090      $ 28,905,110      $ 60,565      $ (32,400   $ 100,352,315   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2013(1)

  $ 780,355      $ (29,398   $ (4,554   $ 49,759      $ 36,429      $ —        $ 832,591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amount is included in the related amount on investments and derivative instruments in the condensed consolidated statements of operations.

During the nine months ended September 30, 2013, there were no transfers from Level 3 to Level 2 and $1,659,221 in transfers from level 2 to level 3 due to a decrease in observable market data.

 

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The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2012 based off of fair value hierarchy at September 30, 2012:

 

     Senior
Secured  Notes
    First Lien
Term Loans
    Second Lien
Term Loans
    Warrants/
Equity
     Total  

Balance, December 31, 2011

   $ —        $ —        $ —        $ —         $ —     

Purchases

     11,995,516        3,940,874        1,465,000        20,086         17,421,476   

Sales

     (1,007,500     (1,977,848     —          —           (2,985,348

Amortization of discount/ (premium)

     (14,936     (842     2,012        —           (13,766

Paid-in-kind interest income

     —          2,213        —          —           2,213   

Net realized gains

     22,500        2,565        —          —           25,065   

Net change in unrealized appreciation/ (depreciation)

     1,914        (22,908     (6,417     —           (27,411
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2012

   $ 10,997,494      $ 1,944,054      $ 1,460,595      $ 20,086       $ 14,422,229   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

During the nine months ended September 30, 2012, there were no transfers from Level 3 to Level 2 or from Level 2 to Level 3.

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

 

    Fair Value     Valuation techniques   Unobservable input   Range (weighted average)  

Senior secured first lien term loans

  $ 15,681,090      Market approach   Market yield     7.16% – 10.57% (9.69%)   

Senior secured second lien term loans

  $ 28,905,110      Market approach   Market yield     8.84% – 11.99% (10.33%)   

Senior secured first lien notes

  $ 48,429,233      Market approach   Market yield     6.17% – 22.58% (9.79%)   

Senior secured second lien notes

  $ 11,308,717      Market approach   Market yield     7.78% – 10.90% (9.12%)   

Warrants/Equity

  $ 60,565      Enterprise valuation analysis   EBITDA multiple     2.90x – 3.75x (3.34%)   

Total return swap

  $ (32,400   Market approach   Market yield     8.84% – 9.02% (8.95%)   

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

 

    Fair Value     Valuation techniques   Unobservable input   Range (weighted average)  

Senior secured first lien term loan

  $ 1,962,630      Market approach   Market yield     8.8% –13.2% (10.8%)   

Senior secured second lien term loan

  $ 2,928,247      Market approach   Market yield     8.9% –13.9% (10.5%)   

Senior secured notes

  $ 22,551,198      Market approach   Market yield     4.2% –15.8% (12.0%)   

Warrants/Equity

  $ 15,115      Enterprise valuation analysis   EBITDA multiple     1x   

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

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

 

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Note 5. Total Return Swap

On August 27, 2013, the Company, through its wholly-owned financing subsidiary Arbor Funding LLC (“Arbor”), entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”).

The TRS with Citibank enables Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans will not be directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS is analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.

SIC Advisors acts as the investment manager of Arbor and has discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS are governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively establish the TRS, and are collectively referred to herein as the “TRS Agreement”.

Pursuant to the terms of the TRS Agreement, and subject to conditions customary for transactions of this nature, Arbor may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $100,000,000, which is also referred to as the maximum notional amount of the TRS. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Arbor receives from Citibank a periodic payment on set dates that is based upon any coupons, both earned and accrued, generated by the loans underlying the TRS as well as an amount equal to any appreciation in the value of the basket of loans, subject to limitations described in the TRS Agreement as well as any fees associated with the loans included in the portfolio. Arbor pays to Citibank interest at a rate equal to one-month LIBOR + 1.3% per annum as well as an amount equal to any depreciation in value of the basket of loans. In addition, upon the termination or repayment of any loan subject to the TRS, Arbor either receives from Citibank the appreciation in the value of such loan, or pays to Citibank any depreciation in the value of such loan.

Citibank may terminate the TRS on or after the second anniversary of the effectiveness of the TRS. SIC Advisors may terminate the TRS on behalf of Arbor at any time upon providing 10 days prior notice to Citibank. Any termination by SIC Advisors on behalf of Arbor prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. The early termination fee shall equal the present value of the following two cash flows: (a) interest payments at a rate equal 1.30% based on 70% of the maximum notional amount of $100,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS and (b) interest payments at a rate equal to 0.15% based on the maximum notional amount of $100,000,000, payable from the later of the first anniversary of the effectiveness of the TRS or the termination date until the second anniversary of the effectiveness of the TRS.

Arbor is required to pay a minimum usage fee in connection with the TRS of 1.3% on the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the TRS. Such minimum usage fee will not apply during the first 365 days and last 60 days of the term of the TRS. Arbor will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

Arbor is required to initially cash collateralize a specified percentage of each loan (generally 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Arbor may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS. The obligations of Arbor under the TRS Agreement are non-recourse to the Company and the Company’s exposure under the TRS Agreement is limited to the value of the Company’s investment in Arbor, which generally equals the value of cash collateral provided by Arbor under the TRS Agreement.

 

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In connection with the TRS, Arbor has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days; (b) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (c) a default by Arbor or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10,000,000 and 2% of the Company’s net asset value at such time; (d) a merger of Arbor or the Company meeting certain criteria; (e) the Company or Arbor amending their respective constituent documents to alter their investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) SIC Advisors ceasing to be the investment manager of Arbor or to have authority to enter into transactions under the TRS Agreement on behalf of Arbor, and not being replaced by an entity reasonably acceptable to Citibank.

The Company’s maximum derivative risk exposure as of September 30, 2013 is $2,209,000, which is recorded on the consolidated statement of assets and liabilities as cash collateral on total return swap.

The Company’s derivative liability due to Citibank, net of amounts available for offset under a master netting agreement as of September 30, 2013 was $32,400, which is recorded on the consolidated statement of assets and liabilities as unrealized depreciation on total return swap. The Company does not offset collateral posted in relation to the TRS with any unrealized appreciation or depreciation outstanding in the consolidated statement of assets and liabilities as of September 30, 2013.

Transactions in total return swap contracts during the nine months ended September 30, 2013 were $0 in realized gains/(losses) and $32,400 in unrealized losses, which is recorded on the consolidated statement of operations as net change in unrealized appreciation/(depreciation) on total return swap.

For the nine months ended September 30, 2013, the average notional par amount of total return swap contracts was $781,111.

The following is a summary of the TRS reference assets as of September 30, 2013 (unaudited):

 

Company(3)

  Industry   Type of Investment       Maturity     Par
Amount
    Initial
Notional
Amount
    Current
Notional
Amount
    Unrealized
Appreciation
(Depreciation)
 

AMF Bowling Worldwide, Inc.

  Leisure, Amusement,
Motion Pictures,
Entertainment
  Senior Secured

First Lien Term

Loans

  LIBOR +
7.500%,
1.250%
Floor(2)
    6/29/2018        3,000,000      $ 2,985,000      $ 2,970,000      $ (15,000
         

 

 

   

 

 

   

 

 

   

 

 

 
            3,000,000        2,985,000        2,970,000        (15,000

Livingston International, Inc.

  Cargo Transport   Senior Secured
Second Lien

Term Loans

  LIBOR +
7.750%,
1.250%
Floor(1)(2)
    4/18/2020        2,000,000        2,015,000        2,015,000        —     
         

 

 

   

 

 

   

 

 

   

 

 

 
            2,000,000        2,015,000        2,015,000        —     

McGraw-Hill Companies, Inc.

  Printing and
Publishing
  Senior Secured
First Lien Term
Loans
  LIBOR +
7.750%,
1.250%
Floor(2)
    3/22/2019        2,000,000        2,030,000        2,012,600        (17,400
         

 

 

   

 

 

   

 

 

   

 

 

 
            2,000,000        2,030,000        2,012,600        (17,400

Total

            $ 7,030,000      $ 6,997,600      $ (32,400
           

 

 

   

 

 

   

 

 

 

 

(1)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.

(2)

The referenced asset or portion thereof is unsettled as of September 30, 2013.

(3)

All investments are domiciled in the United States except for Livingston International, Inc., which is domiciled in the Netherlands.

 

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Note 6. Borrowings

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

The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s margin borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company’s debt obligation is recorded at its carrying value, which approximates fair value.

Prime Brokerage Agreement

The Company maintains a prime brokerage account and margin borrowing facility (the “Margin Facility”) with Barclays Capital Inc. (“Barclays”) for investment purposes that is based on the fair value of investments held at Barclays as determined by Barclays. As of September 30, 2013, the Company’s borrowings under the Margin Facility totaled $17,196,550 and were recorded as due to prime broker on the Company’s consolidated statements of assets and liabilities. The Company’s average outstanding borrowings for the nine months ended September 30, 2013 was $14,695,275. The interest rate charged is variable and ranges from one month LIBOR plus 0.25% to one month LIBOR plus 2.00%. The Company’s weighted average interest rate on borrowings for the nine months ended September 30, 2013 was 0.96%.

Note 7. Agreements

Investment Advisory Agreement

On April 16, 2012, the Company entered into an investment advisory agreement (“IAA”) with SIC Advisors to manage the Company’s investment activities. Pursuant to the IAA, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the IAA, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. For the first quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately prorated. For the three and nine months ended September 30, 2013, the Company recorded an expense for base management fees of $487,843 and $1,091,731, of which $487,843 and $171,317 were payable at September 30, 2013 and December 31, 2012, respectively.

The incentive fee consists of the following two parts:

An incentive fee on net investment income (“subordinated incentive fee on income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on the Company’s net assets at the end of the immediately preceding fiscal quarter, (the “preferred quarterly return.”) All pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income

 

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when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the IAA is in effect. If the IAA is terminated, the fee will also become payable as of the effective date of such termination. The fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fees. Incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis.

Under GAAP, the Company calculates capital gains incentive fees as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the IAA. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.

For the three and nine months ended September 30, 2013, the Company recorded a provisional capital gains incentive fee of $(34,108), and $0, respectively. The $(34,108) represents a reversal of a portion of provisional capital gains incentive fee accrued in prior periods. As of September 30, 2013, there was no provisional incentive fee recorded on the consolidated statements of assets and liabilities. For the three and nine months ended September 30, 2012, the Company recorded a provisional capital gains incentive fee of $13,125 and $14,485, respectively.

Under the terms of the IAA, SIC Advisors bears all organization and offering expenses on behalf of the Company. Upon such time that the Company has either raised $300,000,000 in gross proceeds in connection with the sale of shares of its common stock or the offering period has expired, SIC Advisors shall no longer be obligated to bear, pay or otherwise be responsible for any ongoing organization and offering expenses on behalf of the Company, and the Company will be responsible for paying or otherwise incurring all such organization and offering expenses.

Pursuant to the terms of the IAA, the Company has agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by the Company over the course of the offering period, which is currently scheduled to terminate two years from the initial offering date, unless extended.

In the event that other organizational and offering expenses exceed 5.25% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering or other organizational and offering expenses, together with selling commissions, dealer manager fees and any discounts paid to members of the Financial Industry Regulatory Authority, exceed 15% of the gross proceeds from the sale of shares of the Company’s common stock pursuant to its public offering or one or more private offerings at the time of the completion of the offering, then SIC Advisors shall be required to pay without reimbursement from the Company, or, if already paid by the Company, reimburse the Company, for amounts exceeding such 5.25% and 15% limit, as appropriate.

For the nine months ended September 30, 2013 and for the period from June 13, 2011 (inception) through December 31, 2012, SIC Advisors incurred organizational and offering costs of $835,452 and $2,984,676, respectively. Of the total $3,820,128 organizational and offering costs incurred from inception through September 30, 2013, $272,205 was reimbursed to SIC Advisors during the year ended December 31, 2012. For

 

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the nine months ended September 30, 2013, $956,436 was reimbursed to SIC Advisors, of which $55,927 relates to expense reimbursements incurred and payable as of December 31, 2012 and, of which $15,702 has been accrued and is reflected in the consolidated statements of assets and liabilities as due to affiliate. The remaining unreimbursed amount will be eligible for reimbursement to the extent the Company receives subscriptions until April 16, 2014, which is the currently scheduled date that the offering period ends, unless it is extended. Organizational and offering expenses paid for by SIC Advisors and reimbursed by the Company will be expensed on the Company’s consolidated statements of operations.

Administration Agreement

On April 5, 2012, the Company entered into an administration agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors. For the three and nine months ended September 30, 2013, the Company recorded an expense of $143,509 and $440,423, respectively, relating to administrator expenses. For the three and nine months ended September 30, 2012, the Company recorded an expense of $141,456 and $247,217, respectively, relating to administrator expense.

Expense Support and Reimbursement Agreement

On June 29, 2012, the Company entered into an Expense Support and Reimbursement Agreement (the “Expense Support Agreement”) with SIC Advisors. Pursuant to the Expense Support Agreement, SIC Advisors has agreed to reimburse the Company for operating expenses in an amount equal to the difference between distributions paid to the Company’s stockholders in each month, less the sum of the Company’s net investment income, the Company’s net realized capital gains and dividends paid to the Company from its portfolio companies during such period (“Expense Support Payment”). To the extent that no dividends or other distributions are paid to the Company’s stockholders in any given month, then the Expense Support Payment for such month shall be equal to such amount necessary in order for Available Operating Funds for the month to equal zero. The terms of the Expense Support Agreement commenced as of the date that the Company’s registration statement was declared effective by the SEC and continued monthly thereafter until December 31, 2012. Subsequently, the Company’s board of directors approved amendments to the Expense Support Agreement that extended the term from December 31, 2012 to June 30, 2014.

Pursuant to the Expense Support Agreement, the Company has a conditional obligation to reimburse SIC Advisors for any amounts funded by SIC Advisors under the Expense Support Agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which SIC Advisors incurred a liability for such amount, the sum of the Company’s net investment income, the Company’s net capital gains and the amount of any dividends and other distributions paid to the Company from its portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders. The purpose of the Expense Support Agreement is to avoid such distributions being characterized as returns of capital for GAAP purposes and to reduce operating expenses until the Company has raised sufficient capital to be able to absorb such expenses.

Pursuant to the Expense Support Agreement, the Company will reimburse SIC Advisors for expense support payments it previously made following any calendar quarter in which the Company received net investment income, net capital gains and dividends from its portfolio companies in excess of the distributions paid to the Company’s stockholders during such calendar quarter (the “Excess Operating Funds”). Any such reimbursement will be made within three years of the date that the expense support payment obligation was incurred by SIC

 

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Advisors, subject to the conditions described below. The amount of the reimbursement during any calendar quarter will equal the lesser of (i) the Excess Operating Funds received during the quarter and (ii) the aggregate amount of all expense payments made by SIC Advisors that have not yet been reimbursed. In addition, the Company will only make reimbursement payments if its “operating expense ratio” (as described in footnote 1 to the table below) is equal to or less than its operating expense ratio at the time the corresponding expense payment was incurred and if the annualized rate of its regular cash distributions to the Company’s stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions to stockholders at the time the corresponding expense payment was incurred.

As of September 30, 2013, the Company recorded $1,965,938 in its consolidated statements of assets and liabilities as due from affiliate relating to the Expense Support and Reimbursement Agreement. For the three and nine months ended September 30, 2013, the Company recorded expense support reimbursements of $1,262,848 and $2,680,676, respectively, on the consolidated statements of operations, included in which was $125,000 that SIC Advisors elected to reimburse on June 27, 2013 related to expenses from prior periods. Reimbursements of Expense Support Payments to SIC Advisors will be accrued as they become probable and estimable. For the three and nine months ended September 30, 2012, the Company recorded expense reimbursements of $437,303 and $893,537, respectively, on the consolidated statements of operations. For the three and nine months ended September 30, 2012 and 2013, the Company did not record any reimbursement of Expense Support Payments to SIC Advisors.

The following table provides information regarding Expenses Support Payments incurred by SIC Advisors pursuant to the Expense Support Agreement as well as other information relating to the Company’s ability to reimburse SIC advisors for such payments:

 

Quarter Ended

   Amount of
Expense
Payment
Obligation
     Operating
Expense
Ratio(1)
    Annualized
Distribution
Rate(2)
    Eligible for
Reimbursement
Through

June 30, 2012

   $ 454,874         6.13     8.00   June 30, 2015

September 30, 2012

     437,303         4.05     8.00   September 30, 2015

December 31, 2012

     573,733         3.91     8.00   December 31, 2015

March 31, 2013

     685,404         1.71     8.00   March 31, 2016

June 30, 2013

     732,425         1.00     7.84   June 30, 2016

September 30, 2013

     1,277,853         0.83     7.84   September 30, 2016

 

(1) 

“Operating Expense Ratio” is as of the date the expense support payment obligation was incurred by our Advisor and includes all expenses borne by the Company, except for organizational and offering expenses, base management and incentive fees owed to SIC Advisors, and interest expense.

(2) 

“Annualized Distribution Rate” equals the annualized rate of distributions paid to stockholders based on the amount of the regular cash distribution paid immediately prior to the date the expense support payment obligation was incurred by SIC Advisors. “Annualized Distribution Rate” does not include special cash or stock distributions paid to stockholders.

Note 8. Related Party Transactions

On October 19, 2011, SIC Advisors entered into a subscription agreement to purchase 110.80 shares of common stock for cash consideration of $1,000. The consideration represents $9.025 per share.

On March 31, 2012, SIC Advisors entered into a subscription agreement to purchase 1,108,033.24 shares of common stock for cash consideration of $10,000,000. The purchase was made on April 17, 2012. The consideration represents $9.025 per share.

Due from affiliate relates to Expense Support Payments as discussed in Note 7.

Due to affiliate relates to reimbursements of organizational and offering expenses paid to the Advisor as discussed in Note 7.

An affiliate of the Company’s dealer manager has an ownership interest in SIC Advisors.

 

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Note 9. Directors Fees

The Company’s independent directors receive an annual retainer fee of $30,000 and further receive a fee of $2,500 ($1,000 for telephonic attendance) for each regularly scheduled board meeting and a fee of $1,000 for each special board meeting and all committee meetings as well as reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attending each board or committee meeting. In addition, the chairman of the audit committee receives an annual retainer of $10,000, while the chairman of any other committee receives an annual retainer of $2,500. For the three and nine months ended September 30, 2013, the Company recorded directors’ fees expenses of $41,646 and $127,286, respectively, of which $62,994 was payable at September 30, 2013. For the three and nine months ended September 30, 2013, the Company recorded directors’ fees expenses of $40,112 and $111,242, respectively.

Note 10. Earnings Per Share

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

The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and nine months ended September 30:

 

     For the three months
ended September 30,
     For the nine months ended
September 30,
 

Basic and diluted

   2013      2012      2013      2012  

Net increase/(decrease) in net assets from operations

   $ 1,444,156       $ 312,197       $ 3,325,346       $ 168,931   

Weighted average common shares outstanding

     7,896,446         1,231,625         5,441,473         721,389   

Earnings per common share-basic and diluted

   $ 0.18       $ 0.25       $ 0.61       $ 0.23   

Note 11. Commitments and Contingencies

As of September 30, 2013, the Company had no unfunded commitments under loan and financing agreements.

Note 12. Distributions and Share Repurchase Plan

Distributions

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

The Company has adopted an “opt in” distribution reinvestment plan (“DRIP”) pursuant to which the Company’s common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Company’s common stock. As a result, if the Company declares a cash dividend or other distribution, each stockholder that has “opted in” to the Company’s reinvestment plan will have their distributions automatically reinvested in additional shares of the Company’s common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the nine months ended September 30, 2013, the Company distributed a total of $3,299,596, of which, $2,291,620 was in cash and $1,007,976 was in the form of common shares associated with the DRIP. For the nine months ended September 30, 2012, the Company distributed a total of $153,884, of which, $150,622 was in cash and $3,262 was in the form of common shares associated with the DRIP.

 

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The following table reflects the cash distributions per share that the Company declared or paid to its stockholders since it commenced operations in April 2012. Stockholders of record as of each respective record date were entitled to receive the distribution.

 

Record Date

   Payment Date      Amount
per share
 

July 13 and 31, 2012

     August 1, 2012       $ 0.03333   

August 15 and 31, 2012

     September 4, 2012         0.03333   

September 14 and 28, 2012

     October 1, 2012         0.03333   

October 15 and 30, 2012

     October 31, 2012         0.03333   

November 15 and 29, 2012

     November 30, 2012         0.03333   

December 14 and 28, 2012

     December 31, 2012         0.03333   

January 15 and 31, 2013

     January 31, 2013         0.03333   

February 15 and 28, 2013

     February 28, 2013         0.03333   

March 15 and 29, 2013

     March 29, 2013         0.03333   

April 15 and 30, 2013

     April 30, 2013         0.03333   

May 15 and 31, 2013

     May 31, 2013         0.03333   

June 14 and 28, 2013

     June 28, 2013         0.03333   

July 15 and 31, 2013

     July 31, 2013         0.03333   

August 15 and 30, 2013

     August 30, 2013         0.03333   

September 13 and 30, 2013

     September 30, 2013         0.03333   

October 15 and 31, 2013

     October 31, 2013         0.03333   

November 15 and 29, 2013

     November 29, 2013         0.03333   

December 13 and 31, 2013

     December 31, 2013         0.03333   

The Company’s distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Company for investment. Any capital returned to stockholders through distributions will be distributed after payment of fees and expenses.

The Company’s previous distributions to stockholders were funded from temporary Expense Support Payments that are subject to repayment to SIC Advisors. These distributions were not based on our investment performance and may not continue in the future. If SIC Advisors had not agreed to make Expense Support Payments, these distributions would have come from paid in capital. The reimbursement of these payments owed to SIC Advisors will reduce the future distributions to which stockholders would otherwise be entitled.

The determination of the tax attributes (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) of distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid for the full year.

Share Repurchase Program

In June 2013, the Company commenced a share repurchase program pursuant to which it intends to conduct quarterly share repurchases, of approximately 2.5% of the weighted average number of outstanding shares in any 3-month period or 10% of the weighted average number of outstanding shares in any 12-month period. The purpose of the share repurchase program is to allow stockholders to sell their shares back to the Company at a price equal to the most recently disclosed net asset value per share of the Company’s common stock immediately prior to the date of repurchase. Shares will be purchased from stockholder participating in the program on a pro rata basis. Unless the Company’s board of directors determines otherwise, the number of shares to be repurchased during any calendar year will be limited to the proceeds received in association with the sale of shares of common stock under the distribution reinvestment plan.

On June 4, 2013, the Company offered to repurchase up to 16,652 shares at a price per share of $9.18, which represented the Company’s net asset value per share as of March 31, 2013. No stockholders elected to participate in this quarterly repurchase, therefore the Company did not purchase any shares.

 

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On August 8, 2013, the Company offered to repurchase up to 32,627 shares at a price per share of $9.13, which represented the Company’s net asset value per share as of June 30, 2013. On September 27, 2013, the Company repurchased 3,642 shares. As of September 30, 2013, the Company recorded a liability of $33,253 on the consolidated statement of assets and liabilities related to the repurchase plan.

Note 13. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30:

 

     2013     2012  

Per Share Data:(1)

    

Net asset value at beginning of period

   $ 8.96      $ 9.03   

Net investment income/(loss)

     0.61        0.07   

Net realized gains/(losses) on investments

     (0.11     0.03   

Net unrealized appreciation/(depreciation) on investments and total return swap

     0.11        0.03   
  

 

 

   

 

 

 

Net increase/(decrease) in net assets

     0.61        0.13   

Distributions declared from net investment income(2)

     (0.58     (0.13

Distributions from net realized capital gains

     (0.02     —     

Distributions from return of capital

     —          (0.07
  

 

 

   

 

 

 

Total distributions to stockholders

     (0.60     (0.20

Issuance of common stock above net asset value(6)

     0.17        0.01   

Net asset value at end of period

     9.14        8.97   

Total return based on net asset value(3)(4)

     8.86     1.17

Portfolio turnover rate

     33.94     25.30

Shares outstanding at end of period

     9,862,017        1,447,861   

Net assets at end of period

     90,146,527        12,990,065   

Ratio/Supplemental Data (annualized):

    

Ratio of net investment income/(loss) to average net assets(4)

     8.82     2.26

Ratio of net expenses to average net assets(4)

     3.46     10.88

Supplemental data (annualized):

    

Ratio of operating expenses to average net assets(5)

     5.29     10.06

Ratio of incentive fees to average net assets

     0.00     0.19

Ratio of interest and financing expenses to average net assets

     0.29     0.48

 

(1)

The per share data was derived by using the shares outstanding at September 30, 2012, which was 721,389 and weighted average shares outstanding for the nine months ended September 30, 2013, which was 5,441,473.

(2)

The per share data for distributions is the actual amount of paid distributions per share during the period.

(3)

Total annual return is historical and assumes reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales charge.

(4)

Total return, ratio of net investment income/(loss), and ratio of net expenses to average net assets for the nine months ended September 30, 2012 and 2013 prior to the effect of the Expense Support and Reimbursement Agreement were as follows: total return (5.79%) and 5.49%, ratio of net investment income/(loss): (19.85%) and 1.70% and ratio of net expenses to average net assets: 33.81% and 10.97%, respectively.

(5) 

“Operating Expenses” include professional fees, administrator expenses, general and administrative expenses, directors fees, interest and financing expenses, and insurance expense paid to the effect of the expense support reimbursement.

(6) 

Shares issued under the DRIP (see Note 12) as well as the continuous issuance of shares of common stock may cause an incremental increase/decrease in net asset value per share due to the effect of issuing shares at amounts that differ from the prevailing net asset value at each issuance date.

 

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Note 14. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the financial statements as of and for the period ended September 30, 2013, except as disclosed below.

The Company issued common shares and received gross proceeds of approximately $25.5 million subsequent to September 30, 2013.

 

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

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contai