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 March 31, 2014

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-35040

 

Medley Capital Corporation

 

(Exact name of registrant as specified in its charter)

 

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

 

375 Park Avenue, Suite 3304

New York, NY 10152

(Address of principal executive offices)

 

(212) 759-0777

(Registrant’s telephone number, including area code)

 

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

 

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

Yes x No ¨

 

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

 

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

 

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

 

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

 

As of May 1, 2014, the Registrant had 52,283,712 shares of common stock, $0.001 par value, outstanding. 

 

  

TABLE OF CONTENTS

 

				Page
Part I.		Financial Information		F-1
Item 1.		Financial Statements		F-1
		Consolidated Statements of Assets and Liabilities as of  March 31, 2014 (unaudited) and September 30, 2013		F-1
		Consolidated Statements of Operations for the three and six months ended  March 31, 2014 and 2013 (unaudited)		F-2
		Consolidated Statements of Changes in Net Assets for the six months ended  March 31, 2014 and 2013 (unaudited)		F-3
		Consolidated Statements of Cash Flows for the six months ended March 31, 2014 and 2013 (unaudited)		F-4
		Consolidated Schedules of Investments as of  March 31, 2014 (unaudited) and September 30, 2013		F-5
		Notes to Consolidated Financial Statements (unaudited)		F-12
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		14
Item 4.		Controls and Procedures		15
Part II.		Other Information		16
Item 1.		Legal Proceedings		16
Item 1A.		Risk Factors		16
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3.		Defaults Upon Senior Securities		16
Item 4.		Mine Safety Disclosures		16
Item 5.		Other Information		16
Item 6.		Exhibits		17
SIGNATURES				18

 

  

Medley Capital Corporation

 

Consolidated Statements of Assets and Liabilities

 

		As of
		March 31, 2014				September 30, 2013
		(unaudited)
ASSETS
Investments at fair value
Non-controlled/non-affiliated investments (amortized cost of $964,610,713 and $748,405,904, respectively)		$	949,196,688			$	740,097,249
Affiliated investments (amortized cost of $9,604,239 and $9,283,640, respectively)			9,804,849				9,139,377
Total investments at fair value			959,001,537				749,236,626
Cash			22,672,886				8,557,899
Interest receivable			12,376,761				9,607,539
Deferred financing costs, net			8,374,690				8,523,291
Fees receivable			431,417				-
Other assets			301,075				249,388
Receivable for paydown of investments			1,365,600				-
Deferred offering costs			337,957				218,681
Total assets		$	1,004,861,923			$	776,393,424
LIABILITIES
Revolving credit facility payable		$	136,200,000			$	2,500,000
Term loan payable			120,000,000				120,000,000
Notes payable			103,500,000				103,500,000
SBA debentures payable			44,000,000				30,000,000
Payable for investments originated, purchased, and participated			1,176,305				54,013
Management and incentive fees payable, net			8,217,029				6,899,653
Accounts payable and accrued expenses			1,755,207				1,305,361
Interest and fees payable			1,276,143				1,155,524
Administrator expenses payable			840,566				701,208
Deferred revenue			327,185				255,922
Deferred tax liability			316,858				-
Due to affiliate			3,389				82,083
Offering costs payable			9,359				105,205
Total liabilities		$	417,622,041			$	266,558,969
Commitments (See note 8)
NET ASSETS
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 46,283,712 and 40,152,904 common shares issued and outstanding, respectively		$	46,284			$	40,153
Capital in excess of par value			588,676,918				506,062,597
Accumulated undistributed net investment income			13,820,206				12,184,623
Accumulated undistributed net realized gain/(loss) from investments			73,052				-
Net unrealized appreciation/(depreciation) on investments			(15,376,578	)			(8,452,918	)
Total net assets			587,239,882				509,834,455
Total liabilities and net assets		$	1,004,861,923			$	776,393,424
NET ASSET VALUE PER SHARE		$	12.69			$	12.70

 

See accompanying notes to consolidated financial statements.

 

 

Medley Capital Corporation

 

Consolidated Statements of Operations

 

		For the three months ended March 31								For the six months ended March 31
		2014				2013				2014				2013
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
INVESTMENT INCOME
Interest from investments
Non-controlled/Non-affiliated investments		$	25,602,922			$	16,339,659			$	50,292,812			$	30,810,626
Affiliated investments			391,863				367,177				784,909				735,713
Total interest income			25,994,785				16,706,836				51,077,721				31,546,339
Interest from cash and cash equivalents			2,354				2,412				4,308				3,515
Other fee income (See note 9)			5,400,886				3,498,191				11,984,234				6,377,067
Total investment income			31,398,025				20,207,439				63,066,263				37,926,921
EXPENSES
Base management fees			4,078,221				2,533,841				7,743,187				4,629,797
Incentive fees			4,138,807				2,599,111				8,396,522				5,003,393
Interest and financing expenses			4,613,661				2,933,456				9,153,907				5,250,742
Administrator expenses			840,566				569,380				1,512,562				1,091,424
Professional fees			542,689				548,589				1,157,012				840,702
Directors fees			190,125				131,125				341,250				243,661
Insurance			136,720				73,323				276,285				140,759
General and administrative			302,007				273,559				899,450				564,261
Organizational expense			-				148,611				-				148,611
Total expenses			14,842,796				9,810,995				29,480,175				17,913,350
NET INVESTMENT INCOME			16,555,229				10,396,444				33,586,088				20,013,571
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) from investments			28,052				152,434				73,052				374,354
Net unrealized appreciation/(depreciation) on investments			(3,978,116	)			974,271				(6,760,497	)			747,827
Net unrealized appreciation/(depreciation) on participations			153,695				-				153,695				-
Provision for taxes on unrealized gain/(loss) on investments			(316,858	)			-				(316,858)				-
Net gain/(loss) on investments			(4,113,227	)			1,126,705				(6,850,608	)			1,122,181
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS		$	12,442,002			$	11,523,149			$	26,735,480			$	21,135,752
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE		$	0.28			$	0.40			$	0.64			$	0.79
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE		$	0.38			$	0.36			$	0.80			$	0.75
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
- BASIC AND DILUTED (SEE NOTE 11)			43,883,259				28,669,859				42,002,482				26,697,175
DIVIDENDS DECLARED PER COMMON SHARE		$	0.37			$	0.36			$	0.74			$	0.72

 

See accompanying notes to consolidated financial statements.

 

 

Medley Capital Corporation

 

Consolidated Statements of Changes in Net Assets

 

		For the six months ended March 31
		2014				2013
		(unaudited)				(unaudited)
INCREASE FROM OPERATIONS:
Net investment income		$	33,586,088			$	20,013,571
Net realized gain/(loss) from investments			73,052				374,354
Net unrealized appreciation/(depreciation) on investments			(6,760,497	)			747,827
Net unrealized appreciation/(depreciation) on participations			153,695				-
Provision For taxes on unrealized gain/(loss) on investments			(316,858	)			-
Net increase/(decrease) in net assets from operations			26,735,480				21,135,752
SHAREHOLDER DISTRIBUTIONS:
Distributions declared from net investment income			(31,950,505	)			(18,638,027	)
Net decrease in net assets from shareholder distributions			(31,950,505	)			(18,638,027	)
CAPITAL SHARE TRANSACTIONS:
Issuance of common stock, net of underwriting costs (6,000,000 and 5,495,263 shares, respectively)			81,060,000				72,537,472
Offering costs			(132,715	)			(270,096	)
Issuance of common stock under dividend reinvestment plan (130,808 and 97,892 shares, respectively)			1,693,167				1,376,747
Net increase in net assets from common share transactions			82,620,452				73,644,123
Total increase/(decrease) in net assets			77,405,427				76,141,848
Net assets at beginning of period			509,834,455				289,339,231
Net assets at end of period including accumulated undistributed net investment income of $13,820,206 and $6,935,179, respectively		$	587,239,882			$	365,481,079
Net asset value per common share		$	12.69			$	12.73
Common shares outstanding at end of period			46,283,712				28,703,397

 

See accompanying notes to consolidated financial statements.

 

 

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

		For the six months ended March 31
		2014				2013
		(unaudited)				(unaudited)
Cash flows from operating activities
NET INCREASE IN NET ASSETS FROM OPERATIONS		$	26,735,480			$	21,135,752
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:
Investment increases due to paid-in-kind interest			(5,320,542	)			(4,088,581	)
Net amortization of premium/(discount) on investments			(256,725	)			(367,145	)
Amortization of deferred financing costs			995,749				606,053
Net realized (gain)/loss from investments			(73,052	)			(374,354	)
Net deferred income taxes			316,858				-
Net unrealized (appreciation)/depreciation on investments			6,760,497				(747,827	)
Net unrealized (appreciation)/depreciation on participations			(153,695	)			-
Proceeds from sale and settlements of investments			143,038,959				92,094,021
Purchases, originations, and participations			(353,760,353	)			(278,730,223	)
(Increase)/decrease in operating assets:
Interest receivable			(2,769,222	)			(3,081,967	)
Fees receivable			(431,417	)			(840,000	)
Other assets			(51,687	)			2,214
Receivable for paydown of investments			(1,365,600	)			-
Increase (decrease)/in operating liabilities:
Payable for investments purchased, originated, and participated			1,122,292				20,528,275
Accounts payable and accrued expenses			449,846				337,563
Management and incentive fees payable, net			1,317,376				1,618,181
Administrator expenses payable			139,358				114,324
Interest and fees payable			120,619				606,434
Deferred revenue			71,263				(57,107	)
Due to affiliate			(78,694	)			24,762
Accrued organizational costs			-				42,559
NET CASH USED BY OPERATING ACTIVITIES			(183,192,690	)			(151,177,066	)
Cash flows from financing activities
Proceeds from issuance of common stock, net of underwriting costs			82,753,167				73,914,219
Offering cost paid			(347,836	)			(379,854	)
Borrowings on debt			251,300,000				252,600,000
Paydowns on debt			(103,600,000	)			(128,000,000	)
Financing cost paid			(847,149	)			(3,553,338	)
Payments of cash dividends			(31,950,505	)			(18,638,025	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			197,307,677				175,943,002
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS			14,114,987				24,765,936
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			8,557,899				4,893,616
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	22,672,886			$	29,659,552
Supplemental Information:
Interest paid during the period		$	7,999,150			$	4,000,858
Supplemental non-cash information
Paid-in-kind interest income		$	5,482,666			$	4,088,581
Net amortization of premium/(discount) on investments		$	256,725			$	367,145
Amortization of deferred financing costs		$	(995,749	)		$	(606,053	)
Issuance of common stock in connection with dividend reinvestment plan		$	1,693,167			$	1,376,747

 

See accompanying notes to consolidated financial statements.

 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

March 31, 2014

(unaudited)

 

Company (1)		Industry		Type of Investment		Maturity		Par Amount (2)				Cost(15)				Fair Value				% of Net Assets (3)
Non-Controlled/ Non-Affiliated Investments:
Accupac, Inc.		Containers, Packaging and Glass		Senior Secured Second Lien Term Loan (12.29%)		11/10/2018			10,000,000				10,000,000				10,100,000				1.7	%
									10,000,000				10,000,000				10,100,000
Aderant North America, Inc.		Electronics		Senior Secured Second Lien Term Loan (LIBOR + 8.75% , 1.25% LIBOR Floor)		6/20/2019			4,550,000				4,550,000				4,567,881				0.8	%
									4,550,000				4,550,000				4,567,881
Albertville Quality Foods, Inc. (13)		Beverage, Food and Tobacco		Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor, 3.00% LIBOR Cap)		10/31/2018			17,452,830				17,452,830				17,452,830				3.0	%
									17,452,830				17,452,830				17,452,830
Allen Edmonds Corporation		Retail Stores		Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)		5/27/2019			20,000,000				20,000,000				20,085,600				3.4	%
									20,000,000				20,000,000				20,085,600
Alora Pharmaceuticals LLC (13)		Healthcare, Education and Childcare		Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)		9/13/2018			13,650,000				13,650,000				13,716,339				2.3	%
									13,650,000				13,650,000				13,716,339
AM3 Pinnacle Corporation		Telecommunications		Senior Secured First Lien Term Loan (10.00%)		10/22/2018			7,971,534				7,971,534				7,971,534				1.4	%
									7,971,534				7,971,534				7,971,534
American Apparel, Inc.(8)		Retail Stores		Senior Secured Note (13.00% Cash, 2.00% PIK)		4/15/2020			13,140,833				12,785,899				11,728,194				2.0	%
									13,140,833				12,785,899				11,728,194
Amerit Fleet Services, Inc.		Business Services		Senior Secured Second Lien Term Loan (LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)		12/21/2016			8,616,404				8,616,404				8,637,342				1.5	%
									8,616,404				8,616,404				8,637,342
ARBOC Specialty Vehicles LLC		Automobile		Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)		3/21/2018			23,750,000				23,750,000				23,917,912				4.1	%
									23,750,000				23,750,000				23,917,912
Aurora Flight Sciences Corporation		Aerospace & Defense		Senior Secured Second Lien Term Loan (11.25% Cash, 2.00% PIK)		3/16/2016			15,968,346				15,968,346				15,968,346				2.7	%
									15,968,346				15,968,346				15,968,346
BayDelta Maritime LLC		Cargo Transport		Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)		6/30/2016			6,669,292				6,588,450				6,720,912				1.1	%
				Fee Note (14.88%)(6)		6/30/2016			250,000				182,940				182,940				0.0	%
				Warrants to purchase 10% of the outstanding equity		6/30/2016			-				25,000				323,457				0.1	%
									6,919,292				6,796,390				7,227,309
Be Green Manufacturing and Distribution Centers LLC (11)		Containers, Packaging and Glass		Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor)		12/13/2018			5,000,000				5,000,000				5,000,000				0.9	%
				Senior Secured First Lien Delayed Draw (LIBOR + 10.00%, 1.00% LIBOR Floor)		12/13/2018			500,000				500,000				500,000				0.1	%
				Revolver (LIBOR + 10.00%, 1.00% LIBOR Floor)		12/13/2018			354,167				354,167				354,167				0.1	%
				1.74% Partnership Interest in RCAF VI CIV XXIII, L.P.					-				416,250				372,165				0.1	%
									5,854,167				6,270,417				6,226,332
Brantley Transportation LLC (13)		Oil and Gas		Senior Secured First Lien Term Loan (12.00%)		8/2/2017			9,825,000				9,990,434				9,837,969				1.7	%
									9,825,000				9,990,434				9,837,969
California Products Corporation		Chemicals, Plastics and Rubber		Senior Secured Second Lien Term Loan (13.00%)		5/27/2019			13,750,000				13,750,000				13,750,000				2.3	%
									13,750,000				13,750,000				13,750,000
Calloway Laboratories, Inc.		Healthcare, Education and Childcare		Senior Secured First Lien Term Loan (17.00% PIK)		9/30/2014			28,169,808				26,810,588				17,195,911				2.9	%
				Warrants to purchase 15.00% of the outstanding equity		9/30/2014			-				68,433				-				0.0	%
									28,169,808				26,879,021				17,195,911
Dispensing Dynamics International(8)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured Note (12.50%)		1/1/2018			4,800,000				4,722,528				4,869,360				0.8	%
									4,800,000				4,722,528				4,869,360
DLR Restaurants LLC (13)		Restaurant & Franchise		Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)		4/18/2018			20,176,247				20,176,247				20,290,646				3.5	%
				Unsecured Debt (12.00% Cash, 4.00% PIK)		4/18/2018			259,838				259,838				261,683				0.0	%
									20,436,085				20,436,085				20,552,329
DreamFinders Homes LLC (11) (14)		Buildings and Real Estate		Senior Secured First Lien Term Loan A (LIBOR + 10.00% Cash)		4/30/2014			12,500,000				12,500,000				12,500,000				2.1	%
				Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)		9/13/2018			6,909,777				6,744,357				6,679,173				1.1	%
				Warrants to purchase 5% of outstanding equity		9/13/2018			-				180,000				1,156,020				0.2	%
									19,409,777				19,424,357				20,335,193

 

Dynamic Energy Services International LLC		Oil and Gas		Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)		3/6/2018			19,000,000				19,000,000				19,000,000				3.2	%
									19,000,000				19,000,000				19,000,000
Exide Technologies (10)		Machinery (Nonagriculture, Nonconstruction, Nonelectric)		Senior Secured Note (8.63%)		2/1/2018			11,000,000				9,006,908				8,167,500				1.4	%
									11,000,000				9,006,908				8,167,500
FC Operating LLC		Retail Stores		Senior Secured First Lien Term Loan (LIBOR + 10.75% Cash, 1.25% LIBOR Floor)		11/14/2017			10,350,000				10,350,000				10,095,700				1.7	%
									10,350,000				10,350,000				10,095,700
Geneva Wood Fuels LLC (4)(12)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (4.50% Cash, 10.50% PIK)		12/31/2014			8,199,184				8,143,385				4,090,000				0.7	%
									8,199,184				8,143,385				4,090,000
GSG Fasteners, LLC (13)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)		11/18/2018			8,887,500				8,887,500				8,887,500				1.5	%
									8,887,500				8,887,500				8,887,500
Harrison Gypsum LLC (13)		Mining, Steel, Iron and Nonprecious Metals		Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)		12/21/2017			23,391,443				23,391,443				23,226,065				4.0	%
									23,391,443				23,391,443				23,226,065
HD Vest, Inc.		Finance		Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.25% LIBOR Floor)		6/18/2019			8,750,000				8,750,000				8,866,462				1.5	%
									8,750,000				8,750,000				8,866,462
Help/Systems LLC		Business Services		Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)		6/28/2020			15,000,000				15,000,000				15,054,750				2.6	%
									15,000,000				15,000,000				15,054,750
HGDS Acquisition LLC		Business Services		Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)		3/28/2018			11,256,219				11,256,219				11,069,816				1.9	%
									11,256,219				11,256,219				11,069,816
Hoffmaster Group, Inc.		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.50% LIBOR Floor)		1/3/2019			6,000,000				6,000,000				6,040,800				1.0	%
				Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)		1/3/2019			2,000,000				1,984,241				1,959,920				0.3	%
									8,000,000				7,984,241				8,000,720
Ingenio Acquisition LLC		Personal, Food and Miscellaneous Services		Senior Secured First Lien Term Loan (11.25%)		3/14/2019			23,790,790				23,790,790				23,790,790				4.1	%
									23,790,790				23,790,790				23,790,790
Insight Pharmaceuticals LLC		Personal, Food and Miscellaneous Services		Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)		8/25/2017			7,724,138				7,724,138				7,791,029				1.3	%
									7,724,138				7,724,138				7,791,029
Integra Telecom		Telecommunications		Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)		2/22/2020			12,132,000				12,156,594				12,442,094				2.1	%
									12,132,000				12,156,594				12,442,094
Interface Security Systems(8)		Electronics		Senior Secured Note (9.25%)		1/15/2018			3,333,000				3,333,000				3,413,459				0.6	%
									3,333,000				3,333,000				3,413,459
JD Norman Industries, Inc.		Diversified/Conglomerate Manufacturing		Senior Secured First Lien Term Loan (LIBOR + 10.25% Cash)		3/6/2019			24,000,000				24,000,000				24,000,000				4.1	%
									24,000,000				24,000,000				24,000,000
Lexmark Carpet Mills, Inc.		Home and Office Furnishings, Housewares, and Durable Consumer Products		Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor, 2.50% LIBOR Cap)		9/30/2018			31,000,000				31,000,000				31,426,870				5.4	%
									31,000,000				31,000,000				31,426,870
Lighting Science Group Corporation (11)		Containers, Packaging and Glass		Senior Secured First Lien Delayed Draw (LIBOR + 8.50% Cash, 2.00% PIK)		2/19/2016			5,001,389				5,001,389				5,001,389				0.9	%
				Senior Secured Second Lien Term (LIBOR + 10.00% Cash, 2.00% PIK)		2/19/2019			15,258,472				14,317,793				14,317,793				2.4	%
				Warrants to purchase 2.41% of the outstanding equity					-				955,680				955,680				0.2	%
									20,259,861				20,274,862				20,274,862
Linc Energy Finance (USA), Inc.(8)		Oil and Gas		Senior Secured Note (12.50%)		10/31/2017			3,500,000				3,402,412				3,843,350				0.6	%
									3,500,000				3,402,412				3,843,350
Lucky Strike Entertainment, L.L.C.		Leisure, Amusement, Motion Pictures, Entertainment		Senior Secured Second Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 2.00% PIK)		12/24/2018			11,504,472				11,504,472				11,504,472				2.0	%
									11,504,472				11,504,472				11,504,472
Lydell Jewelry Design Studio LLC (11)(13)(14)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (LIBOR + 10.50%, 1.50% LIBOR Floor)		9/13/2018			13,072,000				13,072,000				12,566,600				2.1	%
				Warrants to purchase 13.3% of the outstanding membership units		9/13/2018			-				-				-				0.0	%
									13,072,000				13,072,000				12,566,600
Marine Accessories Corporation		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 1.00% PIK)		11/26/2018			10,026,413				10,026,413				10,026,413				1.7	%
									10,026,413				10,026,413				10,026,413

 

Merchant Cash and Capital LLC (11)		Structure Finance Securities		Senior Secured First Lien Delayed Draw (LIBOR + 8.00% Cash, 3.00% LIBOR Floor)		3/4/2016			9,403,333				9,403,333				9,403,333				1.6	%
									9,403,333				9,403,333				9,403,333
Meridian Behavioral Health LLC		Healthcare, Education and Childcare		Senior Secured First Lien Term Loan A (LIBOR + 11.50%, 2.50% LIBOR Floor)		11/14/2016			10,289,141				9,950,429				10,353,654				1.8	%
				Senior Secured First Lien Term Loan B (LIBOR + 11.50%, 2.50% LIBOR Floor)		11/14/2016			850,000				850,000				850,000				0.2	%
				Warrants to purchase 8% of the outstanding equity		11/14/2016			-				536,296				1,360,054				0.2	%
									11,139,141				11,336,725				12,563,708
Modern VideoFilm, Inc.		Leisure, Amusement, Motion Pictures, Entertainment		Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor, 3.00% PIK)		9/25/2017			12,701,488				12,388,199				10,669,250				1.8	%
				Warrants to purchase 4.5% of the outstanding equity		9/25/2017			-				339,573				-				0.0	%
									12,701,488				12,727,772				10,669,250
Momentum Telecom, Inc. (11)		Telecommunications		Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)		3/10/2019			10,000,000				10,000,000				10,000,000				1.7	%
				Revolver (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(7)		3/10/2019			-				-				-				0.0	%
									10,000,000				10,000,000				10,000,000
NCM Demolition and Remediation LP		Buildings and Real Estate		Senior Secured First Lien Term Loan (LIBOR + 11.50%, 1.00% LIBOR Floor)		8/29/2018			19,291,000				19,291,000				20,255,550				3.4	%
									19,291,000				19,291,000				20,255,550
Physicians Care Alliance LLC (11)(13)(14)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)		12/28/2017			15,737,690				15,737,690				15,774,831				2.7	%
				Revolving Credit Facility (10.50%)(7)		12/28/2017			-				-				1,811				0.0	%
									15,737,690				15,737,690				15,776,642
The Plastics Group Acquisition Corp (11)		Chemicals, Plastics and Rubber		Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)		2/28/2019			20,786,889				20,786,889				20,786,889				3.5	%
				Delayed Draw Term Loan (11.00% Cash, 2.00% PIK)(7)		2/28/2019			-				-				-				0.0	%
									20,786,889				20,786,889				20,786,889
Prestige Industries LLC		Business Services		Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)		1/31/2017			6,121,826				6,020,791				5,684,483				1.0	%
				Warrants to purchase 0.63% of the outstanding common units		1/31/2017			-				151,855				-				0.0	%
									6,121,826				6,172,646				5,684,483
Prince Mineral Holding Corp.(8)		Mining, Steel, Iron and Nonprecious Metals		Senior Secured Note (11.50%)		12/15/2019			6,800,000				6,730,578				7,440,696				1.3	%
									6,800,000				6,730,578				7,440,696
RCS Management Corporation & Specialized Medical Services, Inc.		Diversified/Conglomerate Service		Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)		4/30/2015			25,539,187				25,539,187				25,539,187				4.3	%
									25,539,187				25,539,187				25,539,187
Red Skye Wireless LLC (11)(14)		Retail Stores		Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)		6/27/2017			14,102,580				14,102,580				14,290,001				2.4	%
									14,102,580				14,102,580				14,290,001
Reddy Ice Corporation		Beverage, Food and Tobacco		Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)		10/1/2019			17,000,000				17,000,000				16,638,070				2.8	%
									17,000,000				17,000,000				16,638,070
Response Team Holdings LLC (11)		Buildings and Real Estate		Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% PIK, 2.00% LIBOR Floor)		3/28/2019			18,518,519				18,518,519				18,518,519				3.2	%
				Preferred Equity (12.00% PIK)		3/28/2019			4,635,802				4,206,790				4,206,203				0.7	%
				Warrants to purchase 6.17% of the outstanding common units		3/28/2019			-				429,012				429,012
									23,154,321				23,154,321				23,153,734
Revstone Aero LLC (9)		Aerospace & Defense		Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.00% PIK)		11/1/2013			13,254,593				13,119,082				13,254,858				2.3	%
				Fee Note		11/1/2013			500,000				296,948				500,000				0.1	%
									13,754,593				13,416,030				13,754,858
Sendero Drilling Company LLC (11) (14)		Oil and Gas		Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash)		3/18/2019			17,255,000				16,465,896				16,111,702				2.7	%
				Warrants to purchase 5.52% of the outstanding common units		3/18/2019			-				793,523				793,523				0.1	%
									17,255,000				17,259,419				16,905,225
SESAC HOLDCO II		Business Services		Senior Secured Second Lien Term Loan (LIBOR + 8.75%, 1.25% LIBOR Floor)		7/12/2019			3,500,000				3,495,105				3,591,595				0.6	%
									3,500,000				3,495,105				3,591,595
Sizzling Platter, LLC(8)		Restaurant & Franchise		Senior Secured Note (12.25% )		4/15/2016			10,867,000				11,021,884				11,532,604				2.0	%
									10,867,000				11,021,884				11,532,604
T. Residential Holdings LLC		Buildings and Real Estate		Senior Secured First Lien Term Loan (12.00%)		3/28/2019			20,000,000				20,000,000				20,000,000				3.4	%
									20,000,000				20,000,000				20,000,000

 

Taylored Freight Services LLC		Business Services		Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)		11/1/2017			14,382,821				14,382,821				12,843,859				2.2	%
									14,382,821				14,382,821				12,843,859
Tempel Steel Company(8)		Mining, Steel, Iron and Nonprecious Metals		Senior Secured Note (12.00%)		8/15/2016			12,000,000				11,853,555				11,694,120				2.0	%
									12,000,000				11,853,555				11,694,120
Tenere Acquisition Corp.(11)(14)		Diversified/Conglomerate Manufacturing		Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)		12/15/2017			11,020,104				11,020,104				11,446,122				2.0	%
									11,020,104				11,020,104				11,446,122
The Great Atlantic & Pacific Tea Company, Inc.		Grocery		Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 2.00% LIBOR Floor)		3/13/2017			7,829,779				7,829,779				8,006,263				1.4	%
									7,829,779				7,829,779				8,006,263
Transtelco Inc.		Telecommunications		Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor)		11/19/2017			19,152,000				19,152,000				19,376,270				3.3	%
									19,152,000				19,152,000				19,376,270
Travelclick, Inc.		Hotels, Motels, Inns and Gaming		Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)		3/26/2018			15,000,000				15,000,000				15,300,000				2.6	%
									15,000,000				15,000,000				15,300,000
U.S. Well Services LLC (10)		Oil and Gas		Senior Secured Note (14.50%)		2/15/2017			23,558,808				23,427,943				23,754,111				4.0	%
				Warrants to purchase 3.48% of the outstanding common membership interests		2/15/2017			-				11,370				637,360				0.1	%
									23,558,808				23,439,313				24,391,471
UELS LLC		Oil and Gas		Senior Secured Second Lien Term Loan (LIBOR + 10.50% Cash, 1.50% LIBOR Floor)		12/5/2018			20,430,000				20,430,000				20,430,000				3.5	%
									20,430,000				20,430,000				20,430,000
United Road Towing Inc. (16)		Personal, Food and Miscellaneous Services		Senior Secured Second Lien Term Loan (10.00% Cash, 5.00% PIK)		6/30/2014			22,880,003				22,461,563				20,235,989				3.4	%
									22,880,003				22,461,563				20,235,989
Water Capital USA, Inc.		Finance		Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)		1/3/2015			26,043,797				26,043,797				25,053,936				4.3	%
									26,043,797				26,043,797				25,053,936
Wheels Up Partners LLC (11) (13)		Aerospace & Defense		Senior Secured First Lien Delayed Draw (LIBOR + 8.55% Cash, 1.00% LIBOR Floor)		4/15/2021			10,754,000				10,754,000				10,754,000				1.8	%
									10,754,000				10,754,000				10,754,000
Subtotal Non-Controlled / Non-Affiliated Investments								$	968,646,456			$	964,610,713			$	949,196,688
Affiliated Investments:
Cymax Stores, Inc.(10)		Home and Office Furnishings, Housewares, and Durable Consumer Products		Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)		8/1/2015			9,235,421				8,926,085				8,764,599				1.5	%
				190 Class B Common Units (5)					-				678,154				1,040,250				0.2	%
Subtotal Affiliated Investments								$	9,235,421			$	9,604,239			$	9,804,849
Total Investments, March 31, 2014								$	977,881,877			$	974,214,952			$	959,001,537				163.3	%

 

(1)

All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada and denominated in USD.

(2)

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

(3)

Percentage is based on net assets of $587,239,882 as of March 31, 2014.

(4)

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

(5)

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

(6)

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

(7)

The entire commitment was unfunded at March 31, 2014. As such, no interest is being earned on this investment.

(8)

Securities are exempt from registration under Rule 144a of the Securities Act of 1933. These securities represent a fair value of $54.5 million and 9.3% of net assets as of March 31, 2014 and are considered restricted.

(9)

The term loan matured by its term on November 1, 2013. The Company continues to make current interest payments.

(10)

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

(11)

The investment has an unfunded commitment as of March 31, 2014 (See note 8).

(12)

The investment was on non-accrual status as of March 31, 2014.

(13)

A portion of this investment was sold via a participation agreement (See note 3).

(14)

Includes an analysis of the value of any unfunded loan commitments.

(15)	Gross unrealized appreciation, gross unrealized depreciation, and net appreciation for federal income tax purposes totaled $23.8 million, $23.3 million and $0.5 million, respectively. The tax cost of investments is $957.9 million.
(16)	A portion of this investment was participated to a third party with a par value of $1.3 million and a fair value of $1.2 million. Such amount has been presented as gross basis in accordance with US GAAP (See note 3).

 

See accompanying notes to consolidated financial statements.

 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

September 30, 2013

 

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

 

 

HD Vest, Inc.		Finance		Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.25% LIBOR Floor)		6/18/2019			8,750,000				8,750,000				8,750,000				1.7	%
									8,750,000				8,750,000				8,750,000
Help/Systems LLC		Business Services		Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)		6/28/2020			15,000,000				15,000,000				15,000,000				3.0	%
									15,000,000				15,000,000				15,000,000
HGDS Acquisition LLC		Business Services		Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)		3/28/2018			13,066,264				13,066,264				13,000,932				2.6	%
									13,066,264				13,066,264				13,000,932
Hoffmaster Group, Inc.		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.50% LIBOR Floor)		1/3/2019			6,000,000				6,000,000				5,951,856				1.2	%
				Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)		1/3/2019			2,000,000				1,983,005				1,926,637				0.4	%
									8,000,000				7,983,005				7,878,493
Ingenio Acquisition LLC		Personal, Food and Miscellaneous Services		Senior Secured First Lien Term Loan (12.75%)		5/9/2018			25,000,000				25,000,000				25,000,000				4.9	%
									25,000,000				25,000,000				25,000,000
Insight Pharmaceuticals LLC		Personal, Food and Miscellaneous Services		Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)		8/25/2017			7,724,138				7,724,138				7,748,867				1.5	%
									7,724,138				7,724,138				7,748,867
Integra Telecom		Telecommunications		Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)		2/22/2020			12,132,000				12,158,115				12,329,145				2.4	%
									12,132,000				12,158,115				12,329,145
Interface Security Systems (8)		Electronics		Senior Secured Note (9.25%)		1/15/2018			3,333,000				3,333,000				3,427,030				0.7	%
									3,333,000				3,333,000				3,427,030
JD Norman Industries, Inc.		Diversified/Conglomerate Manufacturing		Senior Secured Second Lien Term Loan (13.50%)		1/28/2019			12,500,000				12,500,000				12,500,000				2.5	%
									12,500,000				12,500,000				12,500,000
Lexmark Carpet Mills, Inc.		Home and Office Furnishings, Housewares, and Durable Consumer Products		Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor, 2.50% LIBOR Cap)		9/30/2018			31,000,000				31,000,000				31,000,000				6.1	%
									31,000,000				31,000,000				31,000,000
Linc Energy Finance (USA), Inc.(8)		Oil and Gas		Senior Secured Note (12.50%)		10/31/2017			3,500,000				3,392,153				3,823,750				0.7	%
									3,500,000				3,392,153				3,823,750
Lydell Jewelry Design Studio LLC (10)(13)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (LIBOR + 10.50%, 1.50% LIBOR Floor)		9/13/2018			13,072,000				13,072,000				13,072,000				2.6	%
				Revolver (LIBOR + 10.50%, 1.50% LIBOR Floor)		9/13/2018			2,250,000				2,250,000				2,250,000				0.4	%
				Warrants to purchase 17.5% of the outstanding membership units		9/13/2018			-				-				-				0.0	%
									15,322,000				15,322,000				15,322,000
Meridian Behavioral Health LLC		Healthcare, Education and Childcare		Senior Secured First Lien Term Loan A (14.00% )		11/14/2016			10,289,141				9,902,304				10,289,141				2.0	%
				Senior Secured First Lien Term Loan B (14.00%)		11/14/2016			3,750,000				3,750,000				3,750,000				0.7	%
				Warrants to purchase 8% of the outstanding equity		11/14/2016			-				536,296				1,071,347				0.2	%
									14,039,141				14,188,600				15,110,488
Modern VideoFilm, Inc.		Leisure, Amusement, Motion Pictures, Entertainment		Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 3.00% PIK, 1.50% LIBOR Floor)		9/25/2017			11,868,109				11,583,071				9,791,187				1.9	%
				Warrants to purchase 4.5% of the outstanding equity		9/25/2017			-				339,573				-				0.0	%
									11,868,109				11,922,644				9,791,187
NCM Demolition and Remediation LP		Buildings and Real Estate		Senior Secured First Lien Term Loan (LIBOR + 11.50%, 1.00% LIBOR Floor)		8/29/2018			19,291,000				19,291,000				19,291,000				3.8	%
									19,291,000				19,291,000				19,291,000
Physicians Care Alliance LLC (10) (13)		Personal and Nondurable Consumer Products (Manufacturing Only)		Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)		12/28/2017			15,854,027				15,854,027				15,900,559				3.1	%
				Revolving Credit Facility (10.50%)(7)		12/28/2017			-				-				-				0.0	%
									15,854,027				15,854,027				15,900,559
Prestige Industries LLC		Business Services		Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)		1/31/2017			6,029,795				5,914,778				5,506,459				1.1	%
				Warrants to purchase 0.63% of the outstanding common units		1/31/2017			-				151,855				-				0.0	%
									6,029,795				6,066,633				5,506,459
Prince Mineral Holdings Corp.(8)		Mining, Steel, Iron and Nonprecious Metals		Senior Secured Note (11.50%)		12/15/2019			6,800,000				6,726,424				7,242,000				1.4	%
									6,800,000				6,726,424				7,242,000
RCS Management Corporation & Specialized Medical Services, Inc.		Diversified/Conglomerate Service		Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 0.50% PIK, 1.50% LIBOR Floor)		9/23/2015			25,474,725				25,474,725				25,336,272				5.0	%
									25,474,725				25,474,725				25,336,272
Red Skye Wireless LLC (10)		Retail Stores		Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)		6/27/2017			15,080,145				15,080,145				15,075,802				3.0	%
									15,080,145				15,080,145				15,075,802
Reddy Ice Corporation		Beverage, Food and Tobacco		Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)		10/1/2019			17,000,000				17,000,000				16,863,027				3.3	%
									17,000,000				17,000,000				16,863,027
Revstone Aero LLC		Aerospace & Defense		Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.00% PIK)		11/1/2013			13,203,903				13,051,823				13,203,780				2.6	%
				Fee Note		11/1/2013			500,000				274,147				500,000				0.1	%
									13,703,903				13,325,970				13,703,780

 

 

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

 

(1)

All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada and denominated in USD.

(2)

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

(3)

Percentage is based on net assets of $509,834,455 as of September 30, 2013.

(4)

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

(5)

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

(6)

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

(7)

The entire commitment was unfunded at September 30, 2013. As such, no interest is being earned on this investment.

(8)

Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities represent $55.7 million and 10.9% of net assets as of September 30, 2013 and are considered restricted.

(9)

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

(10)

The investment has an unfunded commitment as of September 30, 2013 (See note 8).

(11)

The investment was on PIK non-accrual status as of September 30, 2013.

(12)	Investment changed its name from Kelley Amerit Holdings, Inc. during FY 2013.
(13)	A portion of this investment was sold via a participation agreement (See note 3).

 

See accompanying notes to consolidated financial statements.

 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2014

 

Note 1. Organization

 

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

 

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

 

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

 

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

 

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

 

On January 18, 2011, each of MOF LTD and MOF LP contributed their respective MOF I BDC membership interests to the LLC in exchange for LLC membership interests. As a result, MOF I BDC became a wholly-owned subsidiary of the LLC. As a result of the LLC’s conversion noted above, MOF LTD and MOF LP’s LLC membership interests were exchanged for 5,759,356 shares of the Company’s common stock at $14.75 per share. On February 23, 2012, MOF LTD and MOF LP collectively sold 4,406,301 shares of common stock in an underwritten public offering.  See Note 7 for further information.

  

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

 

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

 

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

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, MOF I BDC, MCC Investment Holdings LLC, MCC Investment Holdings RT1 LLC, MCC Investment Holdings Sendero LLC and SBIC LP. All references made to the “Company,” “we,” and “us” herein include Medley Capital Corporation and its consolidated subsidiaries, except as stated otherwise. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP may be omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended September 30, 2013, which was filed with the U.S. Securities and Exchange Commission on December 10, 2013. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2014.

 

 

Cash and Cash Equivalents

 

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

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Organizational Expenses

 

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

 

Offerings

 

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

 

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

 

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

 

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

 

Deferred Offering Costs

 

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

 

Deferred Financing Costs

 

Financing costs, incurred in connection with our credit facilities, unsecured notes and SBA debentures are deferred and amortized over the life of the respective facility or instrument.

 

Indemnification

 

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

 

Revenue Recognition

 

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

 

 

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to such fees. Other fee income for the three and six months ended March 31, 2014 was approximately $5.4 million and $12.0 million, respectively. For the three and six months ended March 31, 2013 other fee income was approximately $3.5 million and $6.4 million, respectively.

 

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

 

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

 

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three and six months ended March 31, 2014, the Company earned approximately $2.7 million and $5.5 million in PIK, respectively. For the three and six months ended March 31, 2013, the Company earned approximately $1.9 million and $4.1 million in PIK interest, respectively.

 

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

 

Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At March 31, 2014, one portfolio company was on non-accrual status with a fair value of approximately $4.1 million, or 0.4% of the fair value of our portfolio. No portfolio companies were on non-accrual status at September 30, 2013.

 

Investment Classification

 

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

 

Valuation of Investments

 

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

 

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

 

 

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

 

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

 

•

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

 

•

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

 

•

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

 

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

 

•

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

 

•

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

 

•

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

 

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

 

Fair Value of Financial Instruments

 

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

 

New Accounting Pronouncements

 

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

 

Federal Income Taxes

 

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

 

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. There is no provision for federal excise tax for 2013 accrued at March 31, 2014.

 

The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. Such deferred tax liabilities amounted to $316,858 for the six months ended March 31, 2014 and are recorded as deferred tax liability on the consolidated statements of assets and liabilities and are included as a component of net unrealized appreciation/(depreciation) on investments in the consolidated statement of operations.

 

 

 

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

 

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. There were no material uncertain income tax positions at March 31, 2014. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

 

Segments

 

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

 

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

 

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

 

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

 

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

 

Note 3. Investments

 

The composition of our investments as of March 31, 2014 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

		Investments at Amortized Cost				Percentage				Investments at Fair Value				Percentage
Senior Secured First Lien Term Loans		$	590,124				60.6	%		$	575,383				60.0	%
Senior Secured Second Lien Term Loans			288,754				29.6				285,640				29.7
Senior Secured Notes			86,285				8.8				86,443				9.0
Unsecured Debt			260				0.1				262				0.1
Equity/Warrants			8,792				0.9				11,274				1.2
Total		$	974,215				100.0	%		$	959,002				100.0	%

 

 

The composition of our investments as of September 30, 2013 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

		Investments at Amortized Cost				Percentage				Investments at Fair Value				Percentage
Senior Secured First Lien Term Loans		$	418,109				55.2	%		$	408,802				54.5	%
Senior Secured Second Lien Term Loans			253,210				33.4				251,963				33.6
Senior Secured Notes			84,125				11.1				85,262				11.4
Unsecured Debt			255				0.1				255				0.1
Equity/Warrants			1,991				0.2				2,955				0.4
Total		$	757,690				100.0	%		$	749,237				100.0	%

 

 

The following table shows the portfolio composition by industry grouping at fair value at March 31, 2014 (dollars in thousands):

 

		Investments at				Percentage of
		Fair Value				Total Portfolio
Oil and Gas		$	94,408				9.9	%
Buildings and Real Estate			83,745				8.7
Personal and Nondurable Consumer Products (Manufacturing Only)			64,217				6.7
Business Services			56,882				5.9
Retail Stores			56,200				5.9
Personal, Food and Miscellaneous Services			51,818				5.4
Telecommunications			49,790				5.2
Healthcare, Education and Childcare			43,476				4.5
Mining, Steel, Iron and Nonprecious Metals			42,361				4.4
Home and Office Furnishings, Housewares, and Durable Consumer Products			41,232				4.3
Aerospace & Defense			40,477				4.2
Containers, Packaging and Glass			36,601				3.8
Diversified/Conglomerate Manufacturing			35,446				3.7
Chemicals, Plastics and Rubber			34,537				3.6
Beverage, Food and Tobacco			34,091				3.6
Finance			33,920				3.5
Restaurant & Franchise			32,085				3.3
Diversified/Conglomerate Service			25,539				2.7
Automobile			23,918				2.5
Leisure, Amusement, Motion Pictures, Entertainment			22,174				2.3
Hotels, Motels, Inns and Gaming			15,300				1.6
Structure Finance Securities			9,403				1.0
Machinery (Nonagriculture, Nonconstruction, Nonelectric)			8,168				0.9
Grocery			8,006				0.8
Electronics			7,981				0.8
Cargo Transport			7,227				0.8
Total		$	959,002				100.0	%

  

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

 

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

 

 

The Company invests in portfolio companies principally located in North America. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

 

The following table shows the portfolio composition by geographic location at fair value at March 31, 2014 (dollars in thousands):

 

		Investments at Fair Value				Percentage
Midwest		$	253,920				26.5	%
Southeast			192,153				20.0
West			187,211				19.5
Southwest			177,862				18.6
Northeast			90,501				9.4
Mid-Atlantic			47,550				5.0
International			9,805				1.0
Total		$	959,002				100.0	%

 

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

 

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

 

Transactions With Affiliated Companies

 

During the six months ended March 31, 2014, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

Name of Investment		Fair Value at September 30, 2013				Purchases (Sales) of/Advances (Distributions) to Affiliates				Transfers In/(Out) of Affiliates				Income Earned				Fair Value at March 31, 2014				Capital Loss
Non-Controlled Affiliates
Cymax Stores, Inc.		$	9,139,377			$	—			$	—			$	784,909			$	9,804,849			$	—
Total Non-Controlled Affiliates		$	9,139,377			$	—			$	—			$	784,909			$	9,804,849			$	—

 

 

During the six months ended March 31, 2013, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

Name of Investment		Fair Value at September 30, 2012				Purchases (Sales) of/Advances (Distributions) to Affiliates				Transfers In/(Out) of Affiliates				Income Earned				Fair Value at March 31, 2013				Capital Loss
Non-Controlled Affiliates
Cymax Stores, Inc.		$	8,208,006			$	—			$	—			$	735,713			$	8,881,628			$	—
Total Non-Controlled Affiliates		$	8,208,006			$	—			$	—			$	735,713			$	8,881,628			$	—

 

Purchases (sales) of/advances (distributions) to affiliates are included in the purchases and sales presented on the consolidated statements of cash flows for the six months ended March 31, 2014 and March 31, 2013, respectively. Transfers in/(out) of affiliates represents the fair value for the month an investment became or was removed as an affiliated investment. Income received from affiliates is included in total investment income on the consolidated statements of operations for the six months ended March 31, 2014 and March 31, 2013, respectively.

 

Loan Participation Sales

 

Since inception, the Company has sold portions of fourteen investments via participation agreements to a managed account, managed by an affiliate and non-affiliate of the Company in an aggregate amount of approximately $77.8 million. At March 31, 2014 the aggregate fair value of the loans sold on participation was $151.6 million. Such investments where the Company has retained a proportionate interest are included in the consolidated schedule of investments. All of these investments are classified within Level 3 of the fair value hierarchy, as defined in Note 4. One of the loans that has been participated with a par value of $1.3 million and a fair value of $1.2 million has been presented as gross basis in accordance with US GAAP.

  

During the three and six months ended March 31, 2014, the Company made interest and (principal) payments to the sub-participant in the aggregate amount of $1.8 million and $24.3 million. During the three and six months ended March 31, 2013, the Company made interest and (principal) payments to the sub-participant in the aggregate amount of $0.9 million and $1.3 million. Under the terms of the participation agreements, the Company will make periodic payments to the sub-participant equal to the sub-participant's proportionate share of any principal and interest payments received by the Company from the underlying investee companies.

 

Note 4. Fair Value Measurements

 

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

 

·

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

 

·

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

 

·

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

 

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

 

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of March 31, 2014 (dollars in thousands):

 

		Level 1				Level 2				Level 3				Total
Senior Secured First Lien Term Loans		$	—			$	—			$	575,383			$	575,383
Senior Secured Second Lien Term Loans			—				—				285,640				285,640
Senior Secured Notes			—				19,896				66,547				86,443
Unsecured Debt			—				—				262				262
Equity/Warrants			—				—				11,274				11,274
Total		$	—			$	19,896			$	939,106			$	959,002

 

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

 

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

 

The following table provides a reconciliation of the beginning and ending balances for investments that use level 3 inputs for the six months ended March 31, 2014 (dollars in thousands):

 

		Senior				Senior
		Secured				Secured
		First				Second				Senior
		Lien Term				Lien Term				Secured				Unsecured				Equities/
		Loans				Loans				Notes				Debt				Warrants				Total
Balance as of September 30, 2013		$	408,802			$	251,963			$	77,259			$	255			$	2,955			$	741,234
Purchases and other adjustments to cost			60,810				1,761				4,940				5				1,756				69,272
Originations			182,847				80,930				-				-				5,046				268,823
Sales			-				-				(2,985	)			-				-				(2,985	)
Settlements			(71,626	)			(47,191	)			-				-				-				(118,817	)
Net realized gains (losses) from investments			(16	)			44				45				-				-				73
Net transfers in and/or out of Level 3			-				-				(13,260	)			-				-				(13,260	)
Net unrealized gains (losses)			(5,434	)			(1,867	)			548				2				1,517				(5,234	)
Balance as of March 31, 2014		$	575,383			$	285,640			$	66,547			$	262			$	11,274			$	939,106

 

The following table provides a reconciliation of the beginning and ending balances for investments that use level 3 inputs for the six months ended March 31, 2013 (dollars in thousands):

 

		Senior Secured First Lien Loans				Senior Secured Second Lien Loans				Senior Secured Notes				Equities / Warrants				Total
Balance as of September 30, 2012		$	186,841			$	157,015			$	42,213			$	2,343			$	388,412
Purchases and other adjustments to cost			23,018				53,301				49,526				—				125,845
Originations			135,176				20,000				—				—				155,176
Sales			(35,495	)			—				(3,053	)			(144	)			(38,692	)
Settlements			(24,291	)			(21,861	)			(7,250	)			—				(53,402	)
Net realized gains (losses) from investments			127				72				175				—				374
Net change in unrealized gains (losses)			(4,608	)			1,087				1,792				1,992				263
Balance as of March 31, 2013		$	280,768			$	209,614			$	83,403			$	4,191			$	577,976

 

 

Net change in unrealized loss included in earnings related to investments still held as of March 31, 2014 and 2013, was approximately $5.3 million and $1.4 million, respectively.

 

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

 

Sales represent net proceeds received from investments sold.

 

Settlements represent principal paydowns received.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the quarter ended March 31, 2014, one of our Senior Secured Notes with a fair value of $13.3 million transferred from Level 3 to Level 2 because of the increase in availability of the transaction data or the inputs to the valuation became observable. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of March 31, 2014 (dollars in thousands):

 

Fair Value

Valuation Technique

Unobservable Input

Range (weighted average)

Senior Secured First Lien Term Loans

$

544,656

Income Approach (DCF)

Market yield

9.5% - 25.0% (12.0%)

Senior Secured First Lien Term Loans

4,090

Market Approach

EBIDTA Multiple(1)

4.0x - 7.0x (5.5x)

Senior Secured First Lien Term Loans

12,699

Market Approach (Current value)

Revenue Multiple(1)

1.8x - 1.8x (1.8x)

Senior Secured First Lien Term Loans

13,755

Market Approach (Sales proceed)

N/A

N/A

Senior Secured First Lien Term Loans - Fee Note

183

Income Approach (DCF)

Market yield

14.9% - 14.9% (14.9%)

Senior Secured Second Lien Term Loans

285,640

Income Approach (DCF)

Market yield

8.9% - 23.0% (12.7%)

Senior Secured Notes

66,547

Income Approach (DCF)

Market yield

8.5% - 14.1% (11.8%)

Unsecured Debt

262

Income Approach (DCF)

Market yield

15.8% - 15.8% (15.8%)

Equity

4,206

Income Approach (DCF)

Market yield

13.5% - 13.5% (13.5%)

Warrants

429

Income Approach (DCF)

Discount Rate

18.0% - 18.0% (18.0%)

Equity/Warrants

4,643

Market Approach (Guideline Comparable)

EBIDTA Multiple(1)

4.0x - 13.5x (6.6x)

Equity/Warrants

1,040

Market Approach

Revenue Multiple(1)

0.2x - 1.7x (0.2x)

Warrants

956

Option Model

Volatility

80.0% - 80.0% (80.0%)

Total

$

939,106

 

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

 

Fair Value

Valuation Technique

Unobservable Input

Range (weighted average)

Senior Secured First Lien Term Loans

$

404,041

Income Approach (DCF)

Market yield

10.0% - 50.6% (14.4%)

Senior Secured First Lien Term Loans

4,090

Cost recovery

EV coverage

N/A

Senior Secured First Lien Term Loans - Fee Note

671

Income Approach (DCF)

Market yield

0.0% - 14.9% (3.8%)

Senior Secured Second Lien Term Loans

251,963

Income Approach (DCF)

Market yield

9.3% - 20.7% (12.6%)

Senior Secured Notes

77,259

Income Approach (DCF)

Market yield

8.4% - 14.5% (12.2%)

Unsecured Debt

255

Income Approach (DCF)

Market yield

16.0% - 16.0% (16.0%)

Warrants

2,282

Market Approach (Guideline Comparable)

EBITDA multiple (1)

2.8x – 6.5x (5.3x)

Equity

673

Market Approach

Revenue multiple (1)

0.2x - 0.2x (0.2x)

Total

$

741,234

 

 

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

 

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

 

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

 

Note 5. Borrowings 

 

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

 

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

 

The Company’s outstanding debt as of March 31, 2014 and September 30, 2013 were as follows (dollars in thousands):

 

		As of
		March 31, 2014												September 30, 2013
		Aggregate												Aggregate
		Principal				Principal								Principal				Principal
		Amount				Amount				Carrying				Amount				Amount				Carrying
		Available				Outstanding				Value				Available				Outstanding				Value
Revolving Credit Facility		$	245,000			$	136,200			$	136,200			$	245,000			$	2,500			$	2,500
Term Loan Facility			120,000				120,000				120,000				120,000				120,000				120,000
2019 Notes			40,000				40,000				41,120				40,000				40,000				42,048
2023 Notes			63,500				63,500				62,001				63,500				63,500				60,579
SBA Debentures			100,000				44,000				44,000				50,000				30,000				30,000
Total		$	568,500			$	403,700			$	403,321			$	518,500			$	256,000			$	255,127

 

Credit Facility

 

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

 

 Each of the Facilities includes an accordion feature permitting the Company to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $400.0 million.

 

 

At March 31, 2014, the carrying amount of our borrowings under the Facilities approximated the fair value of our debt obligations. The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of our borrowings under the Facilities are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At March 31, 2014 and September 30, 2013, the Facilities would be deemed to be level 3, as defined in Note 4.

 

As of March 31, 2014 and September 30, 2013, $3.8 million and $3.8 million, respectively, of financing costs related to the Revolving Facility have been capitalized and are being amortized over their respective terms. As of March 31, 2014 and September 30, 2013, $2.1 million and $2.1 million of financing costs related to the Term Loan Facility have been capitalized and are being amortized over their respective terms.

 

For the three and six months ended March 31, 2014 and 2013, the components of interest expense, commitment fees related to the Revolving Facility, amortized deferred financing costs, weighted average stated interest rate and weighted average outstanding debt balance for the Facilities were as follows:

 

		For the three months ended March 31,								For the six months ended March 31,
		2014				2013				2014				2013
Revolving Facility interest		$	622			$	319			$	1,009			$	668
Revolving Facility commitment fee			323				403				841				699
Term Facility interest			1,256				1,014				2,519				1,687
Amortization of deferred financing costs			318				280				642				494
Total interest and fees expense		$	2,519			$	2,016			$	5,011			$	3,548
Weighted average stated interest rate			4.42	%			4.12	%			4.23	%			4.19	%
Weighted average outstanding balance		$	172,154			$	131,164			$	167,154			$	112,809

 

As of March 31, 2014 and September 30, 2013, there was $136.2 million and $2.5 million, respectively, outstanding under the Revolving Facility. As of March 31, 2014 and September 30, 2013, there was $120.0 million and $120.0 million, respectively, outstanding under the Term Loan Facility.

 

Unsecured Senior Notes

 

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

 

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

 

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

 

At March 31, 2014, the carrying amount and fair value of the 2019 Notes was $40.0 million and $41.1 million, respectively. At September 30, 2013, the carrying amount and fair value of the 2019 Notes was $40.0 million and $42.0 million, respectively. At March 31, 2014, the carrying amount and fair value of the 2023 Notes was $63.5 million and $62.0 million, respectively. At September 30, 2013, the carrying amount and fair value of the 2023 Notes was $63.5 million and $60.6 million, respectively. The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Unsecured Senior Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. At March 31, 2014 and September 30, 2013 the Unsecured Senior Notes would be deemed to be level 1, as defined in Note 4.

 

As of March 31, 2014 and September 30, 2013, $1.5 million and $1.5 million, respectively, of financing costs related to the 2019 notes have been deferred and are being amortized over their respective terms. As of March 30, 2014 and September 30, 2013, $2.1 million and $2.1 million, respectively, of financing costs related to the 2023 notes have been deferred and are being amortized over their respective terms.

 

 

For the three and six months ended March 31, 2014 and 2013, the components of interest expense, amortized deferred financing costs, weighted average stated interest rate and weighted average outstanding debt balance for the Notes were as follows:

 

		For the three months ended March 31,								For the six months ended March 31,
		2014				2013				2014				2013
2019 Unsecured Notes interest		$	713			$	713			$	1,425			$	1,425
2023 Unsecured Notes interest			972				125				1,945				125
Amortization of deferred financing costs			104				59				210				112
Total interest and fees expense		$	1,789			$	897			$	3,580			$	1,662
Weighted average stated interest rate			6.60	%			6.85	%			6.53	%			6.95	%
Weighted average outstanding balance		$	103,500			$	49,560			$	103,500			$	44,727

 

As of March 31, 2014, $40.0 million and $63.5 million in aggregate principal amount of the 2019 Notes and the 2023 notes were outstanding, respectively. As of March 31, 2013, $40.0 million and $63.5 million in aggregate principal amount of the 2019 Notes and the 2023 notes were outstanding, respectively.

 

SBA Debentures

 

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

 

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

 

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

 

As of March 31, 2014, SBIC LP had $50.0 million in regulatory capital and had $44.0 million SBA-guaranteed debentures outstanding. As of September 30, 2013, SBIC LP had $50.0 million in regulatory capital and had $30.0 million SBA-guaranteed debentures outstanding.

 

Our fixed-rate SBA debentures as of March 31, 2014 and September 30, 2013 were as follows:

 

		March 31, 2014								September 30, 2013(1)
Rate Fix Date		Debenture Amount				Fixed All-in Interest Rate				Debenture Amount				Fixed All-in Interest Rate
September 2013		$	5,000,000				4.404	%		$	5,000,000				4.404	%
March 2014			39,000,000				3.951	%			-			$	-
Weighted Average Rate/Total		$	44,000,000				4.002	%		$	5,000,000				4.404	%

 

(1) The interest rate on the $5.0 million of outstanding debentures was fixed at an average annualized rate of 4.4%. The weighted average annualized interim financing rate on the remaining $25.0 million of outstanding debentures was 1.5% and was set to pool in March 2014.

 

As of March 31, 2014, the carrying amount of the SBA-guaranteed debentures approximated the fair value of our debt obligations. The fair values of the SBA-guaranteed debentures are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the SBA-guaranteed debentures are estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. At March 31, 2014, and September 30, 2013 the SBA-guaranteed debentures would be deemed to be level 3, as defined in Note 4.

 

For the three and six months ended March 31, 2014 and 2013, the components of interest, amortized deferred financing costs, weighted average stated interest rate and weighted average outstanding debt balance for the SBA Debentures were as follows:

 

		For the three months ended March 31,								For the six months ended March 31,
		2014				2013				2014				2013
SBA Debentures interest		$	209			$	-			$	381			$	-
Amortization of deferred financing costs			78				-				143				-
Total interest and fees expense		$	287			$	-			$	524			$	-
Weighted average stated interest rate			1.93	%			N/A				1.90	%			N/A
Weighted average outstanding balance		$	44,000			$	-			$	40,231			$	-

 

 

Note 6. Agreements

 

Investment Management Agreement

 

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

 

The base management fee will be calculated at an annual rate of 1.75% of our gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. For the first quarter of our operations, the base management fee was calculated based on the initial value of our gross assets. Subsequently, the base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters. MCC Advisors agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through December 31, 2011. This waiver does not extend to periods subsequent to December 31, 2011.

 

The incentive fee consists of the following two parts:

 

The first, calculated and payable quarterly in arrears is based on our pre-incentive fee net investment income earned during the calendar quarter for which the Incentive Fee is being calculated. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

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

 

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

 

(2) 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.50% (10.0% annualized) in any calendar quarter; and

 

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

 

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

 

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

 

For the three and six month periods ended March 31, 2014, the Company incurred base management fees to MCC Advisors of $4.1 million and $7.7 million, respectively. For the three and six month periods ended March 31, 2014, we incurred $4.1 million and $8.4 million in incentive fees related to pre-incentive fee net investment income, respectively. For the three and six months ended March 31, 2013, the Company incurred net base management fees payable to MCC Advisors of $2.5 million and $4.6 million, respectively. For the three and six months ended March 31, 2013, the Company incurred $2.6 million and $5.0 million in incentive fees related to pre-incentive fee net investment income, respectively.

 

As of March 31, 2014 and September 30, 2013, $8.2 million and $6.9 million were included in “management and incentive fees payable,” in the accompanying consolidated statements of assets and liabilities.

 

 

Administration Agreement

 

On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. Pursuant to this agreement, MCC Advisors furnishes us with office facilities and equipment, clerical, bookkeeping, recordkeeping and other administrative services related to the operations of the Company. We reimburse MCC Advisors for our allocable portion of overhead and other expenses incurred by it performing its obligations under the administration agreement, including rent and our allocable portion of the cost of certain of our officers and their respective staff. From time to time, our administrator may pay amounts owed by us to third-party service providers and we will subsequently reimburse our administrator for such amounts paid on our behalf. For the three and six months ended March 31, 2014, we incurred $0.8 million and $1.5 million in administrator expenses, respectively. For the three and six months ended March 31, 2013, we incurred $0.6 million and $1.1 million in administrator expenses, respectively.

 

Note 7. Related Party Transactions

 

Investment in Loan Participations

 

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

 

The Company holds its investment in Geneva Wood Fuels LLC through a participation agreement with an affiliated entity, which represents 0.4% of the Company’s investments as of March 31, 2014 and 0.6% as of September 30, 2013. By virtue of owning loans through a participation agreement, the Company has a contractual relationship with the affiliate, not the borrower. As a result, the Company is subject to the credit risk of the affiliate as well as that of the borrower. As of March 31, 2014 and September 30, 2013, the principal amount related to this loan participation was $8.2 million and $8.2 million, respectively. There was no investment income recorded related to this loan participation for the three and six months ended March 31, 2014, as it was on non-accrual status. For the three and six months ended March 31, 2013, total investment income related to this loan participation was $0.2 million and $0.5 million, respectively.

 

Due to Affiliate

 

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

 

Other Related Party Transactions

 

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

 

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

 

 

Note 8. Commitments

 

As of March 31, 2014, we had commitments under loan and financing agreements to fund up to $67.3 million to 13 portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. As of September 30, 2013, we had commitments under loan and financing agreements to fund up to $33.1 million to 6 portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as of March 31, 2014 and September 30, 2013 is shown in the table below (dollars in thousands):

 

		As of
		March 31, 2014				September 30, 2013
Red Skye Wireless LLC		$	15,000			$	15,000
Wheels Up Partners LLC			9,176				-
Merchant Cash and Capital LLC			8,096				-
Sendero Drilling Company LLC			7,745				-
Lighting Science Group Corporation – Delayed Draw TL			6,250				-
Lydell Jewelry Design Studio LLC			5,928				5,928
Be Green Manufacturing and Distribution Centers LLC – Delayed Draw TL			3,667				-
DreamFinders Homes - TLB			2,723				2,723
The Plastics Group Acquisition Corp			2,500				-
Tenere Acquisition Corp.			2,000				2,000
Response Team Holdings LLC			1,852				-
Momentum Telecom, Inc.			1,163				-
Physicians Care Alliance LLC - Revolver			767				767
Be Green Manufacturing and Distribution Centers LLC - Revolver			479				-
DLR Restaurants LLC			-				4,177
DreamFinders Homes - TLA			-				2,500
Total		$	67,346			$	33,095

 

Note 9. Other Fee Income

 

The other fee income consists of origination/closing fee, amendment fee, prepayment penalty, administrative agent fee, transaction break-up fee and other miscellaneous fees. The following tables summarize the Company’s other fee income for the three and six months ended March 31, 2014 and 2013 (dollars in thousands):

 

		For the three months ended March 31
		2014				2013
Origination fee		$	4,330			$	1,615
Prepayment fee			-				1,311
Amendment fee			887				500
Transaction break-up fee			-				-
Administrative agent fee			122				72
Other fees			62				-
Other fee income		$	5,401			$	3,498

 

		For the six months ended March 31
		2014				2013
Origination fee		$	7,361			$	3,644
Prepayment fee			3,026				1,470
Amendment fee			1,173				819
Transaction break-up fee			100				-
Administrative agent fee			236				132
Other fees			88				312
Other fee income		$	11,984			$	6,377

 

Note 10. Directors Fees

 

The independent directors receive an annual fee of $50,000. They also receive $7,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $25,000 and the chairman of each other committee receives an annual fee of $10,000 for their additional services in these capacities. In addition, other members of the audit committee receive an annual fee of $12,500 and other members of each other committee receive an annual fee of $6,000. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three and six months ended March 31, 2014, we accrued $0.2 million and $0.3 million for directors’ fees expense, respectively. For the three and six months ended March 31, 2013, we accrued $0.1 million and $0.2 million for directors’ fees expense, respectively.

  

Note 11. Earnings Per Share

 

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

 

 

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and six months ended March 31, 2014 (dollars in thousands except share and per share amounts):

 

Basic and diluted		Three months ended March 31, 2014				Six months ended March 31, 2014
Net increase in net assets from operations		$	12,442			$	26,735
Weighted average common shares outstanding			43,883,259				42,002,482
Earnings per common share-basic and diluted		$	0.28			$	0.64

 

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and six months ended March 31, 2013 (dollars in thousands except share and per share amounts):

 

Basic and diluted		Three months ended March 31, 2013				Six months ended March 31, 2013
Net increase in net assets from operations		$	11,523			$	21,136
Weighted average common shares outstanding			28,669,859				26,697,175
Earnings per common share-basic and diluted		$	0.40			$	0.79

 

Note 12. Financial Highlights

 

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

 

		For the six months ended March 31
		2014				2013
Per share data:
Net asset value per share at beginning of period		$	12.70			$	12.52
Net investment income (1)			0.80				0.75
Net realized gains on investments			0.00				0.02
Net unrealized appreciation/(depreciation) on investments			(0.16	)			0.03
Net unrealized appreciation/(depreciation) on participations			0.01				-
Provision for taxes on unrealized gain/(loss) on investments			(0.01	)			-
Net increase in net assets			0.64				0.80
Distributions declared from net investment income			(0.74	)			(0.72	)
Issuance of common stock, net of underwriting costs			0.11				0.14
Offering costs			(0.01	)			(0.01	)
Other (2)			(0.01	)			-
Net asset value at end of period		$	12.69			$	12.73
Net assets at end of period		$	587,239,882			$	365,481,079
Shares outstanding at end of period			46,283,712				28,703,397
Per share market value at end of period		$	13.61			$	15.85
Total return based on market value (3)			4.38	%			18.46	%
Total return based on net asset value (4)			5.68	%			6.92	%
Portfolio turnover rate			14.36	%			14.40	%

 

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

 

		For the six months ended March 31
		2014				2013
Ratios: (5)
Ratio of net investment income to average net assets			13.29	%			12.98	%
Ratio of total expenses to average net assets			11.67	%			11.62	%
Ratio of incentive fees to average net assets			3.32	%			3.25	%
Supplemental Data:
Ratio of operating expenses and credit facility related expenses to average net assets			8.34	%			8.38	%
Average debt outstanding (6)		$	310,885,165			$	157,536,099
Average debt outstanding per common share		$	7.40			$	5.90
Asset coverage ratio per unit (7)			2,633				2,558
Average market value per unit
Facilities (8)			N/A				N/A
SBA debentures (8)			N/A				N/A
Notes due 2019		$	25.82			$	26.08
Notes due 2023		$	23.72				24.96

 

 

(1)

Net investment income based on total weighted average common stock outstanding was $0.80 per share and $0.75 per share for the six months ended March 31, 2014 and 2013, respectively.

(2)

Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

(3)

Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.

(4)

Total annual return is historical and assumes changes in net assets value, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.

(5)

Ratios are annualized.

(6)

Based on daily weighted average balance of debt outstanding during the period.

(7)

Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.

(8)

The Facilities and SBA debentures are not registered for public trading.

 

Note 13. Dividends

 

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

 

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

 

The following table summarizes the Company’s dividend declarations and distributions during the six months ended March 31, 2014 and 2013:

 

Date Declared		Record Date		Payment Date		Amount Per Share
For the six months ended March 31, 2014
10/30/2013		11/22/2013		12/13/2013			0.37
2/5/2014		2/26/2014		3/14/2014			0.37
						$	0.74

 

 

Date Declared		Record Date		Payment Date		Amount Per Share
For the six months ended March 31, 2013
11/1/2012		11/23/2012		12/14/2012			0.36
1/30/2013		2/27/2013		3/15/2013			0.36
						$	0.72

 

Note 14. Subsequent Events

 

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the Consolidated Financial Statements as of and for the six months ended March 31, 2014, except as disclosed below.

 

On April 28, 2014, the Company completed a public offering of 6,000,000 shares of its common stock at a public offering price of $13.25 per share, raising approximately $76.7 million in net proceeds after deducting underwriting discounts and commissions and estimated offering expenses.

 

On May 1, 2014, the Company’s board of directors declared a quarterly dividend of $0.37 per share payable on June 13, 2014, to stockholders of record at the close of business on May 28, 2014.

 

 

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

 

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

 

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

 

Forward-Looking Statements

 

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

 

·	the introduction, withdrawal, success and timing of business initiatives and strategies;
·	changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes in the value of our assets;
·	the relative and absolute investment performance and operations of MCC Advisors;
·	the impact of increased competition;
·	the impact of future acquisitions and divestitures;
·	our business prospects and the prospects of our portfolio companies;
·	the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or MCC Advisors;
·	our contractual arrangements and relationships with third parties;
·	any future financings by us;
·	the ability of MCC Advisors to attract and retain highly talented professionals;
·	fluctuations in foreign currency exchange rates;
·	the impact of changes to tax legislation and, generally, our tax position; and
·	the unfavorable resolution of legal proceedings.

 

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

 

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

 

Overview

 

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

 

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

 

  

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

 

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

 

Revenues

 

We generate revenue in the form of interest income on the debt that we hold and capital gains, if any, on warrants or other equity interests that we may acquire in portfolio companies. We invest our assets primarily in privately held companies with enterprise or asset values between $25 million and $250 million and focus on investment sizes of $10 million to $50 million. We believe that pursuing opportunities of this size offers several benefits including reduced competition, a larger investment opportunity set and the ability to minimize the impact of financial intermediaries. We expect our debt investments to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either monthly or quarterly. In some cases our debt investments may provide for a portion of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned.

 

Expenses

 

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

 

·

our organization and continued corporate existence;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

the base management fee and any incentive fee;

 

·

distributions on our shares;

 

·

administration fees payable under our administration agreement;

 

·

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

 

·

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

 

·

transfer agent and custodial fees;

 

·

registration fees and listing fees;

 

·

U.S. federal, state and local taxes;

 

·

independent director fees and expenses;

 

·

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

 

  

·

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

 

·

our fidelity bond;

 

·

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

 

·

indemnification payments;

 

·

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

 

·

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

 

 Portfolio and Investment Activity

 

As of March 31, 2014, our portfolio consisted of investments in 69 portfolio companies with a fair value of approximately $959.0 million. During the three months ended March 31, 2014, we invested $139.8 million in 8 new portfolio companies and $30.9 million in 6 existing portfolio companies, and we had $29.8 million in aggregate amount of exits and repayments, resulting in net investments of $140.9 million for the period. As of March 31, 2013, our portfolio consisted of investments in 51 portfolio companies with a fair value of approximately $594.2 million. During the three months ended March 31, 2013, we invested $89.8 million in 8 new portfolio companies and $33.4 million in 7 existing portfolio companies, and we had $53.0 million in aggregate amount of exits and repayments, resulting in net investments of $70.2 million for the period.

 

During the six months ended March 31, 2014, we invested $287.4 million in 20 new portfolio companies and $43.9 million in 8 existing portfolio companies, and we had $121.8 million in aggregate amounts of exits and repayments, resulting in net investments of $209.5 million for the period. During the six months ended March 31, 2013, we invested $206.9 million in 19 new portfolio companies and $49.5 million in 10 existing portfolio companies, and we had $69.8 million in aggregate amount of exits and repayments, resulting in net investments of $186.6 million for the period.

 

As of March 31, 2014, our average portfolio company investment and our largest portfolio company investment at amortized cost and fair value was approximately $14.1 million and $13.9 million, and $26.0 million and $25.5 million, respectively. As of March 31, 2013, our average portfolio company investment and our largest portfolio company investment at amortized cost and fair value was approximately $11.7 million and $11.7 million, and $25.4 million and $25.7 million, respectively.

 

The following table summarizes the amortized cost and the fair value of investments as of March 31, 2014 (dollars in thousands):

 

		Investments at Amortized Cost				Percentage				Investments at Fair Value				Percentage
Senior Secured First Lien Term Loans		$	590,124				60.6	%		$	575,383				60.0	%
Senior Secured Second Lien Term Loans			288,754				29.6				285,640				29.7
Senior Secured Notes			86,285				8.8				86,443				9.0
Unsecured Debt			260				0.1				262				0.1
Equity/Warrants			8,792				0.9				11,274				1.2
Total		$	974,215				100.0	%		$	959,002				100.0	%

 

The following table summarizes the amortized cost and the fair value of investments as of September 30, 2013 (dollars in thousands):

 

		Investments at Amortized Cost				Percentage				Investments at Fair Value				Percentage
Senior Secured First Lien Term Loans		$	418,109				55.2	%		$	408,802				54.5	%
Senior Secured Second Lien Term Loans			253,210				33.4				251,963				33.6
Senior Secured Notes			84,125				11.1				85,262				11.4
Unsecured Debt			255				0.1				255				0.1
Equity/Warrants			1,991				0.2				2,955				0.4
Total		$	757,690				100.0	%		$	749,237				100.0	%

 

As of March 31, 2014, the weighted average loan to value ratio (“LTV”) of our portfolio investments was approximately 56.3%. We believe that the LTV ratio for a portfolio investment is a useful indicator of the riskiness of the portfolio investment, or its likelihood of default. As part of our investment strategy, we seek to structure transactions with downside protection and seek LTVs of lower than 65%. We regularly evaluate the LTV of our portfolio investments and believe that LTV is a useful indicator for management and investors.

 

 

As of March 31, 2014, our income-bearing investment portfolio, which represented nearly 99.2% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 13.5%, and 63.4% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR, and 36.6% bore interest at fixed rates.

 

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

 

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

 

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of March 31, 2014 (dollars in thousands):

 

Investment Performance Rating		Investments at Fair Value				Percentage
1		$	34,915				3.6	%
2			850,884				88.7
3			60,945				6.4
4			8,168				0.9
5			4,090				0.4
Total		$	959,002				100.0	%

 

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

 

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

 

 

Results of Operations

 

Operating results for the three and six months ended March 31, 2014 and 2013 are as follows (dollars in thousands):

 

		For the three months ended March 31
		2014				2013
		($ in thousands)
Total investment income		$	31,398			$	20,207
Total expenses			14,843				9,811
Net investment income			16,555				10,396
Net realized gains (losses)			28				153
Net unrealized gains (losses) on investments			(3,978	)			974
Net unrealized gains (losses) on participations			154				-
Provision for taxes on unrealized gain/(loss) on investments			(317	)			-
Net increase in net assets resulting from operations		$	12,442			$	11,523

 

		For the six months ended March 31
		2014				2013
		($ in thousands)
Total investment income		$	63,066			$	37,927
Total expenses			29,480				17,913
Net investment income			33,586				20,014
Net realized gains (losses)			73				374
Net unrealized gains (losses) on investments			(6,761	)			748
Net unrealized gains (losses) on participations			154				-
Provision for taxes on unrealized gain/(loss) on investments			(317	)			-
Net increase in net assets resulting from operations		$	26,735			$	21,136

 

Investment Income

 

For the three and six months ended March 31, 2014, investment income totaled $31.4 million and $63.1 million, respectively, of which $26.0 million and $51.1 million was attributable to portfolio interest and $5.4 million and $12.0 million to other fee income.

 

For the three and six months ended March 31, 2013, investment income totaled $20.2 million and $37.9 million, respectively, of which $16.7 million and $31.5 million was attributable to portfolio interest and $3.5 million and $6.4 million to other fee income.

 

Operating Expenses

 

Operating expenses for the three and six months ended March 31, 2014 and 2013 were as follows (dollars in thousands):

 

		For the three months ended
		March 31, 2014				March 31, 2013
Base management fees		$	4,078			$	2,534
Incentive fees			4,139				2,599
Administrator expenses			840				569
Professional fees			543				549
Interest and financing expenses			4,614				2,933
Directors fees			190				131
Insurance			137				73
General and administrative			302				274
Organizational Expense			—				149
Expenses		$	14,843			$	9,811

 

 

		For the six months ended
		March 31, 2014				March 31, 2013
Base management fees		$	7,743			$	4,630
Incentive fees			8,397				5,003
Administrator expenses			1,513				1,091
Professional fees			1,157				841
Interest and financing expenses			9,154				5,251
Directors fees			341				243
Insurance			276				141
General and administrative			899				564
Organizational Expense			—				149
Expenses		$	29,480			$	17,913

 

For the three months ended March 31, 2014, total operating expenses increased by $5.0 million, or 51.3%, compared to the three months ended March 31, 2013. For the six months ended March 31, 2014, total operating expenses increased by $11.6 million, or 64.6%, compared to the six months ended March 31, 2013.

 

Interest and financing expenses were higher in the three months ended March 31, 2014 than the three months ended March 31, 2013 as a result of increase in commitment on a four-year senior secured revolving credit facility, issuing $40.0 million in aggregate principal amount of 7.125% unsecured notes that mature on March 30, 2019 (the “2019 Notes“), entering into a new five-year senior secured term loan credit facility, issuing $63.5 million in aggregate principal amount of 6.125% unsecured notes that mature on March 30, 2023 (the “2023 Notes“) and issuing SBA-guaranteed debentures.

 

Excluding interest and financing expenses, expenses increased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to an increase in professional fees, base management fees, incentive fees, administrative service fees, general administrative expenses and organizational expenses. Professional fees and administrative service fees have increased due to higher legal, audit, valuation services and administrator expenses. Base management fees, which are calculated based on average gross assets, increased due to the growth in the portfolio throughout the period. The incentive fee increased as a result of the increase in pre-incentive fee net investment income.

 

Net Realized Gains/Losses from Investments

 

We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.

 

During the three and six months ended March 31, 2014, we recognized $28,052 and $73,052 realized gains on our portfolio investments, respectively. During the three and six months ended March 31, 2013, we recognized $0.2 million and $0.4 million realized gains, respectively, on portfolio investments.

 

Net Unrealized Appreciation/Depreciation on Investments

 

Net change in unrealized appreciation on investments reflects the net change in the fair value of our investment portfolio. For the three and six months ended March 31, 2014, we had $4.0 million and $6.8 million of unrealized depreciation, respectively, on portfolio investments. For the three and six months ended March 31, 2013, we had $1.0 million and $0.7 million of unrealized appreciation, respectively, on portfolio investments. For the three and six months ended March 31, 2014, we had $0.2 million and $0.2 million of unrealized appreciation, respectively, on participated investments. For the three and six months ended March 31, 2013, we had no unrealized appreciation or depreciation on participated investments.

 

Provision for Taxes on Unrealized Appreciation on Investments

 

Certain consolidated subsidiaries of ours are subject to U.S. federal and state income taxes. These taxable subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax liabilities or assets from temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries. For the three and six months ended March 31, 2014, the Company recognized a provision for tax on unrealized gain of $0.3 million and $0.3 million for consolidated subsidiaries, respectively. For the three and six months ended March 31, 2013, the Company did not recognize a provision for tax on unrealized gain.

 

Changes in Net Assets from Operations

 

For the three months ended March 31, 2014, we recorded a net increase in net assets resulting from operations of $12.4 million versus a net increase in net assets resulting from operations of $11.5 million for the three months ended March 31, 2013. The difference is attributable to an increase in total investment income offset by an increase in total operating expenses, resulting from portfolio growth and an increase in net unrealized depreciation for the three months ended March 31, 2014, as compared to the same period in the prior year. Based on 43,883,259 and 28,669,859 weighted average common shares outstanding for the three months ended March 31, 2014 and 2013, respectively, our per share net increase in net assets resulting from operations was $0.28 for the three months ended March 31, 2014, versus a per share net increase in net assets from operations of $0.40 for the three months ended March 31, 2013.

 

For the six months ended March 31, 2014, we recorded a net increase in net assets resulting from operations of $26.7 million versus a net increase in net assets resulting from operations of $21.1 million for the six months ended March 31, 2013. The difference is attributable to an increase in total investment income offset by an increase in total operating expenses, resulting from portfolio growth and an increase in net unrealized depreciation for the for the six months ended March 31, 2014, as compared to the same period in the prior year. Based on 42,002,482 and 26,697,175 weighted average common shares outstanding for the six months ended March 31, 2014 and 2013, respectively, our per share net increase in net assets resulting from operations was $0.64 for the six months ended March 31, 2014, versus a per share net increase in net assets from operations of $0.79 for the six months ended March 31, 2013.

 

 

Financial Condition, Liquidity and Capital Resources

 

As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital; including raising equity, increasing debt, and funding from operational cash flow.

 

Our liquidity and capital resources have been generated primarily from the net proceeds of public offerings of common stock, advances from the Revolving Facility and the Term Loan Facility (each as defined below and together, the “Facilities”) and net proceeds from the issuance of notes as well as cash flows from operations.

 

On January 20, 2011, we completed our IPO and issued 11,111,112 common shares and received net proceeds of $129.6 million.

 

On August 4, 2011, the Company closed a four-year senior secured revolving credit facility (the “Revolving Facility”) led by ING Capital LLC with initial commitments of $60 million and a feature that provides for expansion of the Facility up to $125 million, subject to customary conditions.

 

On March 21, 2012, we issued $40.0 million in aggregate principal amount of the 2019 Notes. The 2019 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after March 30, 2015. The 2019 Notes bear interest at a rate of 7.125% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2012. The 2019 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MCQ”. As of December 31, 2013, $40.0 million in aggregate principal amount of the 2019 Notes were outstanding.

 

On August 24, 2012, we completed a public offering of 5,750,000 shares, including the underwriters’ full exercise of the option to purchase additional shares, of our common stock at a public offering price of $12.95 per share, raising approximately $71.9 million in net proceeds.

 

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

 

Amendment No. 1 to the Revolving Facility revised the Revolving Facility, to, among other things, increase the amount available for borrowing from $125.0 million to $132.5 million; permit the Term Loan Facility; and extend the maturity date from August 4, 2015 to August 31, 2016. Amendment No. 1 to the Revolving Facility also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR + 3.75% per annum, with a 1% LIBOR floor, to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, LIBOR plus 3.75% per annum, with no LIBOR floor, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, LIBOR plus 3.25% per annum, with no LIBOR floor, and (b) alternative base rate loans based, or ABR, on 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5%, LIBOR for a period of three months plus 1% or the ABR Floor of 2% to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, 2.25% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%. As of March 31, 2014, there was $136.2 million outstanding under the Revolving Facility.

 

Each of the Facilities includes an accordion feature permitting us to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $400.0 million.

 

On September 25, 2012, we closed $5 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $137.5 million.

 

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

 

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

 

Amendment No. 2 to the Revolving Facility revised the Revolving Facility, to, among other things, increase the amount available for borrowing from $137.5 million to $182.0 million.

 

Amendment No. 1 to the Term Loan Facility revised the Term Loan Facility, to, among other things, increase the amount available for borrowing from $55.0 million to $80.5 million. The Term Loan Facility matures on August 31, 2017, bears interest at LIBOR plus 4.0% (with no LIBOR floor, rounded upwards, if necessary, to the next 1/16 of 1.0%).

 

On January 23, 2013, we entered into Amendment No. 2 to the Term Loan Facility. Amendment No. 2 to the Term Loan Facility revised the Term Loan Facility, to, among other things, increase the amount available for borrowing from $80.5 million to $100.0 million.

 

 

On January 23, 2013, the Company closed $18.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $200.0 million.

 

On March 18, 2013, the Company issued $60.0 million in aggregate principal amount of the 2023 Notes. The 2023 Notes may be redeemed in whole or in part at any time or from time to time at the Company's option on or after March 30, 2016. The 2023 Notes bear interest at a rate of 6.125% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2013. The 2023 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol "MCV".

 

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

 

On March 28, 2013, we entered into Amendment No. 3 to the Revolving Facility, and entered into Amendment No. 3 to the Term Loan Facility.

 

Amendment No. 3 to each of the Revolving Facility and the Term Loan Facility amend certain provisions of the Facilities.  In particular, the aggregate accordion feature permitting subsequent increases to the Facilities have been increased to an aggregate maximum amount of $400 million, an increase of $100 million from the prior limit of $300 million.

 

On March 28, 2013, the Company closed $9.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $209.0 million and $5.0 million of additional commitment to the Term Facility resulting in total commitments to the Term Facility of $105.0 million.

 

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

 

On April 18, 2013, the Company closed $1.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $210.0 million.

 

On May 1, 2013, we entered into Amendment No. 4 to the Revolving Facility, and entered into Amendment No. 4 to the Term Loan Facility.

 

Amendment No. 4 to the Revolving Facility revised the Revolving Facility, to, among other things, increase the amount available for borrowing from $210.0 million to $230.0 million.

 

Amendment No. 4 to the Term Loan Facility revised the Term Loan Facility, to, among other things, increase the amount available for borrowing from $105.0 million to $115.0 million.

 

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

 

On September 25, 2013, the Company closed $15.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $245.0 million and $5.0 million of additional commitment to the Term Facility resulting in total commitments to the Term Facility of $120.0 million.

 

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

 

As of March 31, 2014, we had $22.7 million in cash. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.

 

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow.

 

On March 26, 2013, our wholly-owned subsidiary, Medley SBIC LP (“SBIC LP”) received a Small Business Investment Company (“SBIC”) license from the Small Business Administration (“SBA”).

 

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

 

 

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

 

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

 

As of March 31, 2014, SBIC LP had $50.0 million in regulatory capital and had $44.0 million SBA-guaranteed debentures outstanding.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. As of March 31, 2014, we had commitments under loan and financing agreements to fund up to $67.3 million to 13 portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. As of September 30, 2013, we had commitments under loan and financing agreements to fund up to $33.1 million to 6 portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments at March 31, 2014 and September 30, 2013 is shown in the table below (dollars in thousands):

 

		As of
		March 31, 2014				September 30, 2013
Red Skye Wireless LLC		$	15,000			$	15,000
Wheels Up Partners LLC			9,176				-
Merchant Cash and Capital LLC			8,096				-
Sendero Drilling Company LLC			7,745				-
Lighting Science Group Corporation – Delayed Draw TL			6,250				-
Lydell Jewelry Design Studio LLC			5,928				5,928
Be Green Manufacturing and Distribution Centers LLC – Delayed Draw TL			3,667				-
DreamFinders Homes - TLB			2,723				2,723
The Plastics Group Acquisition Corp			2,500				-
Tenere Acquisition Corp.			2,000				2,000
Response Team Holdings LLC			1,852				-
Momentum Telecom, Inc.			1,163				-
Physicians Care Alliance LLC - Revolver			767				767
Be Green Manufacturing and Distribution Centers LLC - Revolver			479				-
DLR Restaurants LLC			-				4,177
DreamFinders Homes - TLA			-				2,500
Total		$	67,346			$	33,095

 

We have certain contracts under which we have material future commitments. We have entered into an investment management agreement with MCC Advisors in accordance with the 1940 Act. The investment management agreement became effective upon the pricing of our initial public offering. Under the investment management agreement, MCC Advisors has agreed to provide us with investment advisory and management services. For these services, we have agreed to pay a base management fee equal to a percentage of our gross assets and an incentive fee based on our performance.

 

We have also entered into an administration agreement with MCC Advisors as our administrator. The administration agreement became effective upon the pricing of our initial public offering. Under the administration agreement, MCC Advisors has agreed to furnish us with office facilities and equipment, provide us clerical, bookkeeping and record keeping services at such facilities and provide us with other administrative services necessary to conduct our day-to-day operations. MCC Advisors will also provide on our behalf significant managerial assistance to those portfolio companies to which we are required to provide such assistance.

 

 

The following table shows our payment obligations for repayment of debt and other contractual obligations at March 31, 2014 (dollars in thousands):

 

		Payment Due by Period
		Total				Less than 1 year				1 – 3 years				3 – 5 years				More than 5 years
Revolving Facility		$	136,200			$	-			$	136,200			$	-			$	-
Term Loan Facility			120,000				-				-				120,000				-
7.125% Notes			40,000				-				-				-				40,000
6.125% Notes			63,500				-				-				-				63,500
SBA Debenture			44,000				-				-				-				44,000
Total contractual obligations		$	403,700			$	-			$	136,200			$	120,000			$	147,500

 

If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our investment management agreement and our administration agreement. Any new investment management agreement would also be subject to approval by our stockholders.

 

Distributions

 

We have elected and qualified to be treated for U.S. federal income tax purposes as a RIC under subchapter M of the Code. As a RIC, in any taxable year with respect to which we distribute at least 90 percent of the sum of our (i) investment company taxable income (which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses) determined without regard to the deduction for dividends paid and (ii) net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions), we (but not our stockholders) generally will not be subject to U.S. federal income tax on investment company taxable income and net capital gains that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income. To the extent that we retain our net capital gains or any investment company taxable income, we may be subject to U.S. federal income tax. We may choose to retain our net capital gains or any investment company taxable income, and pay the associated federal corporate income tax, including the federal excise tax described below.

 

Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:

 

(1)	at least 98.0 percent of our ordinary income (not taking into account any capital gains or losses) for the calendar year;
(2)	at least 98.2 percent of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period ending  on October 31st of the calendar year; and
(3)	income realized, but not distributed, in preceding years.

 

While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

 

We intend to pay quarterly dividends to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to pay a specified level of dividends or year-to-year increases in dividends. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay dividends. All dividends will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will pay dividends to our stockholders in the future.

 

To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a distribution carefully and should not assume that the source of any distribution is our ordinary income or gains.

 

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

 

 

The following table summarizes the dividends declared through the three months ended March 31, 2014:

 

Date Declared		Record Date		Payment Date		Amount Per Share
5/11/2011		6/1/2011		6/15/2011			0.16
8/4/2011		9/1/2011		9/15/2011			0.21
11/29/2011		12/15/2011		12/30/2011			0.25
2/2/2012		2/24/2012		3/15/2012			0.28
5/2/2012		5/25/2012		6/15/2012			0.31
8/1/2012		8/24/2012		9/14/2012			0.36
11/1/2012		11/23/2012		12/14/2012			0.36
1/30/2013		2/27/2013		3/15/2013			0.36
5/1/2013		5/27/2013		6/14/2013			0.36
7/31/2013		8/23/2013		9/13/2013			0.37
10/30/2013		11/22/2013		12/13/2013			0.37
2/5/2014		2/26/2014		3/14/2014			0.37

 

Related Party Transactions

 

Concurrent with the pricing of our initial public offering, we entered into a number of business relationships with affiliated or related parties, including the following:

 

·

We entered into an investment management agreement with MCC Advisors. Mr. Brook Taube, our chairman and chief executive officer, is a managing partner and senior portfolio manager of MCC Advisors, and Mr. Seth Taube, one of our directors, is a managing partner of MCC Advisors.

 

·

MCC Advisors provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our administration agreement. We reimburse MCC Advisors for the allocable portion (subject to the review and approval of our board of directors) of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs.

 

·

We have entered into a license agreement with Medley Capital LLC, pursuant to which Medley Capital LLC has granted us a non-exclusive, royalty-free license to use the name “Medley.”

 

·

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

 

MCC Advisors and its affiliates may in the future manage other accounts that have investment mandates that are similar, in whole and in part, with ours. MCC Advisors and its affiliates may determine that an investment is appropriate for us and for one or more of those other accounts. In such event, depending on the availability of such investment and other appropriate factors, and pursuant to MCC Advisors’ allocation policy, MCC Advisors or its affiliates may determine that we should invest side-by-side with one or more other accounts. We will not make any investments if they are not permitted by applicable law and interpretive positions of the SEC and its staff, or if they are inconsistent with MCC Advisors’ allocation procedures.

 

In addition, we have adopted a formal code of ethics that governs the conduct of our and MCC Advisors’ officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporation Law.

 

Management Fee

 

Pursuant to the investment management agreement, we pay our investment adviser a fee for investment management services consisting of two components — a base management fee and an incentive fee.

 

MCC Advisors receives a base management fee from us payable quarterly in arrears, at an annual rate of 1.75% of our gross assets, including any assets acquired with the proceeds of leverage. MCC Advisors agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through December 31, 2011.

 

The investment management agreement also provides that MCC Advisors is entitled to an incentive fee. The incentive fee consists of the following two parts:

 

The first, calculated and payable quarterly in arrears is based on our pre-incentive fee net investment income earned during the calendar quarter for which the Incentive Fee is being calculated. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

 

Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets calculated as of the end of the calendar quarter immediately preceding the calendar quarter for which the incentive fee is being calculated, will be compared to a “hurdle rate” of 2.0% per quarter (8.0% annualized). We will pay the Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

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

 

(2) 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5% (10.0% annualized) in any calendar quarter; and

 

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

 

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

 

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

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.

 

Valuation of Portfolio Investments

 

We value investments for which market quotations are readily available at their 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, a readily available market value is not expected to exist for many of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. We may seek pricing information with respect to certain of our investments from pricing services or brokers or dealers in order to value such investments. We also employ independent third party valuation firms for all of our investments for which there is not a readily available market value.

 

Valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will consider the pricing indicated by the external event to corroborate the private equity valuation. 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 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.

 

Our board of directors is ultimately and solely responsible for determining the fair value of the investments in our portfolio that are not publicly traded, whose market prices are not readily available on a quarterly basis or any other situation where portfolio investments require a fair value determination.

 

With respect to investments for which market quotations are not readily available, our board of directors will undertake a multi-step valuation process each quarter, as described below:

 

·

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

 

 

·

Preliminary valuation conclusions are then documented and discussed with senior management.

 

·

At least twice annually, the valuation for each portfolio investment is reviewed by an independent valuation firm.

 

·

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

 

·

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

 

In following these approaches, the types of factors that are taken into account in fair value pricing investments include available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples; security covenants; call protection provisions; information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flows; the markets in which the portfolio company does business; comparisons of financial ratios of peer companies that are public; comparable merger and acquisition transactions; and the principal market and enterprise values.

 

Determination of fair values involves subjective judgments and estimates not verifiable by auditing procedures. Under current auditing standards, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.

 

Revenue Recognition

 

Our revenue recognition policies are as follows:

 

Investments and Related Investment Income. We account for investment transactions on a trade-date basis and interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. For investments with contractual PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. Origination, closing and/or commitment fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Other fees are capitalized as deferred revenue and recorded into income over the respective period. 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. 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. We report changes in the fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in our consolidated statement of operations.

 

Non-accrual. We place loans on non-accrual status when principal and interest payments are past due by 90 days or more, or when there is reasonable doubt that we will collect principal or interest. Accrued interest is generally reversed when a loan is placed on non-accrual. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in our management’s judgment, are likely to remain current. At March 31, 2014, one portfolio company was on non-accrual status with a fair value of approximately $4.1 million, or 0.4% of the fair value of our portfolio. At September 30, 2013, we had one portfolio company on PIK non-accrual status.

 

Federal Income Taxes

 

The Company has elected and qualified to be treated for U.S. federal income tax purposes as a RIC under subchapter M of the Code, commencing with its first taxable year as a corporation, and it intends to operate in a manner so as to maintain its RIC tax treatment. As a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements. Once qualified as a RIC, the Company must timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. 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. 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 and pay a 4% excise tax on such income, as required. 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. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year distributions into the next tax year and pay a 4% excise tax on such excess. 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.

 

 

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

Recent Developments

 

On April 28, 2014, the Company completed a public offering of 6,000,000 shares of its common stock at a public offering price of $13.25 per share, raising approximately $76.7 million in net proceeds after deducting underwriting discounts and commissions and estimated offering expenses.

 

On May 1, 2014, the Company’s board of directors declared a quarterly dividend of $0.37 per share payable on June 13, 2014, to stockholders of record at the close of business on May 28, 2014.

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk.

 

We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments and cash and cash equivalents. Our investment income will be affected by changes in various interest rates, including LIBOR, to the extent our debt investments include floating interest rates. In the future, we expect other loans in our portfolio will have floating rates. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. For the three months ended March 31, 2014, we did not engage in hedging activities.

 

As of March 31, 2014, 63.4% of our income-bearing investment portfolio bore interest based on floating rates. The composition of our floating rate debt investments by cash interest rate floor as of March 31, 2014 was as follows:

 

		March 31, 2014
		Fair Value (thousands)				% of Floating Rate Portfolio
Under 1%		$	102,935				17.1	%
1% to under 2%			452,809				75.1
2% to under 3%			37,728				6.3
3%			9,403				1.5
Total		$	602,875				100.0	%

 

Based on our Consolidated Statement of Assets and Liabilities as of March 31, 2014, the following table shows the approximate increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure.

 

Basis point increase (1)		Interest Income (thousands)				Interest Expense (thousands)				Net Increase (Decrease) (thousands)
100		$	1,400			$	3,000			$	(1,600	)
200			6,600				6,000				600
300			12,300				9,000				3,300
400			17,900				12,000				5,900
500			23,500				15,000				8,500

 

 

As of September 30, 2013, 53.1% of our income-bearing investment portfolio bore interest based on floating rates. The composition of our floating rate debt investments by cash interest rate floor as of September 30, 2013 was as follows:

 

		September 30, 2013
		Fair Value (thousands)				% of Floating Rate Portfolio
Under 1%		$	54,113				13.7	%
1% to under 2%			319,630				80.8
2% to under 3%			22,008				5.5
3%			-				-
Total		$	395,751				100.0	%

 

Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2013, the following table shows the approximate increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure.

 

Basis point increase (1)		Interest Income (thousands)				Interest Expense (thousands)				Net Increase (Decrease) (thousands)
100		$	800			$	1,500			$	(700	)
200			4,200				3,100				1,100
300			7,900				4,600				3,300
400			11,600				6,100				5,500
500			15,200				7,600				7,600

 

(1)

A hypothetical decline in interest rates would not have a material impact on our financial statements.

 

Item 4: Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014. The term “disclosure controls and procedures” is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on the evaluation of our disclosure controls and procedures as of March 31, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II - Other Information

 

Item 1: Legal Proceedings.

 

Neither we nor any of our subsidiaries is currently subject to any legal proceedings, nor, to our knowledge, are any legal proceedings threatened against us or our subsidiaries.

 

Item 1A:   Risk Factors.

 

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on December 10, 2013, which could materially affect our business, financial condition and/or operating results. Except as set forth below, there have been no material changes during the six months ended March 31, 2014 to the risk factors discussed in “Item 1A. Risk Factors” of our annual report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

 

Risks Related to Our Business

 

We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

 

Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

·

sudden electrical or telecommunications outages;

·

natural disasters such as earthquakes, tornadoes and hurricanes;

·

disease pandemics;

·

events arising from local or larger scale political or social matters, including terrorist acts; and

·

cyber-attacks.

 

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.

 

Risks Related to an Investment in Our Securities

 

The market price of our common stock may fluctuate significantly.

 

The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

 

·

significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of the companies;

·

changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to BDCs, SBICs or RICs;

·

exclusion of our common stock from certain market indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of certain investment funds or institutional investors to own our common stock and put short-term selling pressure on our common stock;

·

loss of our qualification as a RIC or BDC or our SBIC subsidiary’s status as an SBIC;

·

changes in earnings or variations in operating results;

·

changes in the value of our portfolio of investments;

·

changes in accounting guidelines governing valuation of our investments;

·

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

·

departure of MCC Advisors’ or any of its affiliates’ key personnel;

·

operating performance of companies comparable to us;

·

general economic trends and other external factors; and

·

loss of a major funding source.

 

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

 

None.

 

Item 3:   Defaults Upon Senior Securities.

 

None.

 

Item 4:   Mine Safety Disclosures.

 

None.

 

Item 5:   Other Information.

 

None.

 

 

Item 6:   Exhibits.

 

EXHIBIT INDEX

 

Number		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated:  May 1, 2014	Medley Capital Corporation
	By	/s/ Brook Taube
		Brook Taube
		Chief Executive Officer
		(Principal Executive Officer)
	By	/s/ Richard T. Allorto, Jr.
		Richard T. Allorto, Jr.
		Chief Financial Officer
		(Principal Accounting and
		Financial Officer)