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EX-32.1 - EXHIBIT 32.1 - PhenixFIN Corpv444639_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - PhenixFIN Corpv444639_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - PhenixFIN Corpv444639_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

 

(Mark One)  
   
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2016

or

 

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

 

For the transition period from          to          

 

Commission file number: 1-35040

 

MEDLEY CAPITAL CORPORATION

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   27-4576073
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
     
280 Park Avenue, 6th Floor East, New York, NY 10017   10017
(Address of Principal Executive Offices)   (Zip Code)

 

(212) 759-0777

 

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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. (Check one):

 

Large accelerated filer ¨           Accelerated filer x         Non-accelerated filer ¨        Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x

 

As of August 8, 2016 the Registrant had 54,763,411 shares of common stock, $0.001 par value, outstanding.

 

 

 

 

MEDLEY CAPITAL CORPORATION

TABLE OF CONTENTS

 

Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Consolidated Statements of Assets and Liabilities as of June 30, 2016 (unaudited) and September 30, 2015 F-1
     
  Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015 (unaudited) F-2
     
  Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2016 and 2015 (unaudited) F-3
     
  Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and 2015 (unaudited) F-4
     
  Consolidated Schedules of Investments as of June 30, 2016 (unaudited) and September 30, 2015 F-5
     
  Notes to Consolidated Financial Statements (unaudited) F-24
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
     
Item 4. Controls and Procedures 19
     
Part II. Other Information 20
     
Item 1. Legal Proceedings 20
     
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults Upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 21
     
SIGNATURES 22

 

 

 

 

Medley Capital Corporation 

 

Consolidated Statements of Assets and Liabilities

 

   As of 
   June 30, 2016   September 30, 2015 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-controlled/non-affiliated investments (amortized cost of $969,239,911 and $1,175,785,384, respectively)  $920,130,225   $1,131,893,787 
Controlled investments (amortized cost of $161,531,606 and $86,755,896, respectively)   112,360,720    74,198,202 
Affiliated investments (amortized cost of $10,000,000 and $10,000,000, respectively)   10,000,000    10,000,000 
Total investments at fair value   1,042,490,945    1,216,091,989 
Cash and cash equivalents   11,852,880    15,714,256 
Interest receivable   8,286,602    9,542,547 
Fees receivable   2,315,375    1,389,634 
Other assets   1,082,291    556,285 
Receivable for dispositions and investments sold   778,488    578,868 
Deferred offering costs   242,991    208,477 
Total assets  $1,067,049,572   $1,244,082,056 
           
LIABILITIES          
Revolving credit facility payable (net of debt issuance costs of $3,191,614 and $4,160,150, respectively)  $24,608,386   $188,539,850 
Term loan payable (net of debt issuance costs of $1,982,703 and $2,436,590, respectively)   172,017,297    171,563,410 
Notes payable (net of debt issuance costs of $4,877,813 and $2,324,664, respectively)   172,635,012    101,175,336 
SBA debentures payable (net of debt issuance costs of $3,696,259 and $4,206,226, respectively)   146,303,741    145,793,774 
Management and incentive fees payable (See note 6)   7,591,471    9,962,534 
Interest and fees payable   3,110,450    1,313,931 
Accounts payable and accrued expenses   2,654,033    2,503,442 
Deferred tax liability   2,489,542    1,797,356 
Administrator expenses payable (See note 6)   966,374    1,000,846 
Deferred revenue   271,386    402,029 
Due to affiliate   36,734    109,164 
Total liabilities  $532,684,426   $624,161,672 
           
Commitments (See note 8)          
           
NET ASSETS          
Common stock, par value $0.001 per share, 100,000,000 common shares authorized, 54,763,411 and 56,337,152 common shares issued and outstanding, respectively  $54,763   $56,337 
Capital in excess of par value   707,495,752    718,240,597 
Accumulated undistributed net investment income   11,471,984    20,351,831 
Accumulated net realized gain/(loss) from investments   (84,324,823)   (60,625,616)
Net unrealized appreciation/(depreciation) on investments, net of deferred taxes   (100,332,530)   (58,102,765)
Total net assets   534,365,146    619,920,384 
           
Total liabilities and net assets  $1,067,049,572   $1,244,082,056 
           
NET ASSET VALUE PER SHARE  $9.76   $11.00 

 

See accompanying notes to consolidated financial statements.

 

 F-1 

 

 

Medley Capital Corporation

 

Consolidated Statements of Operations

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
INVESTMENT INCOME:                    
Interest from investments                    
Non-controlled/non-affiliated investments:                    
Cash  $22,708,578   $30,443,298   $76,108,574   $94,065,811 
Payment-in-kind   1,722,822    2,269,865    5,296,725    5,904,729 
Affiliated investments:                    
Cash   166,750    166,750    500,250    971,902 
Payment-in-kind   -    -    -    190,446 
Controlled investments:                    
Cash   821,650    398,725    1,699,753    1,193,301 
Payment-in-kind   2,020,642    491,349    4,147,327    1,442,480 
Total interest income   27,440,442    33,769,987    87,752,629    103,768,669 
Dividend income, net of provisional taxes ($511,510 and $143,883, respectively)   333,351    107,434    333,351    107,434 
Interest from cash and cash equivalents   3,554    1,387    15,957    4,359 
Fee income (See note 9)   634,935    2,084,975    5,451,558    8,708,173 
Total investment income   28,412,282    35,963,783    93,553,495    112,588,635 
                     
EXPENSES:                    
Base management fees (See note 6)   4,657,375    5,545,985    14,880,361    16,876,189 
Incentive fees (See note 6)   2,793,709    4,310,026    9,858,961    13,845,784 
Interest and financing expenses   7,680,571    6,160,394    22,570,853    18,765,192 
Administrator expenses (See note 6)   966,374    1,066,119    2,925,270    3,186,267 
Professional fees   638,558    904,659    1,826,664    2,276,691 
General and administrative   324,949    461,625    1,488,119    1,396,484 
Directors fees   132,724    134,520    396,627    432,895 
Insurance   123,862    140,351    394,681    425,996 
Expenses before management and incentive fee waivers   17,318,122    18,723,679    54,341,536    57,205,498 

Management fee waiver (See note 6)

   (40,339)   -    (111,943)   - 

Incentive fee waiver (See note 6)

   180,725    -    (1,871,059)   - 
Total expenses net of management and incentive fee waivers   17,458,508    18,723,679    52,358,534    57,205,498 
NET INVESTMENT INCOME   10,953,774    17,240,104    41,194,961    55,383,137 
                     
 REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:                    
Net realized gain/(loss) from investments   (29,176,489)   (9,010,451)   (23,699,207)   (18,627,618)
Net unrealized appreciation/(depreciation) on investments   32,285,431    427,082    (41,831,281)   (34,137,086)
Change in provision for deferred taxes on unrealized gain on investments   (40,378)   (283,706)   (398,484)   (778,161)
    Net gain/(loss) on investments   3,068,564    (8,867,075)   (65,928,972)   (53,542,865)
                     
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $14,022,338   $8,373,029   $(24,734,011)  $1,840,272 
                     
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.26   $0.14   $(0.44)  $0.03 
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER  COMMON SHARE  $0.20   $0.30   $0.74   $0.95 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED (SEE NOTE 11)   54,763,411    57,859,274    55,618,719    58,363,128 
                     
DIVIDENDS DECLARED PER COMMON SHARE  $0.30   $0.30   $0.90   $0.97 

 

See accompanying notes to consolidated financial statements.

 

 F-2 

 

 

Medley Capital Corporation

 

Consolidated Statements of Changes in Net Assets

 

   For the nine months ended 
   June 30 
   2016   2015 
   (unaudited)   (unaudited) 
OPERATIONS:          
Net investment income  $41,194,961   $55,383,137 
Net realized gain/(loss) from investments   (23,699,207)   (18,627,618)
Net unrealized appreciation/(depreciation) on investments   (41,831,281)   (34,137,086)
Change in provision for deferred taxes on unrealized gain on investments   (398,484)   (778,161)
Net increase/(decrease) in net assets from operations   (24,734,011)   1,840,272 
SHAREHOLDER DISTRIBUTIONS:          
Distributions from net investment income   (50,074,808)   (56,672,155)
Net decrease in net assets from shareholder distributions   (50,074,808)   (56,672,155)
CAPITAL SHARE TRANSACTIONS:          
Repurchase of common stock under stock repurchase program (1,573,741 and 994,758 shares, respectively)   (10,699,990)   (9,506,069)
Offering costs   (46,429)   - 
Net increase/(decrease) in net assets from common share transactions   (10,746,419)   (9,506,069)
Total increase/(decrease) in net assets   (85,555,238)   (64,337,952)
Net assets at beginning of period   619,920,384    729,856,881 
Net assets at end of period including accumulated undistributed net investment income of $11,471,984 and $20,384,776, respectively  $534,365,146   $665,518,929 
           
Net asset value per common share  $9.76   $11.53 
Common shares outstanding at end of period   54,763,411    57,738,526 

 

See accompanying notes to consolidated financial statements.

 

 F-3 

 

 

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

   For the nine months ended 
   June 30 
   2016   2015 
   (unaudited)   (unaudited) 
Cash flows from operating activities          
NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS  $(24,734,011)  $1,840,272 
ADJUSTMENTS TO RECONCILE NET INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES:          
Investment increases due to payment-in-kind interest   (11,025,799)   (7,334,583)
Net amortization of premium/(discount) on investments   (670,198)   (1,349,196)
Amortization of debt issuance costs   2,613,877    1,807,210 
Net realized (gain)/loss from investments   23,699,207    18,627,618 
Net deferred income taxes   692,186    922,044 
Net unrealized (appreciation)/depreciation on investments   41,831,281    34,137,086 
Proceeds from sale and settlements of investments   207,145,298    223,292,550 
Purchases, originations and participations   (87,378,745)   (226,018,818)
(Increase)/decrease in operating assets:          
Interest receivable   1,255,945    1,284,656 
Fees receivable   (925,741)   455,621 
Other assets   (526,006)   (150,359)
Receivable for dispositions and investments sold   (199,620)   10,007,268 
Increase/(decrease) in operating liabilities:          
Payable for investments purchased, originated and participated   -    (54,995,000)
Management and incentive fees payable, net   (2,371,063)   (588,800)
Accounts payable and accrued expenses   150,591    (113,682)
Interest and fees payable   1,796,519    (193,689)
Administrator expenses payable   (34,472)   53,652 
Deferred revenue   (130,643)   54,938 
Due to affiliate   (72,430)   92,142 
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES   151,116,176    1,830,930 
           
Cash flows from financing activities          
Repurchase of common stock under stock repurchase program   (10,699,990)   (9,506,069)
Offering costs paid   (80,944)   (98,414)
Borrowings on debt   133,112,825    165,500,000 
Paydowns on debt   (224,000,000)   (100,300,000)
Financing costs paid   (3,234,635)   (1,245,929)
Payments of cash dividends   (50,074,808)   (56,672,155)
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES   (154,977,552)   (2,322,567)
           
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS   (3,861,376)   (491,637)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   15,714,256    36,731,488 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $11,852,880   $36,239,851 
           
Supplemental Information:          
Interest paid during the period  $18,102,777   $17,094,090 
Supplemental non-cash information:          
Payment-in-kind interest income  $9,444,052   $7,537,655 
Net amortization of premium/(discount) on investments  $670,198   $1,349,196 
Amortization of debt issuance costs  $(2,613,877)  $(1,807,210)

 

See accompanying notes to consolidated financial statements.

 

 F-4 

 

 

Medley Capital Corporation 

 

Consolidated Schedule of Investments 

 

June 30, 2016

(Unaudited)

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
Non-Controlled/ Non-Affiliated Investments:                       
                              
AAR Intermediate Holdings LLC(12)  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 14.00% PIK, 1.00% LIBOR Floor)(10)(19)  3/30/2019   33,328,635    27,922,608    19,494,918    3.6%
      Warrants to purchase 2.51% of outstanding company equity  3/30/2019   -    2,274,480    -    0.0%
             33,328,635    30,197,088    19,494,918      
                              
Accupac, Inc.  Containers, Packaging & Glass  Senior Secured Second Lien Term Loan (LIBOR + 10.00% Cash, 1.00% LIBOR Floor)(18)  7/14/2020   31,000,000    31,000,000    30,888,400    5.8%
             31,000,000    31,000,000    30,888,400      
                              
Advanced Diagnostic Holdings, LLC  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 8.75% Cash, 0.875% LIBOR Floor)(19)  12/11/2020   15,359,822    15,359,822    15,561,496    2.9%
             15,359,822    15,359,822    15,561,496      
                              
Albertville Quality Foods, Inc.(12)  Beverage & Food  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor, 3.00% LIBOR Cap)(18)  10/31/2018   16,081,177    16,081,177    16,147,271    3.0%
             16,081,177    16,081,177    16,147,271      
                              
Access Media Holdings, LLC(7)  Media:  Broadcasting & Subscription  Senior Secured First Lien Term Loan (10.00%)  7/22/2020   7,828,633    7,828,633    7,828,633    1.5%
      Preferred Equity Series A (12.00% PIK)  7/22/2020   1,755,872    1,755,872    81,297    0.0%
      Preferred Equity Series AA (12.00% PIK)  7/22/2020   478,415    478,415    478,415    0.1%
      16% of Common Equity of Newco  7/22/2020   -    -    -    0.0%
             10,062,920    10,062,920    8,388,345      
                              
American Covers, Inc.  Consumer goods:  Non-durable  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(19)  3/1/2021   10,000,000    10,000,000    10,200,000    1.9%
             10,000,000    10,000,000    10,200,000      
                              
Autosplice, Inc.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 10.50% Cash, 1.00% LIBOR Floor)(19)  6/30/2019   14,534,394    14,534,395    14,426,259    2.7%
             14,534,394    14,534,395    14,426,259      
                              
Backcountry.com, LLC  Retail  Senior Secured First Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(19)  6/30/2020   2,559,115    2,559,115    2,584,706    0.5%
             2,559,115    2,559,115    2,584,706      

 

 F-5 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                              
Be Green Packaging, LLC(7)(9)  Containers, Packaging & Glass  Senior Secured First Lien Term Loan (LIBOR + 12.00%, 1.00% LIBOR Floor)(19)  12/13/2018   5,000,000    5,000,000    4,646,650    0.9%
      Senior Secured First Lien Delayed Draw (LIBOR + 12.00%, 1.00% LIBOR Floor)(19)  12/13/2018   3,416,667    3,416,667    3,175,211    0.6%
      Revolver (LIBOR + 12.00%, 1.00% LIBOR Floor)(19)  12/13/2018   354,167    354,167    291,117    0.1%
      1.563% Partnership Interest in RCAF VI CIV XXIII, L.P.  12/13/2018   -    416,250    -    0.0%
             8,770,834    9,187,084    8,112,978      
                              
Black Angus Steakhouses, LLC(7)(9)  Hotel, Gaming & Leisure  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(18)  4/24/2020   7,957,589    7,957,589    7,762,260    1.5%
      Senior Secured First Lien Delayed Draw (LIBOR + 9.00%, 1.00% LIBOR Floor)  4/24/2020   -    -    -    0.0%
      Revolver (LIBOR + 9.00%, 1.00% LIBOR Floor)(27)  4/24/2020   133,929    133,929    129,411    0.0%
             8,091,518    8,091,518    7,891,671      
                              
Brantley Transportation LLC(7)(12)  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (12.00% PIK)(10)  8/2/2017   9,758,570    9,064,143    5,190,290    1.0%
      Senior Secured First Lien Delayed Draw (LIBOR + 5.00%, 1.00% LIBOR Floor)  8/2/2017   412,500    412,500    412,500    0.1%
      7.50 Common Units represent 8.04% of the outstanding equity interest of Brantley Trucking, LLC  8/2/2017   -    -    -    0.0%
             10,171,070    9,476,643    5,602,790      
                              
CP OPCO LLC  Services:  Consumer  Senior Secured First Lien Term Loan (LIBOR + 6.75% Cash, 1.00% LIBOR Floor)(19)  9/30/2020   17,000,000    17,000,000    16,325,440    3.1%
             17,000,000    17,000,000    16,325,440      
                              
ContMid Intermediate Inc.(12)  Automotive  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(18)  10/25/2019   23,000,000    23,000,000    23,100,970    4.3%
             23,000,000    23,000,000    23,100,970      
                              
ConvergeOne Holdings Corporation  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(19)  6/17/2021   12,500,000    12,403,042    12,330,125    2.3%
             12,500,000    12,403,042    12,330,125      
                              
Crow Precision Components LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(18)  9/30/2019   13,575,000    13,575,000    13,513,505    2.5%
      350 units of outstanding equity in Wingman Holdings, Inc.  9/30/2019   -    700,000    305,455    0.1%
             13,575,000    14,275,000    13,818,960      

 

 F-6 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
DHISCO Electronic Distribution, Inc.(7)(12)  Hotel, Gaming & Leisure 

Senior Secured First Lien Term Loan A (LIBOR + 9.00%, 1.50% LIBOR Floor)

  11/10/2019   31,238,095    31,238,095    30,453,082    5.7%
      Senior Secured First Lien Term Loan B (10.50% PIK)  2/10/2018   6,797,976    6,797,976    6,615,926    1.2%
      Revolving Credit Facility (LIBOR + 9.00%, 1.50% LIBOR Floor)(24)  5/10/2017   -    -    -    0.0%
      Equity - 1,230,769 Units(22)  2/10/2018   -    1,230,769    1,366,185    0.3%
             38,036,071    39,266,840    38,435,193      
                              
DLR Restaurants LLC(12)  Hotel, Gaming & Leisure  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)  4/18/2018   23,963,881    23,963,881    23,652,830    4.4%
      Unsecured Debt (12.00% Cash, 4.00% PIK)  4/18/2018   284,612    284,612    281,080    0.1%
             24,248,493    24,248,493    23,933,910      
                              
Dream Finders Homes, LLC  Construction & Building  Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)  10/1/2018   8,238,496    8,144,945    8,087,566    1.5%
      5,000 common units represent 5% of the outstanding equity interest of Dream Finders Holdings, LLC  10/1/2018   -    180,000    1,046,482    0.2%
             8,238,496    8,324,945    9,134,048      
                              
Dynamic Energy Services International LLC  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor, 1.5% PIK)(18)  3/6/2018   16,229,572    16,229,572    15,569,840    2.9%
             16,229,572    16,229,572    15,569,840      
                              
Essex Crane Rental Corp.(12)  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 12.50% PIK, 1.00% LIBOR Floor)(10)(19)  5/13/2019   22,408,891    20,460,116    2,666,658    0.5%
             22,408,891    20,460,116    2,666,658      
                              
FKI Security Group LLC(12)  Capital Equipment  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(19)  3/30/2020   14,625,000    14,625,000    14,232,611    2.7%
             14,625,000    14,625,000    14,232,611      
                              
Footprint Acquisition LLC  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash)(18)  2/27/2020   5,250,102    5,250,102    5,302,340    1.0%
      Preferred Equity  (8.75% PIK)  2/27/2020   5,624,036    5,624,036    5,623,755    1.1%
      150.0 units of Common Stock(23)  2/27/2020   -    -    479,029    0.1%
             10,874,138    10,874,138    11,405,124      
                              
Freedom Powersports LLC  Automotive  Senior Secured First Lien Term Loan (LIBOR + 11.50% Cash, 1.50% LIBOR Floor)(19)  9/26/2019   14,260,000    14,260,000    14,246,881    2.7%
             14,260,000    14,260,000    14,246,881      

 

 F-7 

 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
Harrison Gypsum LLC(12)  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)(18)  12/21/2018   54,367,231    54,367,231    53,039,583    9.9%
             54,367,231    54,367,231    53,039,583      
                              
Heligear Acquisition Co.  Aerospace & Defense  Senior Secured First Lien Note (10.25% Cash)  10/15/2019   20,000,000    20,000,000    20,896,000    3.9%
             20,000,000    20,000,000    20,896,000      
                              
JD Norman Industries, Inc.  Automotive  Senior Secured First Lien Term Loan (LIBOR + 12.25% Cash)(18)  3/6/2019   21,673,262    21,673,262    20,472,563    3.8%
             21,673,262    21,673,262    20,472,563      
                              
Jordan Reses Supply Company, LLC  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 11.00%, 1.00% LIBOR Floor)  4/24/2020   20,000,000    20,000,000    20,193,400    3.8%
             20,000,000    20,000,000    20,193,400      
                              
Lighting Science Group Corporation  Containers, Packaging & Glass  Senior Secured Second Lien Term (LIBOR + 10.00% Cash, 2.00% PIK)(19)  2/19/2019   15,971,700    15,386,319    15,034,001    2.8%
      Warrants to purchase 0.98% of the outstanding equity  2/19/2024   -    955,680    270,000    0.1%
             15,971,700    16,341,999    15,304,001      
                              
LSF9 Atlantis Holdings, LLC  Retail  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)  1/15/2021   9,875,000    9,782,119    9,776,250    1.8%
             9,875,000    9,782,119    9,776,250      
                              
Lucky Strike Entertainment, L.L.C.  Hotel, Gaming & Leisure  Senior Secured Second Lien Term Loan (LIBOR + 13.00% Cash, 1.00% LIBOR Floor)(19)  12/24/2019   10,254,472    10,254,472    10,331,073    1.9%
             10,254,472    10,254,472    10,331,073      
                              
Merchant Cash and Capital, LLC  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Delayed Draw (LIBOR + 8.00% Cash, 3.00% LIBOR Floor)(18)  12/4/2016   17,500,000    17,500,000    17,500,000    3.3%
      Senior Secured Second Lien Term Loan (12.00% Cash)  5/4/2017   15,000,000    15,000,000    14,911,800    2.8%
             32,500,000    32,500,000    32,411,800      

 

 F-8 

 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
Miratech Intermediate Holdings, Inc.(12)  Automotive  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor, 2.00% PIK)(18)  5/9/2019   12,741,782    12,741,782    12,577,158    2.4%
             12,741,782    12,741,782    12,577,158      
                              
Momentum Telecom, Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(18)  3/10/2019   8,852,097    8,852,097    8,940,618    1.7%
             8,852,097    8,852,097    8,940,618      
                              
Nation Safe Drivers Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 2.00% LIBOR Floor)(19)  9/29/2020   35,278,846    35,278,846    35,922,332    6.7%
             35,278,846    35,278,846    35,922,332      
                              
Nielsen & Bainbridge, LLC  Consumer goods:  Durable  Senior Secured Second Lien Term Loan (LIBOR + 9.25% Cash, 1.00% LIBOR Floor)(18)  8/15/2021   25,000,000    25,000,000    24,372,000    4.6%
             25,000,000    25,000,000    24,372,000      
                              
NorthStar Group Services, Inc.  Construction & Building  Unsecured Debt (2.5% Cash, 15.5% PIK)  10/24/2019   25,123,345    25,123,345    24,746,746    4.6%
             25,123,345    25,123,345    24,746,746      
                              
Oxford Mining Company, LLC  Metals & Mining  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 3.00% PIK, 0.75% LIBOR Floor)  12/31/2018   20,562,776    20,562,776    19,693,999    3.7%
             20,562,776    20,562,776    19,693,999      
                              
The Plastics Group, Inc.  Chemicals, Plastics & Rubber  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  2/28/2019   21,756,119    21,756,119    20,959,845    3.9%
             21,756,119    21,756,119    20,959,845      
                              
Point.360  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash)  7/8/2020   1,920,000    1,920,000    1,907,136    0.4%
      Equity - 479,283 Common Shares(25)  7/8/2020   -    129,406    327,959    0.1%
      Warrants to purchase 2.8% of the outstanding common shares(26)  7/8/2020   -    52,757    217,076    0.0%
             1,920,000    2,102,163    2,452,171      
                              
Prestige Industries LLC  Services:  Business  Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)  11/1/2017   7,621,227    7,596,895    7,017,626    1.3%
      Warrants to purchase 0.63% of the outstanding common units  11/1/2017   -    151,855    -    0.0%
             7,621,227    7,748,750    7,017,626      
                              
Prince Mineral Holding Corp.(8)  Wholesale  Senior Secured First Lien Note (11.50%)  12/15/2019   6,800,000    6,752,587    6,006,712    1.1%
             6,800,000    6,752,587    6,006,712      

 

 F-9 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
RCS Management Corporation & Specialized Medical Services, Inc.(7)  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)(18)  8/29/2016   32,866,858    32,866,858    32,866,858    6.2%
             32,866,858    32,866,858    32,866,858      
                              
Reddy Ice Corporation  Beverage & Food  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)(18)  11/1/2019   17,000,000    17,000,000    13,560,220    2.5%
             17,000,000    17,000,000    13,560,220      
                              
Response Team Holdings, LLC  Construction & Building  Preferred Equity (12.00% PIK)  3/28/2019   6,070,236    5,796,950    6,135,309    1.1%
      Warrants to purchase 7.2% of the outstanding common units  3/28/2019   -    429,012    1,519,529    0.3%
             6,070,236    6,225,962    7,654,838      
                              
Safeworks, LLC(12)  Capital Equipment  Unsecured Debt (12.00% Cash)  1/31/2020   15,000,000    15,000,000    15,057,750    2.8%
             15,000,000    15,000,000    15,057,750      
                              
Sendero Drilling Company, LLC  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash)(18)  3/18/2019   4,362,030    3,871,844    4,424,974    0.8%
      Warrants to purchase 5.52% of the outstanding common units  3/18/2019   -    793,523    5,399,817    1.0%
             4,362,030    4,665,367    9,824,791      
                              
Seotowncenter, Inc.(12)  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(19)  9/11/2019   26,812,500    26,812,500    26,334,969    4.9%
      3,249.697 shares of Common Stock(14)  9/11/2019   -    500,000    133,608    0.0%
             26,812,500    27,312,500    26,468,577      
                              
Ship Supply Acquisition Corporation  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(19)  7/31/2020   8,179,964    8,179,964    8,133,011    1.5%
             8,179,964    8,179,964    8,133,011      
                              
Stancor, Inc.  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 0.75% LIBOR Floor)(18)  8/19/2019   5,981,818    5,981,818    5,811,755    1.1%
      263,814.43 Class A Units(15)  8/19/2019   -    263,815    207,370    0.0%
             5,981,818    6,245,633    6,019,125      

 

 F-10 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
                          
T Residential Holdings, LLC  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (12.00%)  3/28/2019   18,750,000    18,750,000    18,703,688    3.5%
             18,750,000    18,750,000    18,703,688      
                              
Taylored Freight Services, LLC  Services:  Business  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)(19)  11/1/2017   15,113,306    15,113,307    14,759,504    2.8%
             15,113,306    15,113,307    14,759,504      
                              
Tenere Acquisition Corp.(7)(9)  Chemicals, Plastics & Rubber  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  12/15/2017   11,128,769    11,128,769    11,110,257    2.1%
             11,128,769    11,128,769    11,110,257      
                              
Transtelco Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor)(18)  11/19/2017   18,720,000    18,720,000    18,809,482    3.5%
             18,720,000    18,720,000    18,809,482      
                              
Untangle, Inc.  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 14.00% Cash)(18)  4/18/2019   9,058,233    9,058,233    9,091,568    1.7%
             9,058,233    9,058,233    9,091,568      
                              
Velocity Pooling Vehicle LLC  Automotive  Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(18)  5/13/2022   24,000,000    21,248,500    12,795,840    2.4%
             24,000,000    21,248,500    12,795,840      
                              
Watermill-QMC Midco, Inc.  Automotive  Senior Secured First Lien Term Loan (13.00% Cash)  6/30/2020   18,035,565    18,035,565    18,371,568    3.4%
      1.3% Partnership Interest in Watermill-QMC Midco Inc.(6)  6/30/2020   -    295,362    388,239    0.1%
             18,035,565    18,330,927    18,759,807      
                              
Wheels Up Partners LLC(12)  Aerospace & Defense  Senior Secured First Lien Delayed Draw (LIBOR + 8.55% Cash, 1.00% LIBOR Floor)(19)  10/15/2021   17,039,435    17,039,435    16,902,438    3.2%
             17,039,435    17,039,435    16,902,438      
                              
Subtotal Non-Controlled / Non-Affiliated Investments     $973,371,717   $969,239,911   $920,130,225      

 

 F-11 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
Control Investments:(5)                       
                              
Capstone Nutrition(12)  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 12.50% PIK, 1.00% LIBOR Floor)(10)(19)  4/28/2019   22,016,504    20,803,397    13,573,615    2.5%
      Senior Secured First Lien Delayed Draw (LIBOR + 12.50% PIK, 1.00% LIBOR Floor)(10)(19)  4/28/2019   9,526,523    9,153,997    5,873,292    1.1%
      4,664.6 Class B Shares and 9,424.4 Class C Shares(28)  4/28/2019   -    12    -    0.0%
      2,932.3 Units of Common Stock(13)  4/28/2019   -    400,003    -    0.0%
             31,543,027    30,357,409    19,446,907      
                              
Lydell Jewelry Design Studio, LLC(12)  Consumer goods:  Non-durable  Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 7.50% PIK, 1.50% LIBOR Floor)(10)(18)  9/13/2018   15,281,674    14,269,868    5,599,511    1.0%
      Senior Secured First Lien Term Loan (LIBOR + 5.00% Cash, 1.50% LIBOR Floor)(10)(18)  9/13/2018   1,000,000    1,000,000    1,000,000    0.2%
      Warrants to Purchase 13.3% of the outstanding membership units  9/13/2018   -    -    -    0.0%
      4,324,951.76 shares of Common Stock(20)  9/13/2018   -    -    -    0.0%
             16,281,674    15,269,868    6,599,511      
                              
MCC Senior Loan Strategy JV I LLC(11)  Multisector Holdings  Equity - 87.5% ownership of MCC Senior Loan Strategy JV I LLC      -    30,187,500    30,348,015    5.7%
             -    30,187,500    30,348,015      
                              
OmniVere, LLC  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 13.00% PIK)(19)  5/5/2019   21,593,055    21,261,453    21,593,055    4.0%
      Unsecured Debt  (8.00% PIK)(10)  7/24/2025   22,348,273    20,756,913    14,917,472    2.8%
      Warrants to purchase outstanding equity(21)  5/5/2019   -    872,698    -    0.0%
             43,941,328    42,891,064    36,510,527      
                              
United Road Towing, Inc.  Services:  Business  Senior Secured Second Lien Term Loan (LIBOR + 9.00% PIK)  2/21/2020   18,269,492    18,269,492    18,269,492    3.4%
      Preferred Equity Class C (8.00% PIK)(10)  2/21/2020   18,802,789    16,712,204    1,186,268    0.2%
      Preferred Equity  Class C-1 (8.00% PIK)(10)  2/21/2020   2,564,784    2,081,118    -    0.0%
      Preferred Equity  Class A-2 (8.00% PIK)(10)  2/21/2020   5,303,832    4,664,855    -    0.0%
      65,809.73 Class B Common Units(16)  2/21/2020   -    1,098,096    -    0.0%
             44,940,897    42,825,765    19,455,760      
                              
 Subtotal Control Investments     $136,706,926   $161,531,606   $112,360,720      

 

 F-12 

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value   % of
Net Assets(4)
 
Affiliated Investments:                             
                              
US Multifamily, LLC(11)  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (10.00% Cash)  9/10/2019   6,670,000    6,670,000    6,670,000    1.2%
      Preferred Equity - 33,300 Units(17)  9/10/2019   -    3,330,000    3,330,000    0.6%
             6,670,000    10,000,000    10,000,000      
                              
Subtotal Affiliated Investments     $6,670,000   $10,000,000   $10,000,000      
                              
Total Investments, June 30, 2016     $1,116,748,643   $1,140,771,517   $1,042,490,945    195.1%

 

(1)All of our investments are domiciled in the United States. Certain investments also have international operations.

 

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

 

(3)Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $19.8 million, $101.5 million and $81.7 million, respectively. The tax cost of investments is $1,124.2 million as of June 30, 2016.

 

(4)Percentage is based on net assets of $534,365,146 as of June 30, 2016.

 

(5)Control Investments are defined by the Investment Company Act of 1940 ("1940 Act") as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.

 

(6)12,711 Units represents 1.3% of partnership interest in Watermill-QMC Partners, LP.

 

(7)The investment has an unfunded commitment as of June 30, 2016 (See note 8).

 

(8)Securities are exempt from registration under Rule 144a of the Securities Act of 1933. This security represents a fair value of $6.0 million and 1.1% of net assets as of June 30, 2016 and is considered restricted.

 

(9)Includes an analysis of the value of any unfunded loan commitments.

 

(10)The investment was on non-accrual status as of June 30, 2016.

 

(11)The investment is not a qualifying asset as defined under Section 55(a) of 1940 Act, in a whole, or in part.

 

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

 

(13)2,932.3 Units represents 3.06% ownership of INI Parent, Inc.

 

(14)3,249.697 shares of Common Stock represents 2.917% ownership of Boostability Holdings, Inc.

 

(15)263,814.43 Class A Units represents 0.882% ownership of Stancor, Inc.

 

(16)65,809.73 Class B Common Units Represents 65.8% ownership of United Road Towing, Inc.

 

(17)33,300 Units represents 18.167% ownership of US Multifamily, LLC.

 

(18)The interest rate on these loans is subject to a base rate plus 1 Month London Interbank Offering Rate ("LIBOR"), which at June 30, 2016 was 0.46%. As the interest rate is subject to a minimum LIBOR Floor which was greater than the 1 Month LIBOR rate at June 30, 2016, the prevailing rate in effect at June 30, 2016 was the base rate plus the LIBOR Floor.

 

(19)The interest rate on these loans is subject to a base rate plus 3 Month LIBOR, which at June 30, 2016 was 0.67%. As the interest rate is subject to a minimum LIBOR Floor which was greater than the 3 Month LIBOR rate at June 30, 2016, the prevailing rate in effect at June 30, 2016 was the base rate plus the LIBOR Floor.

 

(20)

4,324,951.76 Units of Common Stock represents 62.7% of the outstanding equity.

 

(21)5,055.56 Units of Common Stock, represents 50.56% of the outstanding equity.

 

(22)1,230,769 Units represents 3.12% ownership of Pegasus Solutions, Inc.

 

(23)150 Units represents 15.0% of Footprint Holding Company, Inc.

 

(24)The investment earns 0.50% commitment fee on all unused commitment. At June 30, 2016, there was $1,904,761.91 of unused commitment.

 

(25)479,283 Common Shares represents 3.8% of the outstanding common shares in Point.360.

 

(26)351,713 Units represents 2.8% of the outstanding common shares in Point.360.

 

(27)The investment earns 0.50% commitment fee on all unused commitment. At June 30, 2016, there was $758,928.60 of unused commitment.

 

(28)4,664.6 Class B and 9,424.4 Class C Shares represents 4.86% and 9.83% ownership in INI Parent, Inc., respectively.

 

See accompanying notes to consolidated financial statements.

 

 F-13 

 

 

Medley Capital Corporation

 

Consolidated Schedule of Investments 

 

September 30, 2015 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
                          
Non-Controlled/ Non-Affiliated Investments:                       
                              
AAR Intermediate Holdings LLC(11)  Energy:  Oil & Gas  Senior Secured First Lien Term Loan  (LIBOR + 12.00%, 1.00% LIBOR Floor)(18)  3/30/2019   31,966,906    30,302,821    22,503,872    3.6%
      Warrants to purchase 1.80% of outstanding company equity  3/30/2019   -    2,274,480    -    0.0%
             31,966,906    32,577,301    22,503,872      
                              
Accupac, Inc.  Containers, Packaging & Glass  Senior Secured Second Lien Term Loan (LIBOR + 10.00% Cash, 1.00% LIBOR Floor) (17)  3/20/2020   35,000,000    35,000,000    34,680,800    5.6%
             35,000,000    35,000,000    34,680,800      
                              
AESC Holding Corp, Inc.  Retail  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(17)  5/27/2019   20,000,000    20,000,000    20,149,200    3.3%
             20,000,000    20,000,000    20,149,200      
                              
Albertville Quality Foods, Inc. (11)  Beverages & Food  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.00% LIBOR Floor, 3.00% LIBOR Cap)(17)  10/31/2018   17,452,830    17,452,830    17,580,585    2.8%
             17,452,830    17,452,830    17,580,585      
                              
Access Media Holdings, LLC (7)  Media:  Broadcasting & Subscription  Senior Secured First Lien Term Loan (10.00%)  7/22/2020   7,536,913    7,536,913    7,536,913    1.2%
      Preferred Equity (12.00% PIK)  7/22/2020   1,187,417    1,187,417    207,578    0.0%
      16% of Common Equity of Newco  7/22/2020   -    -    -    0.0%
             8,724,330    8,724,330    7,744,491      
                              
American Covers, Inc.  Consumer Discretionary  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(18)  3/1/2021   10,000,000    10,000,000    10,000,000    1.6%
             10,000,000    10,000,000    10,000,000      

 

 F-14 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan
(11.25% Cash, 2.00% PIK)
  3/16/2016   16,461,545    16,461,545    16,461,545    2.7%
             16,461,545    16,461,545    16,461,545      
                              
Autosplice, Inc. (7)(9)  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 11.50% Cash, 1.00% LIBOR Floor)(18)  6/30/2019   14,817,844    14,817,844    14,773,761    2.4%
             14,817,844    14,817,844    14,773,761      
                              
Backcountry.com, Inc.  Retail  Senior Secured First Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(18)  6/30/2020   2,583,333    2,583,333    2,583,333    0.4%
             2,583,333    2,583,333    2,583,333      
                              
BayDelta Maritime LLC  Transportation:  Cargo  Warrants to purchase 10% of the outstanding equity  6/30/2016   -    25,000    460,099    0.1%
             -    25,000    460,099      
                              
Be Green Packaging, LLC (7)(9)  Containers, Packaging & Glass  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.00% LIBOR Floor)(18)  12/13/2018   5,000,000    5,000,000    4,823,494    0.8%
      Senior Secured First Lien Delayed Draw (LIBOR + 10.00%, 1.00% LIBOR Floor)(18)  12/13/2018   3,416,667    3,416,667    3,294,714    0.5%
      Revolver (LIBOR + 10.00%, 1.00% LIBOR Floor)(18)  12/13/2018   354,167    354,167    327,425    0.1%
      1.13% Partnership Interest in RCAF VI CIV XXIII, L.P.  12/13/2018   -    416,250    230,894    0.0%
             8,770,834    9,187,084    8,676,527      
                              
Black Angus Steakhouses, LLC (7)(9)  Hotel, Gaming & Leisure  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(17)  4/24/2020   8,111,607    8,111,607    8,111,607    1.3%
      Senior Secured First Lien Delayed Draw (LIBOR + 9.00%, 1.00% LIBOR Floor)  4/24/2020   -    -    -    0.0%
      Revolver (LIBOR + 9.00%, 1.00% LIBOR Floor)  4/24/2020   446,429    446,429    446,429    0.1%
             8,558,036    8,558,036    8,558,036      
                              
Brantley Transportation LLC (11)  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (12.00%)  8/2/2017   9,000,000    9,100,912    6,332,324    1.0%
             9,000,000    9,100,912    6,332,324      
                              
California Products Corporation  Chemicals, Plastics & Rubber  Senior Secured Second Lien Term Loan (13.00%)  5/27/2019   13,750,000    13,750,000    13,837,313    2.2%
             13,750,000    13,750,000    13,837,313      
                              
Calloway Laboratories, Inc.  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (17.00% PIK) (10)  9/30/2016   38,860,511    29,573,477    -    0.0%
      Warrants to purchase 15.00% of the outstanding equity  9/30/2016   -    68,433    -    0.0%
             38,860,511    29,641,910    -      

 

 F-15 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Capstone Nutrition  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 11.50% Cash,  1.00% PIK, 1.00% LIBOR Floor)(18)  4/28/2019   20,085,144    20,085,144    20,109,849    3.2%
      384.62 Units of Common Stock (12)  4/28/2019   -    400,000    731,126    0.1%
             20,085,144    20,485,144    20,840,975      
                              
CP OPCO LLC  Services:  Consumer  Senior Secured First Lien Term Loan (LIBOR + 6.75% Cash, 1.00% LIBOR Floor)(18)  9/30/2020   17,000,000    17,000,000    17,000,000    2.7%
             17,000,000    17,000,000    17,000,000      
                              
ContMid Intermediate Inc.(11)  Automotive  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(17)  10/25/2019   15,000,000    15,000,000    14,811,049    2.4%
             15,000,000    15,000,000    14,811,049      
                              
ConvergeOne Holdings Corporation  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(18)  6/17/2021   12,500,000    12,391,902    12,320,250    2.0%
             12,500,000    12,391,902    12,320,250      
                              
Crow Precision Components LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(17)  9/30/2019   14,000,000    14,000,000    13,998,510    2.3%
      250 units of outstanding equity in Wingman Holdings, Inc.  9/30/2019   -    500,000    589,147    0.1%
             14,000,000    14,500,000    14,587,657      
                              
DHISCO Electronic Distribution, Inc. (7)(11)  Hotel, Gaming & Leisure  Senior Secured First Lien Term Loan A (LIBOR + 9.00%, 1.50% LIBOR Floor)  11/10/2019   31,238,095    31,238,095    31,479,253    5.1%
      Senior Secured First Lien Term Loan B (10.50% PIK)  2/10/2018   6,278,067    6,278,067    6,301,164    1.0%
      Revolving Credit Facility (LIBOR + 9.00%, 1.50% LIBOR Floor)(23)  5/10/2017   -    -    -    0.0%
      Equity - 1,230,769 Units(21)  2/10/2018   -    1,230,769    2,378,890    0.4%
             37,516,162    38,746,931    40,159,307      
                              
DLR Restaurants LLC (11)  Hotel, Gaming & Leisure  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)  4/18/2018   23,512,686    23,512,686    23,226,501    3.7%
      Unsecured Debt (12.00% Cash, 4.00% PIK)  4/18/2018   276,092    276,092    272,037    0.0%
             23,788,778    23,788,778    23,498,538      

 

 F-16 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
DreamFinders Homes LLC (9)  Construction & Building  Senior Secured First Lien Term Loan B (LIBOR + 14.50% Cash)  10/1/2018   14,091,194    13,971,357    14,140,514    2.3%
      5,000 units of outstanding equity  10/1/2018   -    180,000    1,929,761    0.3%
             14,091,194    14,151,357    16,070,275      
                              
Dynamic Energy Services International LLC  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(17)  3/6/2018   17,575,000    17,575,000    17,042,829    2.7%
             17,575,000    17,575,000    17,042,829      
                              
Essex Crane Rental Corp. (11)  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)(18)  5/13/2019   20,000,000    20,000,000    19,325,800    3.1%
             20,000,000    20,000,000    19,325,800      
                              
FKI Security Group LLC (11)  Capital Equipment  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(18)  3/30/2020   14,906,250    14,906,250    14,616,174    2.4%
             14,906,250    14,906,250    14,616,174      
                              
Footprint Acquisition LLC  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash)(17)  2/27/2020   5,250,102    5,250,103    5,151,828    0.8%
      Preferred Equity  (8.75% PIK)  2/27/2020   5,151,581    5,151,581    4,652,001    0.8%
      150.0 units of Common Stock(22)  2/27/2020   -    -    -    0.0%
             10,401,683    10,401,684    9,803,829      
                              
Freedom Powersports LLC(7)(9)  Automotive  Senior Secured First Lien Term Loan (LIBOR + 11.50% Cash, 1.50% LIBOR Floor)(18)  9/26/2019   10,200,000    10,200,000    10,268,663    1.7%
      Senior Secured First Lien Delayed Draw (LIBOR + 11.50% Cash, 1.50% LIBOR Floor)  9/26/2019   3,000,000    3,000,000    3,032,312    0.5%
             13,200,000    13,200,000    13,300,975      
                              
Harrison Gypsum LLC (11)  Metals & Mining  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)(17)  12/21/2018   56,134,983    56,134,983    55,225,035    8.9%
             56,134,983    56,134,983    55,225,035      
                              
Heligear Acquisition Co.  Aerospace & Defense  Senior Secured First Lien Note (10.25% Cash)  10/15/2019   20,000,000    20,000,000    20,523,479    3.3%
             20,000,000    20,000,000    20,523,479      
                              
Help/Systems LLC  Services:  Business  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(17)  6/28/2020   15,000,000    15,000,000    15,150,000    2.5%
             15,000,000    15,000,000    15,150,000      

 

 F-17 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
JD Norman Industries, Inc.  Automotive  Senior Secured First Lien Term Loan (LIBOR + 10.25% Cash)(17)  3/6/2019   22,500,000    22,500,000    22,183,434    3.6%
             22,500,000    22,500,000    22,183,434      
                              
Jordan Reses Supply Company LLC  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 11.00%, 1.00% LIBOR Floor)  4/24/2020   20,000,000    20,000,000    20,349,811    3.3%
             20,000,000    20,000,000    20,349,811      
                              
Lighting Science Group Corporation  Containers, Packaging & Glass  Senior Secured Second Lien Term (LIBOR + 10.00% Cash, 2.00% PIK)(18)  2/19/2019   15,730,619    15,014,318    15,055,776    2.4%
      Warrants to purchase 2.36% of the outstanding equity  2/19/2019   -    955,680    353,080    0.1%
             15,730,619    15,969,998    15,408,856      
                              
Lucky Strike Entertainment, L.L.C.  Hotel, Gaming & Leisure  Senior Secured Second Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 2.00% PIK)(18)  12/24/2019   10,254,472    10,254,472    10,163,515    1.6%
             10,254,472    10,254,472    10,163,515      
                              
Lydell Jewelry Design Studio LLC (11)  Consumer goods: Non-durable  Senior Secured First Lien Term Loan (LIBOR + 5.50% Cash, 7.50% PIK, 1.50% LIBOR Floor)(17)  9/13/2018   14,436,386    14,195,568    11,888,075    1.9%
      Warrants to purchase 13.3% of the outstanding membership units  9/13/2018   -    -    -    0.0%
             14,436,386    14,195,568    11,888,075      
                              
Merchant Cash and Capital LLC (9)  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Delayed Draw (LIBOR + 8.00% Cash, 3.00% LIBOR Floor)(17)  3/4/2016   17,500,000    17,500,000    17,547,775    2.8%
      Senior Secured Second Lien Term Loan (12.00% Cash)  8/19/2016   15,000,000    15,000,000    14,978,850    2.4%
             32,500,000    32,500,000    32,526,625      
                              
Meridian Behavioral Health LLC (7)(9)  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan A (LIBOR + 11.50%, 2.50% LIBOR Floor)(18)  11/14/2016   10,289,141    10,122,094    10,289,141    1.7%
      Senior Secured First Lien Term Loan B (LIBOR + 11.50%, 2.50% LIBOR Floor)(18)  11/14/2016   6,600,000    6,600,000    6,600,000    1.1%
      Warrants to purchase 8% of the outstanding equity  11/14/2016   -    536,296    5,431,566    0.9%
             16,889,141    17,258,390    22,320,707      
                              
Miratech Intermediate Holdings, Inc. (9)(11)  Automotive  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor, 2% PIK)(17)  5/9/2019   13,756,657    13,756,657    13,580,572    2.2%
             13,756,657    13,756,657    13,580,572      

 

 F-18 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Momentum Telecom, Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(17)  3/10/2019   9,140,653    9,140,653    9,274,290    1.5%
             9,140,653    9,140,653    9,274,290      
                              
Nation Safe Drivers Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 2.00% LIBOR Floor)(18)  9/29/2020   35,278,846    35,278,846    35,302,130    5.7%
             35,278,846    35,278,846    35,302,130      
                              
Nielsen & Bainbridge LLC  Consumer goods:  Durable  Senior Secured Second Lien Term Loan (LIBOR + 9.25% Cash, 1.00% LIBOR Floor)(17)  8/15/2021   25,000,000    25,000,000    24,714,648    4.0%
             25,000,000    25,000,000    24,714,648      
                              
Northern Lights MIDCO LLC  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (LIBOR + 9.50% Cash, 1.50% LIBOR Floor)  11/24/2019   4,523,750    4,523,750    4,570,584    0.7%
             4,523,750    4,523,750    4,570,584      
                              
NorthStar Group Services, Inc.  Construction & Building  Unsecured Debt (2.50% Cash, 15.50% PIK)  10/24/2019   23,181,705    23,181,705    23,181,705    3.7%
             23,181,705    23,181,705    23,181,705      
                              
Oxford Mining Company, LLC (9)  Metals & Mining  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 3.00% PIK, 0.75% LIBOR Floor)  12/31/2018   20,160,994    20,160,994    19,387,166    3.1%
             20,160,994    20,160,994    19,387,166      
                              
The Plastics Group, Inc.  Chemicals, Plastics & Rubber  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  2/28/2019   21,427,726    21,427,726    21,083,168    3.4%
             21,427,726    21,427,726    21,083,168      
                              
Point.360 (7)  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash)(18)  7/8/2020   320,000    320,000    320,000    0.1%
      Equity - 479,283 Common Shares(24)  7/8/2020   -    129,406    479,283    0.1%
      Warrants to purchase 2.8% of the outstanding common shares (25)  7/8/2020   -    52,757    272,711    0.0%
             320,000    502,163    1,071,994      
                              
Prestige Industries LLC  Services:  Business  Senior Secured Second Lien Term Loan (18.00% PIK)  11/1/2017   7,932,041    7,879,441    7,280,186    1.2%
      Warrants to purchase 0.63% of the outstanding common units  11/1/2017   -    151,855    -    0.0%
             7,932,041    8,031,296    7,280,186      
                              
Prince Mineral Holding Corp.(8)  Metals & Mining  Senior Secured First Lien Note (11.50%)  12/15/2019   6,800,000    6,744,599    5,712,000    0.9%
             6,800,000    6,744,599    5,712,000      
                              
RCS Management Corporation & Specialized Medical Services, Inc. (7)  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)(17)  2/29/2016   28,746,290    28,746,290    28,746,290    4.6%
             28,746,290    28,746,290    28,746,290      
                              
Red Skye Wireless LLC (7)(9)  Retail  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(17)  6/27/2018   20,387,686    20,387,686    20,666,563    3.3%
             20,387,686    20,387,686    20,666,563      
                              
Reddy Ice Corporation  Beverages & Food  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)(17)  11/1/2019   17,000,000    17,000,000    13,436,761    2.2%
             17,000,000    17,000,000    13,436,761      

 

 F-19 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Response Team Holdings, LLC  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% PIK, 2.00% LIBOR Floor)(17)  3/28/2019   25,537,850    25,537,850    25,305,455    4.1%
      Preferred Equity (12.00% PIK)  3/28/2019   5,549,736    5,218,954    5,077,731    0.8%
      Warrants to purchase 6.17% of the outstanding common units  3/28/2019   -    429,012    837,967    0.1%
             31,087,586    31,185,816    31,221,153      
                              
Safeworks LLC(11)  Capital Equipment  Unsecured Debt (12.00% Cash)  1/31/2020   15,000,000    15,000,000    15,148,023    2.4%
             15,000,000    15,000,000    15,148,023      
                              
Sendero Drilling Company LLC (9)  Energy:  Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 11.00% Cash)(17)  3/18/2019   13,026,628    12,427,454    13,106,872    2.1%
      Warrants to purchase 5.52% of the outstanding common units  3/18/2019   -    793,523    4,353,269    0.7%
             13,026,628    13,220,977    17,460,141      
Seotowncenter, Inc.(11)  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(18)  9/11/2019   27,500,000    27,500,000    27,428,182    4.4%
      3,249.697 shares of Common Stock(13)  9/11/2019   -    500,000    1,184,303    0.2%
             27,500,000    28,000,000    28,612,485      
                              
Ship Supply Acquisition Corporation (7)  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(18)  7/31/2020   8,498,664    8,498,664    8,498,579    1.4%
      Revolver (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(18)(19)  7/31/2016   414,569    414,569    414,569    0.1%
             8,913,233    8,913,233    8,913,148      
                              
Stancor, Inc.  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 0.75% LIBOR Floor)(17)  8/19/2019   7,000,000    7,000,000    6,815,830    1.1%
      263,814.43 Class A Units(14)  8/19/2019   -    263,814    267,114    0.0%
             7,000,000    7,263,814    7,082,944      
                              
T. Residential Holdings LLC  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (12.00%)  3/28/2019   19,500,000    19,500,000    19,500,000    3.1%
             19,500,000    19,500,000    19,500,000      
                              
Taylored Freight Services LLC  Services:  Business  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)(18)  11/1/2017   15,330,548    15,330,548    14,274,887    2.3%
             15,330,548    15,330,548    14,274,887      

 

 F-20 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Tempel Steel Company(8)  Metals & Mining  Senior Secured First Lien Note (12.00%)  8/15/2016   11,000,000    10,952,851    10,145,174    1.7%
             11,000,000    10,952,851    10,145,174      
                              
Tenere Acquisition Corp.(7)(9)  Chemicals, Plastics & Rubber  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)  12/15/2017   11,359,842    11,359,842    11,627,039    1.9%
             11,359,842    11,359,842    11,627,039      
                              
Transtelco Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.50% LIBOR Floor)(17)  11/19/2017   18,864,000    18,864,000    18,924,365    3.1%
             18,864,000    18,864,000    18,924,365      
                              
Untangle, Inc.  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash)(17)  4/18/2019   9,527,500    9,527,500    9,527,690    1.5%
             9,527,500    9,527,500    9,527,690      
                              
Velocity Pooling Vehicle LLC  Automotive  Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(17)  5/14/2022   24,000,000    21,008,149    19,832,766    3.2%
             24,000,000    21,008,149    19,832,766      
                              
Watermill-QMC Midco, Inc.  Automotive  Senior Secured First Lien Term Loan (13.00% Cash)  6/30/2020   15,409,609    15,409,609    15,409,609    2.5%
      1.3% Partnership Interest in Watermill-QMC Midco Inc. (6)  6/30/2020   -    295,362    295,362    0.0%
             15,409,609    15,704,971    15,704,971      
                              
Wheels Up Partners LLC (11)  Aerospace & Defense  Senior Secured First Lien Delayed Draw (LIBOR + 8.55% Cash, 1.00% LIBOR Floor)(18)  10/15/2021   18,230,736    18,230,736    18,311,863    3.1%
             18,230,736    18,230,736    18,311,863      
                              
Window Products, Inc.  Construction & Building  Senior Secured Second Lien Term Loan (LIBOR + 10.75% Cash, 1.00% LIBOR Floor)(18)  12/27/2019   14,000,000    14,000,000    14,140,000    2.3%
             14,000,000    14,000,000    14,140,000      
                              
Subtotal Non-Controlled / Non-Affiliated Investments     $1,182,862,012   $1,175,785,384   $1,131,893,787      

 

 F-21 

 

 

Company (1)  Industry  Type of Investment  Maturity  Par Amount (2)   Cost(3)   Fair Value   % of
 Net Assets (4)
 
Control Investments:(5)                       
                              
MCC Senior Loan Strategy JV I LLC  Multisector Holdings  Equity - 87.5% ownership of MCC Senior Loan Strategy JV I LLC      -    14,437,500    14,215,834    2.3%
             -    14,437,500    14,215,834      
                              
OmniVere LLC  Services:  Business  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 1.00% PIK)(18)  5/5/2019   17,805,885    17,406,591    17,805,885    2.9%
      Unsecured Debt  (8.00% PIK) (10)  7/24/2025   12,971,722    12,482,835    7,059,693    1.1%
      Warrants to purchase outstanding equity (20)  5/5/2019   -    872,698    -    0.0%
             30,777,607    30,762,124    24,865,578      
                              
United Road Towing Inc.  Services:  Business  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash)(18)  2/21/2020   17,000,000    17,000,000    16,489,975    2.7%
      Preferred Equity Class C (8.00% PIK) (10)  2/21/2020   18,802,789    17,466,375    17,747,200    2.9%
      Preferred Equity  Class C-1 (8.00% PIK) (10)  2/21/2020   1,326,945    1,326,946    27,028    0.0%
      Preferred Equity  Class A-2 (8.00% PIK) (10)  2/21/2020   4,996,578    4,664,855    690,695    0.1%
      65,809.73 Class B Common Units(15)  2/21/2020   -    1,098,096    161,892    0.0%
             42,126,312    41,556,272    35,116,790      
                              
 Subtotal Control Investments     $72,903,919   $86,755,896   $74,198,202      
                              
Affiliated Investments:                       
                              
US Multifamily, LLC  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (10.00% Cash)  9/10/2019   6,670,000    6,670,000    6,670,000    1.1%
      Preferred Equity - 33,300 Units(16)  9/10/2019   -    3,330,000    3,330,000    0.5%
             6,670,000    10,000,000    10,000,000      
                              
Subtotal Affiliated Investments     $6,670,000   $10,000,000   $10,000,000      
                              
Total Investments, September 30, 2015     $1,262,435,930   $1,272,541,280   $1,216,091,989    196.2%

 

(1)All of our investments are domiciled in the United States. Certain investments also have international operations.

 

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

 

(3)Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $32.9 million, $71.4 million and $38.5 million, respectively. The tax cost of investments is $1,253.0 million.

 

(4)Percentage is based on net assets of $619,920,384 as of September 30, 2015.

 

(5)Control Investments are defined by the Investment Company Act of 1940 ("1940 Act") as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.

 

(6)12,711 Units represents 1.3% of partnership interest in Watermill-QMC Partners, LP.

 

(7)The investment has an unfunded commitment as of September 30, 2015 (See note 8).

 

(8)Securities are exempt from registration under Rule 144a of the Securities Act of 1933. These securities represent a fair value of $15.9 million and 2.6% of net assets as of September 30, 2015 and are considered restricted.

 

 F-22 

 

 

(9)Includes an analysis of the value of any unfunded loan commitments.

 

(10)The investment was on non-accrual status as of September 30, 2015.

 

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

 

(12)384.62 Units represents 1.55% ownership of Cornerstone Research & Development Inc.

 

(13)3,249.697 shares of Common Stock represents 2.917% ownership of Boostability Holdings, Inc.

 

(14)263,814.43 Class A Units represents 0.882% ownership of Stancor, Inc.

 

(15)65,809.73 Class B Common Units Represents 65.8% ownership of United Road Towing, Inc.

 

(16)33,300 Units represents 18.167% ownership of US Multifamily, LLC.

 

(17)The interest rate on these loans is subject to a base rate plus 1 Month London Interbank Offering Rate ("LIBOR"), which at September 30, 2015 was 0.20%. As the interest rate is subject to a minimum LIBOR Floor which was greater than the 1 Month LIBOR rate at September 30, 2015, the prevailing rate in effect at September 30, 2015 was the base rate plus the LIBOR Floor.

 

(18)The interest rate on these loans is subject to a base rate plus 3 Month LIBOR, which at September 30, 2015 was 0.33%. As the interest rate is subject to a minimum LIBOR Floor which was greater than the 3 Month LIBOR rate at September 30, 2015, the prevailing rate in effect at September 30, 2015 was the base rate plus the LIBOR Floor.

 

(19)The investment earns 0.50% commitment fee on all unused commitment. At September 30, 2015, there was $621,853.46 of unused commitment.

 

(20)5,055.56 Units of Common Stock, represents 50.56% of the outstanding equity.

 

(21)1,230,769 Units represents 4.17% ownership of Pegasus Solutions, Inc.

 

(22)150 Units represents 15.0% of Footprint Holding Company, Inc.

 

(23)The investment earns 0.50% commitment fee on all unused commitment. At September 30, 2015, there was $3,047,619.05 of unused commitment.

 

(24)479,283 Common Shares represents 3.8% of the outstanding common shares in Point.360.

 

(25)351,713 Units represents 2.8% of the outstanding common shares in Point.360.

 

 F-23 

 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

June 30, 2016

(Unaudited)

 

Note 1. Organization

 

Medley Capital Corporation (the “Company”, “we” and “us”) is a non-diversified closed end management investment company incorporated in Delaware that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We completed our initial public offering (“IPO”) and commenced operations on January 20, 2011. The Company has elected and qualified to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We are externally managed and advised by MCC Advisors LLC (“MCC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to an investment management agreement. MCC Advisors is a majority owned subsidiary of Medley LLC, which is controlled by Medley Management Inc., a publicly traded asset management firm, which in turn is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. We use the term “Medley” to refer collectively to the activities and operations of Medley Capital LLC, Medley LLC, Medley Management Inc., Medley Group LLC, MCC Advisors, associated investment funds and their respective affiliates.

 

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 to privately-held middle market companies, primarily through directly originated transactions, to help these companies fund acquisitions, growth or refinancing. The portfolio generally consists of senior secured first lien loans and senior secured second lien loans. In many of our investments, we will receive warrants or other equity participation features which we believe will increase the total investment returns.

 

 F-24 

 

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The Company follows the accounting and reporting guidance in the Financial Accounting Standards Board Accounting Standards Codification 946 (“ASC 946”). 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 subsidiary SBIC LP and its Taxable Subsidiaries. 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 of the Securities Act of 1933. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. 

 

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. 

 

Offerings

 

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

 

On April 28, 2014, the Company completed a public offering of 6,000,000 shares of our common stock at a public offering price of $13.25 per share, raising approximately $76.9 million in net proceeds.

 

On August 1, 2014, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with Goldman, Sachs & Co., Barclays Capital Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, Janney Montgomery Scott LLC, Ladenburg Thalmann & Co. Inc., MLV & Co. LLC, Maxim Group LLC, National Securities Corporation and Gilford Securities Incorporated, through which the Company could sell shares of its common stock having an aggregate offering price of up to $100.0 million. During the period from August 5, 2014 to September 30, 2014, the Company sold 671,278 shares of its common stock at an average price of $12.87 per share, and raised $8.7 million in net proceeds, under the ATM program.

 

On August 26, 2014, the Company completed a public offering of 5,000,000 shares of our common stock and an additional 750,000 shares of our common stock pursuant to the underwriters’ partial exercise of the over-allotment option at a public offering price of $13.02 per share, raising approximately $72.8 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.

 

 F-25 

 

 

Debt Issuance Costs

 

Debt issuance costs, incurred in connection with our credit facilities, unsecured notes and SBA debentures (see Note 5) 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. Dividend income, which represents dividends from equity investments and distributions from Taxable Subsidiaries, are recorded on ex-dividend date and when distribution is received, respectively.

 

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. Fee income for the three and nine months ended June 30, 2016 was approximately $0.6 million and $5.5 million, respectively. For the three and nine months ended June 30, 2015 fee income was approximately $2.1 million and $8.7 million, respectively (see Note 9).

 

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

 

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

 

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three and nine months ended June 30, 2016, the Company earned approximately $3.7 million and $9.4 million in PIK, respectively. For the three and nine months ended June 30, 2015, the Company earned approximately $2.8 million and $7.5 million in PIK, 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 management’s designation of non-accrual status. Interest receivable is analyzed regularly and may be reserved against when deemed uncollectible. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At June 30, 2016, seven investments were on non-accrual status with a combined fair value of approximately $68.5 million, or 6.6% of the fair value of our portfolio. At September 30, 2015, three investments were on non-accrual status with a combined fair value of approximately $25.5 million, or 2.1% of the fair value of our portfolio.

 

Investment Classification

 

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

 

 F-26 

 

 

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 quotations, 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.

 

Investments in investment funds are valued at fair value. Fair values are generally determined utilizing the net asset value (“NAV”) supplied by, or on behalf of, management of each investment fund, which is net of management and incentive fees or allocations charged by the investment fund and is in accordance with the “practical expedient”, as defined by the Accounting Standards Update (“ASU”) 2009-12, Investments in Certain Entities that Calculate Net Asset Value per Share. NAVs received by, or on behalf of, management of each investment fund are based on the fair value of the investment funds’ underlying investments in accordance with policies established by management of each investment fund, as described in each of their financial statements and offering memorandum.

 

The methodologies utilized by the Company in estimating its fair value of its investments categorized as Level 3 generally fall into the following two categories:

 

·The “Market Approach” uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business.

 

·The “Income Approach” converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts.

 

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 market yield analysis under the Income Approach or an enterprise model of valuation under the Market Approach, or a combination thereof. 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 and information that the Company utilizes when applying the Market Approach for performing investments includes, among other things:

 

 F-27 

 

 

·valuations of comparable public companies “(Guideline Comparable Approach)”,

 

·recent sales of private and public comparable companies “(Guideline Comparable Approach)”,

 

·recent acquisition prices of the company, debt securities or equity securities “(Acquisition Price Approach)”,

 

·external valuations of the portfolio company, offers from third parties to buy the company “(Estimated Sales Proceeds Approach)”,

 

·subsequent sales made by the company of its investments “(Expected Sales Proceeds Approach)”; and

 

·estimating the value to potential buyers.

 

The methodologies and information that the Company utilizes when applying the Income Approach for performing investments includes:

 

·discounting the forecasted cash flows of the portfolio company or securities (Discounted Cash Flow (“DCF”) Approach); and

 

·Black-Scholes model or simulation models or a combination thereof (Income Approach – Option Model) with respect to the valuation of warrants.

 

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 (Market Approach – Expected Recovery Analysis or Estimated Liquidation Proceeds).

 

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: 

 

·

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

  

·

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

 

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

 

 F-28 

 

 

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.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB released Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40)(“ASU 2014-15”). ASU 2014-15 requires the Company to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within the one year period subsequent to the date that the financial statements are issued or within the one year period subsequent the date that the financial statements are available to be issued. ASU 2014-15 becomes effective for fiscal periods ending after December 15, 2016; however, early adoption is permitted. The Company has not elected to early adopt ASU 2014-15 and is considering its effects upon the financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the guidance is effective for annual and interim periods beginning after December 15, 2015. Prior to adoption, the Company recorded deferred debt issuance costs as deferred financing costs as an asset on the consolidated statements of assets and liabilities. Upon adoption, the Company reclassified all of these costs as unamortized debt issuance costs that reduce debt in the liabilities on the consolidated statements of assets and liabilities and retrospectively reclassified $13.1 million of deferred debt issuance costs that were previously presented as deferred financing costs as an asset as of September 30, 2015.

 

In May 2015, the FASB issued ASU 2016-07 Fair Value Measurements: Disclosures for Investments in Certain Entitles that Calculate Net Asset Value per Share (or its Equivalent). The pronouncement removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV per share practical expedient. The pronouncement also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to the investments for which the entity has not elected to measure the fair value using that practical expedient. For public business entities, the guidance becomes effective and will be applied retrospectively for fiscal years beginning after December 15, 2015 and interim periods within those years; however, early adoption is permitted. The Company has elected to early adopt the pronouncement for the current reporting period, which is permitted; therefore the Company excluded all investments in affiliated entities fair valued using the practical expedient from the fair value hierarchy.

 

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 2015 accrued at June 30, 2016.

 

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. As of June 30, 2016 and September 30, 2015, the Company recorded a deferred tax liability of $2.5 million and $1.8 million, respectively, on the consolidated statements of assets and liabilities. The change in provision for deferred taxes is included as a component of net gain/(loss) on investments in the consolidated statements of operations. For the three and nine months ended June 30, 2016 the change in provision for deferred taxes on the unrealized gain on investments were $40,378 and $0.4 million, respectively. For the three and nine months ended June 30, 2015 the change in provision for deferred taxes on the unrealized gain on investments were $0.3 million and $0.8 million, respectively.

 

 F-29 

 

 

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

 

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. There were no material uncertain income tax positions at June 30, 2016. 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.

 

 F-30 

 

 

Note 3. Investments

 

The composition of our investments as of June 30, 2016 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $662,062    58.0%  $605,188    58.1%
Senior Secured Second Lien Term Loans   309,418    27.1    296,554    28.4 
Senior Secured First Lien Notes   26,753    2.3    26,903    2.6 
Unsecured Debt   61,165    5.4    55,003    5.3 
MCC Senior Loan Strategy JV I LLC   30,187    2.7    30,348    2.9 
Equity/Warrants   51,187    4.5    28,495    2.7 
Total  $1,140,772    100.0%  $1,042,491    100.0%

 

The composition of our investments as of September 30, 2015 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands): 

 

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $740,831    58.2%  $695,970    57.2%
Senior Secured Second Lien Term Loans   379,115    29.8    372,176    30.6 
Senior Secured First Lien Notes   37,697    3.0    36,380    3.0 
Unsecured Debt   50,941    4.0    45,661    3.7 
MCC Senior Loan Strategy JV I LLC   14,437    1.1    14,216    1.2 
Equity/Warrants   49,520    3.9    51,689    4.3 
Total  $1,272,541    100.0%  $1,216,092    100.0%

 

In connection with certain of the Company’s investments, the Company receives warrants which are obtained for the objective of increasing the total investment returns and are not held for hedging purposes. At June 30, 2016 and September 30, 2015, the total fair value of warrants was $7.4 million and $11.9 million, respectively, and were included in investments at fair value on the consolidated statement of assets and liabilities.

 

Total unrealized losses related to warrants for the three and nine months ended June 30, 2016 were $0.3 million and $3.9 million, respectively and were recorded on the consolidated statement of operations in those accounts. The warrants are received in connection with individual investments and are not subject to master netting arrangements.  During the three and nine months ended June 30, 2016, the Company did not acquire any warrant positions. Total unrealized gain related to warrants for the three months ended June 30, 2015 was $0.4 and total unrealized loss for the nine months ended June 30, 2015 was $0.4 million were recorded on the consolidated statement of operations in those accounts. The warrants are received in connection with individual investments and are not subject to master netting arrangements.  During the three and nine months ended June 30, 2015, the Company acquired 0 and 1 warrant positions, respectively.

 

 F-31 

 

 

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2016 (dollars in thousands):

 

   Fair Value   Percentage 
Services:  Business  $141,313    13.6%
Automotive   101,953    9.8 
Construction & Building   97,242    9.3 
Banking, Finance, Insurance & Real Estate   97,038    9.3 
Healthcare & Pharmaceuticals   88,069    8.4 
Hotel, Gaming & Leisure   80,592    7.7 
Containers, Packaging & Glass   54,305    5.2 
Aerospace & Defense   51,617    5.0 
Energy:  Oil & Gas   50,492    4.8 
Telecommunications   40,080    3.8 
Chemicals, Plastics & Rubber   32,070    3.1 
Multisector Holdings   30,348    2.9 
Beverage & Food   29,708    2.9 
Capital Equipment   29,290    2.8 
Consumer goods:  Durable   24,372    2.3 
Metals & Mining   19,694    1.9 
Consumer goods:  Non-durable   16,800    1.6 
Services:  Consumer   16,326    1.6 
High Tech Industries   14,426    1.4 
Retail   12,361    1.2 
Media:  Broadcasting & Subscription   8,388    0.8 
Wholesale   6,007    0.6 
Total  $1,042,491    100.0%

 

 F-32 

 

 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2015. The September 30, 2015 industry groupings have been modified to conform to the June 30, 2016 industry groupings (dollars in thousands):

 

   Fair Value   Percentage 
Services:  Business  $161,700    13.3%
Construction & Building   103,939    8.6 
Banking, Finance, Insurance & Real Estate   101,899    8.4 
Automotive   99,414    8.2 
Healthcare & Pharmaceuticals   92,258    7.6 
Metals & Mining   90,469    7.4 
Hotel, Gaming & Leisure   73,821    6.1 
Aerospace & Defense   69,885    5.7 
Energy:  Oil & Gas   63,339    5.2 
Containers, Packaging & Glass   58,766    4.8 
Chemicals, Plastics & Rubber   46,548    3.8 
Retail   43,399    3.6 
Telecommunications   40,519    3.3 
Beverage & Food   39,575    3.3 
Capital Equipment   29,764    2.4 
Consumer goods:  Durable   24,715    2.0 
Services:  Consumer   17,000    1.4 
High Tech Industries   14,774    1.2 
Multisector Holdings   14,216    1.2 
Consumer goods:  Non-durable   11,888    1.0 
Consumer Discretionary   10,000    0.8 
Media:  Broadcasting & Subscription   7,744    0.6 
Transportation:  Cargo   460    0.1 
Total  $1,216,092    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.

 

 F-33 

 

 

The following table shows the portfolio composition by geographic location at fair value at June 30, 2016 (dollars in thousands):

  

   Fair Value   Percentage 
Midwest  $286,145    27.4%
Southwest   238,561    22.9 
Southeast   170,708    16.4 
West   166,443    16.0 
Northeast   123,034    11.8 
Mid-Atlantic   57,600    5.5 
Total  $1,042,491    100.0%

  

The following table shows the portfolio composition by geographic location at fair value at September 30, 2015 (dollars in thousands):

 

   Fair Value   Percentage 
Midwest  $387,086    31.8%
Southwest   254,265    20.9 
West   192,906    15.9 
Southeast   177,269    14.6 
Northeast   126,756    10.4 
Mid-Atlantic   77,810    6.4 
Total  $1,216,092    100.0%

 

Transactions With Affiliated Companies

 

During the nine months ended June 30, 2016 and 2015, the Company had investments in portfolio companies designated as controlled investments and affiliates under the 1940 Act. Transactions with control investments and affiliates were as follows: 

 

 F-34 

 

 

Name of Investment  Fair Value at
September 30,
2015
   Purchases
(Sales)
of/Advances to
Affiliates
   Transfers
In/(Out) of
Affiliates
   Fair Value at
June 30, 2016
   Income
Earned
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
 
Controlled Investments                                   
Capstone Nutrition  $-   $9,072,168   $20,840,975   $19,446,907   $783,359   $(11,266,332)  $- 
Lydell Jewelry Design Studio, LLC   -    1,000,000    11,888,075    6,599,511    266,041    (6,362,864)   - 
MCC Senior Loan Strategy JV I LLC(1)   14,215,834    15,750,000    -    30,348,015    367,500    382,181    - 
OmniVere LLC   24,865,578    10,000,000    -    36,510,527    2,130,598    (483,992)   - 
United Road Towing, Inc.   35,116,790    -    -    19,455,760    1,284,172    (16,930,522)   - 
Total Controlled Investments  $74,198,202   $35,822,168   $32,729,050   $112,360,720   $4,831,670   $(34,661,529)  $- 
                                    
Non-Controlled Affiliates                                   
US Multifamily, LLC  $10,000,000   $-   $-   $10,000,000   $500,250   $-   $- 
Total Non-Controlled Affiliates  $10,000,000   $-   $-   $10,000,000   $500,250   $-   $- 

  

(1)The Company and Great American Life Insurance Company (“GALIC”) are the members of MCC Senior Loan Strategy JV I LLC (“MCC JV”), a joint venture formed as a Delaware limited liability company that is not consolidated by either member for financial reporting purposes. The members of MCC JV make capital contributions as investments by MCC JV are completed, and all portfolio and other material decisions regarding MCC JV must be submitted to MCC JV’s board of managers, which is comprised of an equal number of members appointed by each of the Company and GALIC. Approval of MCC JV’s board of managers requires the unanimous approval of a quorum of the board of managers, with a quorum consisting of equal representation of members appointed by each of the Company and GALIC. Because management of MCC JV is shared equally between the Company and GALIC, the Company does not have operational control over the MCC JV for purposes of the 1940 Act or otherwise.

 

 F-35 

 

 

Name of Investment  Fair Value at
September 30,
2014
   Purchases
(Sales)
of/Advances to
Affiliates
   Transfers
In/(Out) of
Affiliates
   Fair Value at
June 30, 2015
   Income
Earned
   Unrealized
Gain/(Loss)(2)
   Realized
Gain/(Loss)(2)
 
Controlled Investments                                   
United Road Towing, Inc.  $38,244,386   $-   $-   $37,999,642   $2,635,782   $(1,409,713)  $- 
Total Controlled Investments  $38,244,386   $-   $-   $37,999,642   $2,635,782   $(1,409,713)  $- 
                                    
Non-Controlled Affiliates                                   
US Multifamily, LLC  $10,000,000   $-   $-   $10,000,000   $500,250   $-   $- 
Cymax Stores, Inc.   11,434,667    (11,685,980)   -    -    662,098    (1,491,516)   1,449,030 
Total Non-Controlled Affiliates  $21,434,667   $(11,685,980)  $-   $10,000,000   $1,162,348   $(1,491,516)  $1,449,030 

  

(2)The prior year table has been modified to conform to the current year.

 

Purchases (sales) of/advances (distributions) to affiliates are included in the purchases and sales presented on the consolidated statements of cash flows for the nine months ended June 30, 2016 and 2015, respectively. Transfers in/(out) of affiliates represents the fair value for the month an investment became or was removed as an affiliated investment. Income received from affiliates is included in total investment income on the consolidated statements of operations for the three and nine months ended June 30, 2016 and 2015, respectively.

 

Loan Participation Sales

 

The Company sells portions of its investments via participation agreements to a managed account, managed by an affiliate and non-affiliate of the Company. At June 30, 2016, there were 15 participation agreements outstanding with an aggregate fair value of $277.4 million. At September 30, 2015, there were 14 participation agreements outstanding with an aggregate fair value of $301.6 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.

 

During the three and nine months ended June 30, 2016, the Company made interest and principal payments to the sub-participant in the aggregate amount of $3.1 million and $8.5 million, respectively. During the three and nine months ended June 30, 2015, the Company made interest and principal payments to the sub-participant in the aggregate amount of $7.2 million and $20.8 million, respectively. 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.

 

MCC Senior Loan Strategy JV I LLC

 

On March 27, 2015, the Company and GALIC entered into a limited liability company operating agreement to co-manage MCC JV. All portfolio and other material decisions regarding MCC JV must be submitted to MCC JV’s board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control MCC JV. As the Company does not operationally control MCC JV, it does not consolidate the operations of MCC JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the value of its investment in MCC JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4).

 

 F-36 

 

 

As of June 30, 2016, MCC JV had total capital commitments of $100.0 million with the Company providing $87.5 million and GALIC providing $12.5 million. Approximately $34.5 million was funded as of June 30, 2016 relating to these commitments, of which $30.2 million was from the Company.

 

On August 4, 2015, MCC JV entered into a senior secured revolving credit facility (the “JV Facility”) led by Credit Suisse, AG with initial commitments of $100 million subject to leverage and borrowing base restrictions. The JV Facility will bear interest at a rate of LIBOR (with no minimum) + 2.50% per annum. The revolving loan period ends on August 4, 2021 and the final maturity date is August 4, 2022. As of June 30, 2016, there was approximately $58.3 million outstanding under the JV Facility.

 

At June 30, 2016 and September 30, 2015, MCC JV had total assets at fair value of $81.3 million and $14.3 million, respectively. As of June 30, 2016 and September 30, 2015, MCC JV’s portfolio was comprised of senior secured first lien term loans to 25 and 5 borrowers, respectively. As of June 30, 2016 and September 30, 2015, none of these loans were on non-accrual status.

 

Below is a summary of MCC JV’s portfolio, followed by a listing of the individual loans in MCC JV’s portfolio as of June 30, 2016 and September 30, 2015:

 

   June 30, 2016   September 30, 2015 
Senior Secured Loans(1)  $82,376,313   $14,373,473 
Weighted average current interest rate on Senior Secured Loans(2)   6.67%   7.17%
Number of borrowers in MCC JV   25    5 
Largest loan to a single borrower(1)  $4,879,630   $3,000,000 
Total of five largest loans to borrowers(1)  $21,697,128   $14,373,473 

 

(1)At par value.

 

(2)Computed as the (a) annual stated interest rate on accruing senior secured loans, divided by (b) total senior secured loans at principal amount.

 

 F-37 

 

 

MCC JV Loan Portfolio as of June 30, 2016

 

Company  Industry  Type of Investment  Maturity  Par Amount   Cost   Fair Value(2)   % of
Net Assets
 
                          
4Over, Inc.  Media: Advertising, Printing & Publishing 

Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)

 

6/7/2022

 

 2,500,000

   2,500,000   2,500,000  

7.2

%
             2,500,000   2,500,000   2,500,000     
                          
AccentCare, Inc.  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)  9/3/2021   2,765,000    2,740,995    2,745,673    7.9%
             2,765,000    2,740,995    2,745,673      
                              
APCO Holdings Inc.  Automotive  Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)  1/31/2022   3,726,562    3,622,277    3,614,766    10.4%
             3,726,562    3,622,277    3,614,766      
                              
API Technologies Corp.  Aerospace & Defense 

Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)

 

4/22/2022

   

3,000,000

    

2,941,543

    

2,940,990

    

8.5

%
             

3,000,000

    

2,941,543

    

2,940,990

      
                              
Blount International, Inc.  Capital Equipment  Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1) 

4/12/2023

   

3,000,000

    

 2,945,591

    

2,909,910

    

8.4

%
             

3,000,000

    

 2,945,591

    

2,909,910

      
                              
CP OPCO LLC  Services: Consumer  Senior Secured First Lien Term Loan (LIBOR + 6.75%, 1.00% LIBOR Floor)(1)  9/30/2020   3,000,000    2,985,109    2,880,900    8.3%
             3,000,000    2,985,109    2,880,900      
                              
CRGT, Inc.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)  12/19/2020   2,886,076    2,879,940    2,864,142    8.3%
             2,886,076    2,879,940    2,864,142      
                              
Elite Comfort Solutions LLC 

Chemicals, Plastics & Rubber

  Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1) 

1/15/2021

   

 4,223,437

    

 4,223,437

    

 4,223,437

    12.2%
             

 4,223,437

    

 4,223,437

    

 4,223,437

      
                              
eResearch Technology, Inc. 

Healthcare & Pharmaceuticals

  Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1) 

5/2/2023

   

3,000,000

    

2,989,039

    

2,970,000

    

8.6

%
             

3,000,000

    

2,989,039

    

2,970,000

      
                              
HarborTouch Payments LLC  Banking, Finance, Insurance & Real Estate 

Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)

 

5/31/2022

   

3,500,000

    

3,465,207

    

3,465,000

    

10.0

%
             

3,500,000

    

3,465,207

    

3,465,000

      
                              
Imagine! Printing Solutions, Inc 

Media: Advertising, Printing & Publishing

 

Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)

 

3/30/2022

   

 4,114,688

    

4,055,359

    

 4,052,967

    

11.7

%
             

 4,114,688

    

4,055,359

    

 4,052,967

      
                              
Keurig Green Mountain, LLC  Beverage, Food & Tobacco  Senior Secured First Lien Term Loan (LIBOR + 4.50%, 0.75% LIBOR Floor)(1)  3/3/2023   4,023,333    3,971,269    4,010,137    11.6%
             4,023,333    3,971,269    4,010,137      
                              
Kraton Polymers LLC  Chemicals, Plastics & Rubber  Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1) 

1/6/2022

   

3,000,000

    

2,886,618

    

2,883,750

    

8.3

%
             

3,000,000

    

2,886,618

    

2,883,750

      
                              
Language Line, Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)  7/7/2021   3,654,660    3,637,103    3,648,447    10.4%
             3,654,660    3,637,103    3,648,447      

  

 

 F-38 

 

 

MB Aerospace ACP Holdings Corp.  Aerospace and Defense  Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1) 

12/15/2022

   

4,229,373

    

4,189,961

    

4,184,373

    

12.1

%
             

4,229,373

    4,189,961    

4,184,373

      
                              
NetSmart  High Tech Industries 

Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)

 

4/19/2023

   

3,000,000

    

2,970,168

    

2,992,500

    

8.6

%
             

3,000,000

    

2,970,168

    

2,992,500

      
                              
New Media Holdings II LLC  Media: Advertising, Printing & Publishing  Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)  6/4/2020   2,969,840    2,969,840    2,915,195    8.4%
             2,969,840    2,969,840    2,915,195      
                              

Prime Security Services LLC

 

Services: Consumer

  Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)  5/2/2022   1,250,000    1,237,827    1,237,827    3.6%
             1,250,000    

1,237,827

    

1,237,827

      
                              
Quanex Building Products Corporation  Construction and Building  Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)  11/2/2022   3,490,000    3,476,403    3,459,567    10.0%
             3,490,000    3,476,403    3,459,567      
                              
Quorum Health Corp.  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1) 

4/29/2022

   

2,992,500

    

2,934,061

    

2,915,623

    

8.4

%
             

2,992,500

    

2,934,061

    

2,915,623

      
                              
Sirius Computer Solutions, Inc.  Wholesale  Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1) 

10/30/2022

   

2,966,292

    

2,912,285

    

2,904,564

    8.4%
             

2,966,292

    

2,912,285

    

2,904,564

      
                              
Sundial Brands LLC  Consumer Goods - Non-Durable  Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)  10/19/2021   2,962,500    2,910,002    2,916,640    8.4%
             2,962,500    2,910,002    2,916,640      
                              
Survey Sampling International LLC  Services: Business  Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)  12/16/2021   2,992,422    2,963,897    2,964,592    8.5%
             2,992,422    2,963,897    2,964,592      
                              

TaxACT, Inc.

  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1) 

1/3/2023

   4,879,630    4,754,539    4,867,430    14.0%
             4,879,630    4,754,539    4,867,430      
                              
Western Digital Corp.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 5.50%, 0.75% LIBOR Floor)(1)  4/29/2023   4,250,000    4,161,236    4,263,302    12.3%
             4,250,000    4,161,236    4,263,302      
                              
Total Investments, June 30, 2016     $82,376,313   $81,323,706   $81,343,905    234.5%

 

 

(1)Represents the weighted average annual current interest rate as of June 30, 2016. All interest rates are payable in cash, unless otherwise noted.

 

(2)Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.

 

 F-39 

 

 

MCC JV Loan Portfolio as of September 30, 2015 

 

Company  Industry  Type of Investment  Maturity  Par Amount   Cost   Fair Value(2)   % of
Net Assets
 
                          
AccentCare, Inc.  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)  9/3/2021   2,800,000    2,772,167    2,772,000    17.0%
             2,800,000    2,772,167    2,772,000      
                              
CP OPCO LLC  Services: Consumer  Senior Secured First Lien Term Loan (LIBOR + 6.75%, 1.00% LIBOR Floor)(1)  9/30/2020   3,000,000    2,982,480    3,000,000    18.5%
             3,000,000    2,982,480    3,000,000      
                              
CRGT, Inc.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)  12/19/2020   2,981,013    2,973,610    2,973,560    18.3%
             2,981,013    2,973,610    2,973,560      
                              
Language Line, Inc.  Telecommunications  Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)  7/7/2021   2,600,000    2,574,605    2,596,750    16.0%
             2,600,000    2,574,605    2,596,750      
                              
New Media Holdings II LLC  Media: Advertising, Printing & Publishing  Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)  6/4/2020   2,992,460    2,992,460    2,939,191    18.1%
             2,992,460    2,992,460    2,939,191      
                              
Total Investments, September 30, 2015     $14,373,473   $14,295,322   $14,281,501    87.9%

 

(1)Represents the weighted average annual current interest rate as of September 30, 2015. All interest rates are payable in cash, unless otherwise noted.

 

(2)Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.

 

 F-40 

 

 

Below is certain summarized financial information for MCC JV as of June 30, 2016 and September 30, 2015, and for the three and nine months ended June 30, 2016 and June 30, 2015:

 

   As of
June 30, 2016
   As of
September 30, 2015
 
Selected Consolidated Statement of Assets and Liabilities Information:          
Investments in loans at fair value (cost: of $81,323,706 and $14,295,322, respectively)  $81,343,905   $14,281,501 
Cash   10,822,078    977,318 
Other assets   265,080    34,869 
Deferred financing costs (net of amortization of $188,398 and $34,302 respectively)   1,040,296    1,196,392 
Total assets  $93,471,359   $16,490,080 
           
Line of credit  $58,280,000   $- 
Other liabilities   293,972    162,857 
Interest payable   213,941    80,556 
Total liabilities   58,787,913    243,413 
Members' capital   34,683,446    16,246,667 
Total liabilities and members' capital  $93,471,359   $16,490,080 

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015(1)   2016   2015(1) 
Selected Consolidated Statement of Operations Information:                    
Total revenues  $1,203,795    N/A   $2,332,338    N/A 
Total expenses   (792,361)   N/A    (1,544,005)   N/A 
Net unrealized appreciation   120,246    N/A    34,020    N/A 
Net realized gains   16,109    N/A    36,377    N/A 
Net income/(loss)  $547,789    N/A   $858,730    N/A 

  

(1)MCC JV did not commence operations until July 2015.

 

 F-41 

 

 

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 below. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy:

 

·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.

  

 F-42 

 

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of June 30, 2016 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $-   $-   $605,188   $605,188 
Senior Secured Second Lien Term Loans   -    -    296,554    296,554 
Senior Secured First Lien Notes   -    -    26,903    26,903 
Unsecured Debt   -    -    55,003    55,003 
Equity/Warrants   328    487    27,680    28,495 
Total  $328   $487   $1,011,328   $1,012,143 
MCC Senior Loan Strategy JV I LLC                 $30,348 
Total Investments, at fair value                 $1,042,491 

  

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2015 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $-   $-   $695,970   $695,970 
Senior Secured Second Lien Term Loans   -    -    372,176    372,176 
Senior Secured First Lien Notes   -    5,711    30,669    36,380 
Unsecured Debt   -    -    45,661    45,661 
Equity/Warrants   479    626    50,584    51,689 
Total  $479   $6,337   $1,195,060   $1,201,876 
MCC Senior Loan Strategy JV I LLC                 $14,216 
Total Investments, at fair value                 $1,216,092 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended June 30, 2016 (dollars in thousands):

 

   Senior
Secured
First Lien
Term
Loans
   Senior
Secured
Second
Lien Term
Loans
   Senior
Secured
First Lien
Notes
   Unsecured
Debt
   Equities/Warrants   Total 
Balance as of September 30, 2015  $695,970   $372,176   $30,669   $45,661   $50,584   $1,195,060 
Purchases and other adjustments to cost   6,932    2,103    9    1,946    1,209    12,199 
Originations   47,153    12,000    -    8,278    1,088    68,519 
Sales   -    -    -    -    -    - 
Settlements   (103,452)   (83,801)   (11,000)   -    (6,383)   (204,636)
Net realized gains/(losses) from investments   (29,402)   -    39    -    5,753    (23,610)
Net transfers in and/or out of Level 3   -    -    6,007    -    -    6,007 
Net unrealized gains/(losses)   (12,013)   (5,924)   1,179    (882)   (24,571)   (42,211)
Balance as of June 30, 2016  $605,188   $296,554   $26,903   $55,003   $27,680   $1,011,328 

 

 F-43 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use level 3 inputs for the nine months ended June 30, 2015 (dollars in thousands):

 

   Senior
Secured
First Lien
Term
Loans
   Senior
Secured
Second
Lien Term
Loans
   Senior
Secured
First Lien
Notes
   Unsecured
Debt
   Equities/Warrants   Total 
Balance as of September 30, 2014  $747,740   $359,209   $53,634   $38,186   $44,282   $1,243,051 
Purchases and other adjustments to cost   8,348    2,162    15    182    1,716    12,423 
Originations   140,423    49,500    -    -    7,026    196,949 
Sales   (14,771)   (26,576)   (12,118)   -    (2,233)   (55,698)
Settlements   (124,093)   (18,002)   -    -    -    (142,095)
Net realized gains/(losses) from investments   (8,860)   (563)   (2,401)   -    1,322    (10,502)
Net transfers in and/or out of Level 3   -    -    (18,326)   -    (105)   (18,431)
Net unrealized gains/(losses)   (36,145)   (1,464)   (778)   (6)   (345)   (38,738)
Balance as of June 30, 2015  $712,642   $364,266   $20,026   $38,362   $51,663   $1,186,959 

 

Net change in unrealized loss included in earnings related to investments still held as of June 30, 2016 and 2015, was approximately $83.5 million and $35.7 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. 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. During the nine months ended June 30, 2016, one of our Senior Secured Notes with a fair value of $6.0 million transferred from Level 2 to Level 3 because of the decrease in availability of the transaction data or the inputs to the valuation became observable. During the nine months ended June 30, 2015, two of our Senior Secured Notes with a fair value of $18.3 million and one of our warrants with a fair value of $0.1 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.

 

 F-44 

 

  

The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of June 30, 2016 (dollars in thousands):

 

   Fair Value   Valuation Technique  Unobservable Input  Range (Weighted Average)
              
Senior Secured First Lien Term Loans  $505,509   Income Approach (DCF)  Market yield  7.31% - 16.43% (11.71%)
               
Senior Secured First Lien Term Loans   19,495   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), NTM EBITDA Multiple(1), Discount Rate   0.75x - 1.25x (1.00x)/5.00x - 6.00x (5.50x)/16.00% - 18.00% (17.00%)
               
Senior Secured First Lien Term Loans   7,829   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), NTM EBITDA Multiple(1), RGU, Discount Rate   1.00x - 1.60x (1.30x)/7.00x - 8.00x (7.50x)/$393.75 - $525.00 ($459.38)/13.00% - 15.00% (14.00%)
               
Senior Secured First Lien Term Loans   26,046   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), Discount Rate   0.50x-0.60x (0.57x)/20.00% - 25.00% (21.27%)
               
Senior Secured First Lien Term Loans   5,603   Market Approach (Guideline Comparable)/Income Approach (DCF)  LTM Revenue Multiple(1), Discount Rate  0.75x - 1.25x (1.00x) /15.00%-18.00% (16.50%)
               
Senior Secured First Lien Term Loans   21,593   Market Approach (Guideline Comparable)/Income Approach (DCF)  LTM Revenue Multiple(1), NTM Revenue Multiple(1), NTM EBITDA Multiple(1), Discount Rate   0.75x-1.25x (1.00x)/0.75x-1.25x (1.00x)/6.50x-7.00x(6.75x)/ 17.50%-22.50% (20.00%)
               
Senior Secured First Lien Term Loans   2,667   Enterprise Valuation Analysis  Precedent Transaction  $85.0M-$85.0M ($85.0M)
               
Senior Secured First Lien Term Loans   16,446   Recent Arms-Length Transaction  Recent Arms-Length Transaction  N/A
               
Senior Secured Notes   26,903   Income Approach (DCF)  Market yield  8.42% -15.78% (10.06%)
               
Senior Secured Second Lien Term Loans   258,471   Income Approach (DCF)  Market yield  9.04% -  19.09% (11.81%)
               
Senior Secured Second Lien Term Loans   7,018   Income Approach (DCF)  Cost of equity  17.50%-19.50% (18.50%)
               
Senior Secured Second Lien Term Loans   18,269   Market Approach (Guideline Comparable)  LTM Revenue Multiple(1), NTM Revenue Multiple(1), LTM EBITDA Multiple(1)  0.50x-0.75x(0.63x) / 0.50x-0.75x(0.63x) / 6.00x-6.50x (6.25x)
               
Senior Secured Second Lien Term Loans   12,796   Market Approach (Guideline Comparable)  LTM and NTM EBITDA Multiple(1)  8.50x-9.50x(9.00x) /8.00x-9.00x (8.50x)
               
Unsecured Debt   14,917   Market Approach (Guideline Comparable)/Income Approach (DCF)  LTM Revenue Multiple(1), NTM Revenue Multiple(1), NTM EBITDA Multiple(1), Discount Rate   0.75x-1.25x (1.00x)/0.75x-1.25x (1.00x)/6.50x-7.00x(6.75x)/ 17.50%-22.50% (20.00%)
               
Unsecured Debt   24,747   Income Approach (DCF)  Cost of equity  17.50%-19.50% (18.50%)
               
Unsecured Debt   15,339   Income Approach (DCF)  Market yield  11.62%-16.53% (11.71%)
               
Equity   11,759   Income Approach (DCF)  Market yield  8.50%-11.60% (10.12%)
               
Equity   3,330   Recent Arms-Length Transaction  Recent Arms-Length Transaction  N/A
               
Equity   560   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), NTM EBITDA Multiple(1), RGU, Discount Rate   1.00x-1.60x (1.30x)/ 7.00x-8.00x (7.50x)/ $393.75-$525.00 ($459.38)/ 13.00%-15.00% (14.00%)
               
Equity   -   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), Discount Rate   0.50x-0.60x (0.57x)/20.00% - 25.00% (21.27%)
               
Equity   -   Market Approach (Guideline Comparable)/Income Approach (DCF)  LTM Revenue Multiple(1), Discount Rate  0.75x - 1.25x (1.00x) /15.00%-18.00% (16.50%)
               
Equity   1,186   Market Approach (Guideline Comparable)  LTM Revenue Multiple(1), NTM Revenue Multiple(1), LTM EBITDA Multiple(1)  0.50x-0.75x(0.63x) / 0.50x-0.75x(0.63x) / 6.00x-6.50x (6.25x)
               
Equity   1,366   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM EBITDA Multiple(1), Discount rate, Precedent Transaction  7.00x-8.00x(7.50x)/ 14.00%-17.00% (15.50%) / $136.6M-$136.6M ($136.6M)
               
Equity   9,000   Market Approach (Guideline Comparable)  LTM and NTM EBITDA Multiple(1)  4.50x -7.50x (5.69x)/4.50x -7.00x (5.46x)
               
Warrants   479   Market Approach (Guideline Comparable)  NTM EBITDA Multiple(1)  4.50x - 6.00x (6.00x)
               
Warrants   -   Market Approach (Guideline Comparable)/Income Approach (DCF)  NTM Revenue Multiple(1), NTM EBITDA Multiple(1), Discount Rate   0.75x - 1.25x (1.00x)/5.00x - 6.00x (5.50x)/16.00% - 18.00% (17.00%)
               
Warrants   -   Market Approach (Guideline Comparable)/Income Approach (DCF)  LTM Revenue Multiple(1), NTM Revenue Multiple(1), NTM EBITDA Multiple(1), Discount Rate   0.75x-1.25x (1.00x)/0.75x-1.25x (1.00x)/6.50x-7.00x(6.75x)/ 17.50%-22.50% (20.00%)
               
Total  $1,011,328          

 

 F-45 

 

  

The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of September 30, 2015 (dollars in thousands):

 

   Fair Value   Valuation Technique  Unobservable Input  Range (Weighted Average)
              
Senior Secured First Lien Term Loans  $594,118   Income Approach (DCF)  Market yield  8.08% - 15.25% (11.48%)
               
Senior Secured First Lien Term Loans   22,504   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1) and 2015 EBITDA Multiple(1)  0.50x - 1.00x (0.75x)/3.50x - 4.50x (4.00x)
               
Senior Secured First Lien Term Loans   7,537   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1), 2015 EBITDA Multiple(1), Revenue Generating Unit Price  1.00x - 1.25x (1.13x)/12.00x - 13.00x (12.50x)/$393.75 - $525.00 ($459.38)
               
Senior Secured First Lien Term Loans   6,332   Market Approach (Guideline Comparable)  LTM EBITDA Multiple(1)  4.00x - 5.00x (5.00x)
               
Senior Secured First Lien Term Loans   -   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1)  0.40x - 0.60x (0.50x)
               
Senior Secured First Lien Term Loans   17,806   Market Approach (Guideline Comparable)  2015 EBITDA Multiple(1)  6.25x - 6.75x (6.50x)
               
Senior Secured First Lien Term Loans   11,888   Income Approach (DCF) and Market Approach (Guideline Comparable)  LTM and NTM EBITDA Multiple(1), Discount Rate  4.50x - 5.00x (4.50x)/4.50x - 5.00x (4.50x)/20.0% - 22.0% (21.5%)
               
Senior Secured First Lien Term Loans   35,785   Recent Arms-Length Transaction  Recent Arms-Length Transaction  N/A
               
Senior Secured Second Lien Term Loans   340,621   Income Approach (DCF)  Market yield  9.58% -  18.38% (11.79%)
               
Senior Secured Second Lien Term Loans   7,280   Income Approach (DCF)  Market yield, Cost of equity  15.93%/19.00%-21.00% (19.00%)
               
Senior Secured Second Lien Term Loans   14,275   Income Approach (DCF)  Cost of equity  16.00%-18.00% (17.00%)
               
Senior Secured Second Lien Term Loans   10,000   Recent Arms-Length Transaction  Recent Arms-Length Transaction  N/A
               
Senior Secured Notes   30,669   Income Approach (DCF)  Market yield  9.46%-22.42% (13.75%)
               
Unsecured Debt   38,601   Income Approach (DCF)  Market yield  11.71% - 18.00% (15.52%)
               
Unsecured Debt   7,060   Market Approach (Guideline Comparable)  2015 EBITDA Multiple(1)  6.25x - 6.75x (6.50x)
               
Equity   208   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1), 2015 EBITDA Multiple(1), Revenue Generating Unit Price  1.00x - 1.25x (1.13x)/12.00x - 13.00x (12.50x)/$393.75 - $525.00 ($459.38)
               
Equity   5,078   Income Approach (DCF)  Market yield  14.63%-14.63% (14.63%)
               
Equity   18,627   Option Model  LTM EBITDA Multiple(1)/Discount Rate/Volatility  5.5x-6.5x (6.0x) / 12.0% -14.0% (12.0%) /  17.0% - 44.9% (25.0%)
               
Equity   7,869   Market Approach (Guideline Comparable)  LTM and 2015 EBITDA Multiple(1)  7.50x -7.50x (7.50x)/5.50x -7.00x (6.69x)
               
Warrants   -   Income Approach (DCF) and Market Approach (Guideline Comparable)  LTM and NTM EBITDA Multiple(1), Discount Rate  4.50x - 5.00x (4.50x)/4.50x - 5.00x (4.50x)/20.0% - 22.0% (21.5%)
               
Warrants   14,486   Market Approach (Guideline Comparable)  LTM and NTM EBITDA Multiple(1)  4.25x - 10.00x (7.18x); 3.75x -10.00x (6.78x)
               
Warrants   231   Market Approach (Guideline Comparable)  2015 EBITDA Multiple(1)  4.0x - 7.5x (7.5x)
               
Warrants   -   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1) and 2015 EBITDA Multiple(1)  0.50x - 1.00x (0.75x)/3.50x - 4.50x (4.00x)
               
Warrants   -   Market Approach (Guideline Comparable)  2015 Revenue Multiple(1)  0.40x - 0.60x (0.50x)
               
Warrants   460   Market Approach (Guideline Comparable)/Option Model  LTM and NTM EBITDA Multiple(1), Volatilty  5.50x - 6.50x (6.00x); 5.00x - 6.00x (5.50x); 12.28% - 20.27% (45.0%)
               
Equity   3,330   Income Approach (DCF)  Discount Rate  8.00%-12.00% (8.00%)
               
Equity   295   Market Approach (Guideline Comparable)  LTM EBITDA Multiple(1)  4.00x - 5.00x (4.50x)
               
Total  $1,195,060          

 

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

 

 F-46 

 

  

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 multiples of Revenue or EBITDA (earnings before interest, taxes, depreciation and amortization) for the last twelve months (“LTM”), next twelve months (“NTM”) or a reasonable period a market participant would consider. 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, excluding the netting of debt issuance costs required by ASU 2015-03, as of June 30, 2016 and September 30, 2015 was as follows (dollars in thousands):

 

   As of 
   June 30, 2016   September 30, 2015 
   Aggregate
Principal
Amount
Available
   Principal
Amount
Outstanding
   Carrying
Value
   Aggregate
Principal
Amount
Available
   Principal
Amount
Outstanding
   Carrying
Value
 
Revolving Credit Facility  $343,500   $27,800   $27,800   $343,500   $192,700   $192,700 
Term Loan Facility   174,000    174,000    174,000    174,000    174,000    174,000 
2019 Notes   40,000    40,000    40,000    40,000    40,000    40,000 
2021 Notes   74,013    74,013    74,013    N/A    N/A    N/A 
2023 Notes   63,500    63,500    63,500    63,500    63,500    63,500 
SBA Debentures   150,000    150,000    150,000    150,000    150,000    150,000 
Total  $845,013   $529,313   $529,313   $771,000   $620,200   $620,200 

 

Credit Facility

 

On July 28, 2015, we entered into Amendment No. 7 to our existing Revolver Amendment and Amendment No. 7 to our existing Term Loan Amendment, each with certain lenders party thereto and ING Capital LLC, as administrative agent. The Amendments amend certain provisions of the Facilities.

 

 F-47 

 

 

The pricing in the case of the Term Loan Facility was reduced for LIBOR loans from LIBOR (with no minimum) plus 3.25% to LIBOR plus 3.00%. The pricing on the Revolving Credit Facility will remain the same at LIBOR (with no minimum) plus 2.75%. Both the Term Loan Facility and Revolving Credit Facility will decrease by an additional 25 basis points upon receiving an investment grade rating from Standard & Poor’s.

 

Additionally, the Term Loan Facility’s bullet maturity was extended from June 2019 to July 2020 and the Revolving Credit Facility’s revolving period was extended from June 2017 to July 2019, followed by a one-year amortization period and a final maturity in July 2020.

 

As of June 30, 2016, total commitments under the Facilities are $517.5 million, comprised of $343.5 million committed to the Revolving Credit Facility and $174.0 million funded under the Term Loan Facility.

 

At June 30, 2016, the carrying amount of our borrowings under the Facilities approximated their fair value. 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 June 30, 2016 and September 30, 2015, the Facilities would be deemed to be Level 3, as defined in Note 4.

  

In accordance with ASU 2015-03, the debt issuance costs related to the Facilities are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the Facilities. As of June 30, 2016 and September 30, 2015, debt issuance costs related to the Facilities were as follows (dollars in thousands):

 

   June 30, 2016   September 30, 2015 
   Revolving
Facility
   Term Facility   Revolving
Facility
   Term Facility 
Amortized Debt Issuance Costs  $4,270   $1,933   $3,284   $721 
Unamortized Debt Issuance Costs   3,192    1,983    4,160    2,437 
Total  $7,462   $3,916   $7,444   $3,158 

 

The following table shows the components of interest expense, commitment fees related to the Revolving Facility, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the Facilities for the three and nine months ended June 30, 2016 and 2015 (dollars in thousands):

  

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Revolving Facility interest  $161   $1,156   $2,051   $3,941 
Revolving Facility commitment fee   819    242    1,633    644 
Term Facility interest   1,521    1,490    4,484    4,471 
Amortization of debt issuance costs   481    369    1,450    1,106 
Agency and other fees   20    20    58    56 
Total  $3,002   $3,277   $9,676   $10,218 
Weighted average stated interest rate   3.5%   3.3%   3.3%   3.2%
Weighted average outstanding balance  $193,619   $325,857   $261,553   $347,540 

 

As of June 30, 2016 and September 30, 2015, there was $27.8 million and $192.7 million, respectively, outstanding under the Revolving Facility. As of June 30, 2016 and September 30, 2015, there was $174.0 million 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”.

  

 F-48 

 

 

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”). 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 December 17, 2015, the Company issued $70.8 million in aggregate principal amount of 6.50% unsecured notes that mature on January 30, 2021 (the “2021 Notes” and together with the 2019 Notes and 2023 Notes, the “Notes”). The 2021 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 January 30, 2019. The 2021 Notes bear interest at a rate of 6.50% per year, payable quarterly on January 30, April 30, July 30 and October 30 of each year, beginning January 30, 2016. The 2021 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MCX”.

 

On January 14, 2016, the Company closed an additional $3.25 million in aggregate principal amount of the 2021 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes.

 

At June 30, 2016, the carrying amount and fair value of the 2019 Notes was $40.0 million and $40.6 million, respectively. At September 30, 2015, the carrying amount and fair value of the 2019 Notes was $40.0 million and $40.0 million, respectively. At June 30, 2016, the carrying amount and fair value of the 2023 Notes was $63.5 million and $63.1 million, respectively. At September 30, 2015, the carrying amount and fair value of the 2023 Notes was $63.5 million and $62.1 million, respectively. At June 30, 2016, the carrying amount and fair value of the 2021 Notes was $74.0 million and $73.4 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 Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. At June 30, 2016 and September 30, 2015 the Notes would be deemed to be Level 1, as defined in Note 4.

 

In accordance with ASU 2015-03, the debt issuance costs related to the Notes are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the Notes. As of June 30, 2016 and September 30, 2015, debt issuance costs related to the Notes were as follows (dollars in thousands):

 

    June 30, 2016     September 30, 2015
    2019 Notes     2021 Notes     2023 Notes     2019 Notes     2021 Notes     2023 Notes
Amortized Debt Issuance Costs   $ 898     $ 337     $ 698     $ 741       N/A     $ 539
Unamortized Debt Issuance Costs     577       2,870       1,431       734       N/A       1,590
Total   $ 1,475     $ 3,207     $ 2,129     $ 1,475       N/A     $ 2,129

 

For the three and nine months ended June 30, 2016 and 2015, the components of interest expense, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the Notes were as follows (dollars in thousands): 

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
2019 Unsecured Notes interest  $713   $713   $2,138   $2,138 
2021 Unsecured Notes interest   1,203    N/A    2,579    N/A 
2023 Unsecured Notes interest   972    972    2,917    2,917 
Amortization of debt issuance costs   261    105    654    316 
Total  $3,149   $1,790   $8,288   $5,371 
Weighted average stated interest rate   6.5%   6.5%   6.5%   6.5%
Weighted average outstanding balance  $177,513   $103,500   $156,111   $103,500 

  

As of June 30, 2016 and September 30, 2015, $40.0 million and $63.5 million in aggregate principal amount of the 2019 Notes and the 2023 Notes were outstanding, respectively. As of June 30, 2016, $74.0 million in aggregate principal amount of the 2021 Notes was outstanding.

 

 F-49 

 

 

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 (“SBA Debentures”), subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA Debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA Debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA 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 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 $150.0 million when it has at least $75.0 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 June 30, 2016, SBIC LP had $75.0 million in regulatory capital and had $150.0 million SBA Debentures outstanding. As of September 30, 2015, SBIC LP had $75.0 million in regulatory capital and had $150.0 million SBA Debentures outstanding that mature between September 2023 and September 2025.

  

Our fixed-rate SBA Debentures as of June 30, 2016 and September 30, 2015 were as follows (dollars in thousands):

 

   June 30, 2016   September 30, 2015 
Rate Fix Date  Debenture
Amount
   Fixed All-in
Interest Rate
   Debenture
Amount
   Fixed All-in
Interest Rate
 
September 2013  $5,000    4.404%  $5,000    4.404%
March 2014   39,000    3.951    39,000    3.951 
September 2014   50,000    3.370    50,000    3.370 
September 2014   6,000    3.775    6,000    3.775 
September 2015   50,000    3.571    50,000    3.571 
Weighted Average Rate/Total  $150,000    3.639%  $150,000    3.639%

 

As of June 30, 2016, the carrying amount of the SBA Debentures approximated their fair value. The fair values of the SBA 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 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 June 30, 2016, and September 30, 2015 the SBA Debentures would be deemed to be Level 3, as defined in Note 4.

 

In accordance with ASU 2015-03, the debt issuance costs related to the SBA Debentures are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the SBA Debentures. As of June 30, 2016 and September 30, 2015, debt issuance costs related to the SBA Debentures were as follows (dollars in thousands): 

 

   June 30, 2016   September 30, 2015 
Amortized Debt Issuance Costs  $1,441   $931 
Unamortized Debt Issuance Costs   3,697    4,207 
Total  $5,138   $5,138 

 

For the three and nine months ended June 30, 2016 and 2015, the components of interest, amortized debt issuance costs, weighted average stated interest rate and weighted average outstanding debt balance for the SBA Debentures were as follows (dollars in thousands): 

  

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
SBA Debentures interest  $1,361   $956   $4,097   $2,790 
Amortization of debt issuance costs   169    137    510    386 
Total  $1,530   $1,093   $4,607   $3,176 
Weighted average stated interest rate   3.7%   3.5%   3.7%   3.6%
Weighted average outstanding balance  $150,000   $111,099   $150,000   $103,971 

 

 F-50 

 

 

Note 6. Agreements

 

Investment Management Agreement

 

Under the terms of our investment management agreement, MCC Advisors:

 

·determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
·identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and
·executes, closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.

 

MCC Advisors’ services under the investment management agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

 

Pursuant to our investment management agreement, we pay MCC Advisors a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

 

On December 3, 2015, MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the investment management agreement. Beginning January 1, 2016, the base management fee will be reduced to 1.50% on gross assets above $1 billion. In addition, MCC Advisors will reduce its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee will include a netting mechanism and will be subject to a rolling three-year look back from January 1, 2016 forward. Under no circumstances will the new fee structure result in higher fees to MCC Advisors than fees under the current investment management agreement.

 

The following discussion of our base management fee and two-part incentive fee reflect the terms of the fee waiver agreement executed by MCC Advisors on February 8, 2016 (the “Fee Waiver Agreement”). The terms of the Fee Waiver Agreement are effective as of January 1, 2016, and are a permanent reduction in the base management fee and incentive fee on net investment income payable to MCC Advisors for the investment advisory and management services it provides under the investment management agreement. The Fee Waiver Agreement does not change the second component of the incentive fee, which is the incentive fee on capital gains.

 

Base Management Fee

 

For providing investment advisory and management services to us, MCC Advisors receives a base management fee. The base management fee is calculated at an annual rate of 1.75% (0.4375% per quarter) of up to $1.0 billion of the Company’s gross assets and 1.50% (0.375% per quarter) of any amounts over $1.0 billion of the Company’s gross assets, and is payable quarterly in arrears. The base management fee will be calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and will be appropriately pro-rated for any partial quarter.

 

Incentive Fee

 

The incentive fee has two components, as follows:

 

Incentive Fee Based on Income

 

The first component of the incentive fee is payable quarterly in arrears and is based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee is being calculated. MCC Advisors is entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 1.5%. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter.

 

Beginning with the calendar quarter that commenced on January 1, 2016, the incentive fee on net investment income will be determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since January 1, 2016). We refer to such period as the “Trailing Twelve Quarters.”

 F-51 

 

  

The hurdle amount for the incentive fee on net investment income is determined on a quarterly basis, and is equal to 1.5% multiplied by the Company’s net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The incentive fee for any partial period will be appropriately prorated. Any incentive fee on net investment income will be paid to MCC Advisors on a quarterly basis, and will be based on the amount by which (A) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company’s capital gains.

 

Quarterly Incentive Fee Based on Income

 

The incentive fee on net investment income for each quarter is determined as follows:

 

·No incentive fee on net investment income is payable to MCC Advisors for any calendar quarter for which there is no Excess Income Amount.
·100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 1.8182% multiplied by the Company’s net assets at the beginning of each applicable calendar quarter, as adjusted as noted above, comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee on net investment income; and
·17.5% of the Ordinary Income that exceeds the Catch-up Amount is included in the calculation of the incentive fee on net investment income.

 

The amount of the incentive fee on net investment income that will be paid to MCC Advisors for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as described below).

 

The incentive fee on net investment income that is paid to MCC Advisors for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

 

“Cumulative Net Return” means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, the Company will pay no incentive fee on net investment income to MCC Advisors for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors, calculated as described above, for such quarter without regard to the Incentive Fee Cap.

 

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company’s net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company’s net assets due to capital raising or capital action, in such period.

 

Dilution to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company’s net assets due to other capital action is calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company.

 

 F-52 

 

 

For the avoidance of doubt, the purpose of the new incentive fee calculation under the Fee Waiver Agreement is to permanently reduce aggregate fees payable to MCC Advisors by the Company, effective as of January 1, 2016. In order to ensure that the Company will pay MCC Advisors lesser aggregate fees on a cumulative basis, as calculated beginning January 1, 2016, we will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to January 1, 2016. If, at any time beginning January 1, 2016, the aggregate fees on a cumulative basis, as calculated based on the formula in place after January 1, 2016, would be greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior to January 1, 2016, MCC Advisors shall only be entitled to the lesser of those two amounts.

 

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

 

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

 

For the three months ended June 30, 2016 and 2015, the Company incurred base management fees to MCC Advisors of $4.7 million and $5.5 million, respectively. For the three months ended June 30, 2016 and 2015, we incurred $2.8 million and $4.3 million of incentive fees related to pre-incentive fee net investment income, respectively.

 

For the three months ended June 30, 2016, base management fees, net of fees waived under the Fee Waiver Agreement, were $4.6 million. For the three months ended June 30, 2016, incentive fees, net of the reversal of a portion of fees previously waived under the Fee Waiver Agreement, were $3.0 million. The reversal was a result of capital gains recorded during the period, reducing the Company’s cumulative net capital loss.

 

For the nine months ended June 30, 2016 and 2015, the Company incurred base management fees to MCC Advisors of $14.9 million and $16.9 million, respectively. For the nine months ended June 30, 2016 and 2015, we incurred $9.9 million and $13.8 million of incentive fees related to pre-incentive fee net investment income, respectively.

 

For the nine months ended June 30, 2016 base management and incentive fees, net of fees waived under the Fee Waiver Agreement were $14.8 million and $8.0 million, respectively.

 

As of June 30, 2016 and September 30, 2015, $7.6 million and $10.0 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 nine months ended June 30, 2016, we incurred $1.0 million and $2.9 million in administrator expenses, respectively. For the three and nine months ended June 30, 2015, we incurred $1.1 million and $3.2 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.

 

Due to Affiliate

 

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

 

 F-53 

 

 

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.

 

Opportunities for co-investments may arise when MCC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients, or affiliated funds. As a BDC, the Company was substantially limited in its ability to co-invest in privately negotiated transactions with affiliated funds until it obtained an exemptive order from the SEC on November 25, 2013 (the “Exemptive Order”). The Exemptive Order permits the Company to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser is Medley, LLC, the parent company of Medley Capital LLC and MCC Advisors, or an investment adviser controlled by Medley, LLC in a manner consistent with its investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors. Co-investment under the Exemptive Order is subject to certain conditions therein, including the condition that, in the case of each co-investment transaction, the Company’s Board of Directors determines that it would be advantageous for the Company to co-invest in a manner described in the Exemptive Order. Before receiving the Exemptive Order, the Company only participated in co-investments that were allowed under existing regulatory guidance, such as syndicated loan transactions where price was the only negotiated term, which limited the types of investments that the Company could make.

 

 F-54 

 

 

Note 8. Commitments

 

Unfunded commitments

 

As of June 30, 2016 and September 30, 2015, we had commitments under loan and financing agreements to fund up to $8.5 million to 7 portfolio companies and $28.1 million to 12 portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and a revolver and an analysis of their fair value is included in the Consolidated Schedule of Investments. 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 June 30, 2016 and September 30, 2015 is shown in the table below (dollars in thousands):

 

   As of 
   June 30, 2016   September 30, 2015 
Tenere Acquisition Corp.  $2,000   $2,000 
DHISCO Electronic Distribution, Inc. - Revolver   1,905    3,048 
Brantley Transportation LLC - Delayed Draw Term Loan   1,087    - 
RCS Management Corporation & Specialized Medical Services, Inc.   1,000    5,000 
Black Angus Steakhouses, LLC - Delayed Draw Term Loan   893    893 
Black Angus Steakhouses, LLC - Revolver   759    446 
Be Green Packaging, LLC - Revolver   479    479 
Access Media Holdings, LLC - Series AA Preferred Equity   336    - 
Red Skye Wireless LLC   -    7,500 
Autosplice, Inc.   -    3,026 
Freedom Powersports LLC - Delayed Draw Term Loan   -    1,800 
Point.360   -    1,600 
Be Green Packaging, LLC - Delayed Draw Term Loan   -    750 
Ship Supply Acquisition Corporation   -    622 
Meridian Behavioral Health, LLC - Term Loan B   -    500 
Access Media Holdings, LLC - Series A Preferred Equity   -    424 
Total  $8,459   $28,088 

 

Legal Proceedings

 

We are a party to certain legal proceedings incidental to the normal course of our business, including where third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect on our financial condition or results of operations.

 

 F-55 

 

 

Note 9. Fee Income

 

The 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 fee income for the three and nine months ended June 30, 2016 and 2015 (dollars in thousands):

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Origination fee  $60   $940   $1,290   $3,878 
Prepayment fee   -    332    1,234    1,945 
Amendment fee   421    580    2,127    2,273 
Administrative agent fee   154    149    525    430 
Other fees   -    84    276    182 
Fee income  $635   $2,085   $5,452   $8,708 

 

Note 10. Directors Fees

 

The independent directors each receive an annual fee of $55,000. 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 nine months ended June 30, 2016, we accrued $0.1 million and $0.4 million for directors’ fees expense, respectively. For the three and nine months ended June 30, 2015, we accrued $0.1 million and $0.4 million for directors’ fees expense, respectively.

 

Note 11. Earnings Per Share

 

In accordance with the provisions of ASC Topic 260 - Earnings per Share, 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 nine months ended June 30, 2016 and 2015 (dollars in thousands except share and per share amounts): 

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Basic and diluted:                    
Net increase / (decrease) in net assets from operations  $14,022   $8,373   $(24,734)  $1,840 
Weighted average common shares outstanding   54,763,411    57,859,274    55,618,719    58,363,128 
Earnings per common share-basic and diluted  $0.26   $0.14   $(0.44)  $0.03 

  

 F-56 

 

 

Note 12. Financial Highlights

 

The following is a schedule of financial highlights for the nine months ended June 30, 2016 and 2015: 

 

   For the nine months ended 
   June 30 
   2016   2015 
Per share data:        
Net asset value per share at beginning of period  $11.00   $12.43 
           
Net investment income(1)   0.74    0.95 
Net realized gains/(losses) on investments   (0.43)   (0.32)
Net unrealized appreciation/(depreciation) on investments   (0.75)   (0.58)
Change in provision for deferred taxes on unrealized gain/(loss) on investments   (0.01)   (0.01)
Net increase/(decrease) in net assets   (0.45)   0.03 
           
Distributions from net investment income   (0.90)   (0.97)
Distributions from net realized gains   -    - 
Distributions from tax return of capital   -    - 
           
Repurchase of common stock under stock repurchase program   0.10    0.04 
Other(2)   0.01    - 
           
Net asset value at end of period  $9.76   $11.53 
Net assets at end of period  $534,365,146   $665,518,929 
Shares outstanding at end of period   54,763,411    57,738,526 
           
Per share market value at end of period  $6.70   $8.91 
Total return based on market value(3)   1.93%   (16.23)%
Total return based on net asset value(4)   0.43%   3.00%
Portfolio turnover rate   10.21%   20.25%

 

The following is a schedule of ratios and supplemental data for the nine months ended June 30, 2016 and 2015:

  

   For the nine months ended 
   June 30 
   2016   2015 
Ratios:          
Ratio of net investment income to average net assets after waivers(5)(6)(7)   10.21%   10.82%
Ratio of total expenses to average net assets after waivers(5)(6)(7)   11.91%   11.20%
Ratio of incentive fees to average net assets after waivers(6)(7)   1.42%   2.70%
           
Supplemental Data:          
Ratio of operating expenses and credit facility related expenses to average net assets(5)(6)   10.49%   8.47%
Percentage of non-recurring fee income(8)   5.27%   7.34%
Average debt outstanding(9)  $567,663,919   $555,010,989 
Average debt outstanding per common share  $10.21   $9.51 
Asset coverage ratio per unit(10)   2,447    2,457 
Average market value per unit:          
Facilities(11)   N/A    N/A 
SBA debentures(11)   N/A    N/A 
Notes due 2019  $25.20   $25.28 
Notes due 2021  $24.32    N/A 
Notes due 2023  $24.36   $25.15 

 

 F-57 

 

 

1)Net investment income excluding management and incentive fee waivers based on total weighted average common stock outstanding equals $0.71 per share for the nine months ended June 30, 2016 and net investment income based on total weighted average common stock outstanding equals $0.95 per share for the nine months ended June 30, 2015.
2)Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
3)Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.
4)Total annual return is historical and assumes changes in net assets value, reinvestments of all dividends and distributions at prices obtained under the Company’s dividend reinvestment plan, and no sales change for the period.
5)Ratios are annualized.
6)For the nine months ended June 30, 2016, excluding management and incentive fee waivers, the ratio of net investment income, operating expenses, incentive fees, credit facility related expenses and total expenses to average net assets is 9.85%, 5.18%, 1.75%, 5.34%, 12.27%, respectively.

7)The ratios for the nine months ended June 30, 2015, revised to include the effect of non-annualized incentive fees and organizational and offering costs, were as follows: ratio of net investment income to average net assets after waivers: 11.53%, ratio of total expenses to average net assets: 10.49% and ratio of incentive fees to average net assets after waivers: 2.02%.
8)Represents the impact of the non-recurring fees over investment income.
9)Based on daily weighted average balance of debt outstanding during the period.
10)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. Asset coverage ratio per unit does not include unfunded commitments. The inclusion of unfunded commitments in the calculation of the asset coverage ratio per unit would not cause us to be below the required amount of regulatory coverage.
11)The Facilities and SBA Debentures are not registered for public trading.

 

 F-58 

 

 

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 distributions during the nine months ended June 30, 2016 and 2015:

  

Date Declared  Record Date  Payment Date  Amount Per Share 
During the nine months ended June 30, 2016           
11/5/2015  11/25/2015  12/18/2015  $0.30 
2/1/2016  2/24/2016  3/18/2016   0.30 
5/5/2016  5/25/2016  6/24/2016   0.30 
         $0.90 

  

Date Declared  Record Date  Payment Date  Amount Per Share 
During the nine months ended June 30, 2015           
10/30/2014  11/26/2014  12/12/2014  $0.37 
2/9/2015  2/25/2015  3/13/2015   0.30 
5/6/2015  5/20/2015  6/12/2015   0.30 
         $0.97 

 

Note 14. Stock Repurchase Program

 

The following table summarizes our share repurchases under our stock repurchase program for the three and nine months ended June 30, 2016 and June 30, 2015 (dollars in thousands):

  

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Dollar amount repurchased  N/A(1)   $1,576   $10,700   $9,506 
Shares Repurchased   

N/A(1)

    169,081    1,573,741    994,758 
Average price per share 

N/A(1)

   $9.32   $6.80   $9.56 
Weighted average discount to Net Asset Value   

N/A(1)

   20.0%   32.7%   18.9%

  

(1)The Company did not repurchase any shares for the three months ended June 30, 2016.

 

On February 5, 2015, our board of directors approved a share repurchase program pursuant to which we can purchase up to an aggregate amount of $30.0 million of our common stock between the period of the approval date and February 5, 2016. On December 4, 2015, the board of directors extended the duration of the share repurchase program through December 31, 2016, and increased the aggregate amount to $50.0 million. Any stock repurchases will be made through the open market at times, and in such amounts, as management deems appropriate. As of June 30, 2016, the Company has repurchased an aggregate of 3,969,873 shares of common stock at an average price of $8.04 per share with a total cost of approximately $31.9 million. The maximum dollar value of shares that may yet be purchased under the plan is $18.1 million. This program may be limited or terminated at any time without prior notice. Since the inception of the program, the Company's net asset value per share was increased by approximately $0.21 as a result of the share repurchases.

 

 F-59 

 

 

Note 15. 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 nine months ended June 30, 2016, except as disclosed below.

 

On August 7, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.22 per share payable on September 23, 2016, to stockholders of record at the close of business on August 24, 2016.

 

 F-60 

 

 

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.

 

 1 

 

 

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” in our annual report on Form 10-K, 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 to privately-held middle market companies, primarily through directly originated transactions, 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 timely 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.

 

 2 

 

 

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).
 3 

 

 

Portfolio and Investment Activity

 

As of June 30, 2016 and 2015, our portfolio had a fair market value of approximately $1,042.5 million and $1,204.2 million, respectively. The following table summarizes our portfolio and investment activity during the three and nine months ended June 30, 2016 and 2015 (dollars in thousands):

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Investments made in new portfolio companies  $-   $33,600   $25,554   $123,347 
Investments made in existing portfolio companies   11,668    13,925    58,815    72,345 
Aggregate amount in exits and repayments   (12,074)   (49,435)   (204,568)   (193,005)
Net investment activity  $(406)  $(1,910)  $(120,199)  $2,687 
                     
Portfolio Companies, at beginning of period   65    72    72    79 
Number of new portfolio companies   -    3    2    8 
Number of exited portfolio companies   (2)   (4)   (11)   (16)
Portfolio companies, at end of period   63    71    63    71 
                     
Number of investments in existing portfolio companies   8    10    15    17 

 

The following table summarizes the amortized cost and the fair value of our average portfolio company investment and largest portfolio company investment as of June 30, 2016 and 2015 (dollars in thousands):

 

   As of   As of 
   June 30, 2016   June 30, 2015 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
Average portfolio company investment  $18,107   $16,547   $17,860   $16,960 
Largest portfolio company investment   54,367    53,040    37,807    39,061 

 

The following table summarizes the amortized cost and the fair value of investments as of June 30, 2016 (dollars in thousands):

  

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $662,062    58.0%  $605,188    58.1%
Senior Secured Second Lien Term Loans   309,418    27.1    296,554    28.4 
Senior Secured First Lien Notes   26,753    2.3    26,903    2.6 
Unsecured Debt   61,165    5.4    55,003    5.3 
MCC Senior Loan Strategy JV I LLC   30,187    2.7    30,348    2.9 
Equity/Warrants   51,187    4.5    28,495    2.7 
Total  $1,140,772    100.0%  $1,042,491    100.0%

 

 4 

 

 

The following table summarizes the amortized cost and the fair value of investments as of September 30, 2015 (dollars in thousands):

  

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $740,831    58.2%  $695,970    57.2%
Senior Secured Second Lien Term Loans   379,115    29.8    372,176    30.6 
Senior Secured First Lien Notes   37,697    3.0    36,380    3.0 
Unsecured Debt   50,941    4.0    45,661    3.7 
MCC Senior Loan Strategy JV I LLC   14,437    1.1    14,216    1.2 
Equity/Warrants   49,520    3.9    51,689    4.3 
Total  $1,272,541    100.0%  $1,216,092    100.0%

 

As of June 30, 2016, our income-bearing investment portfolio, which represented nearly 89.1% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 12.0%, and 78.2% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR, and 21.8% 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.

 

 5 

 

 

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of June 30, 2016 and September 30, 2015 (dollars in thousands):

 

   As of June 30, 2016   As of September 30, 2015 
Investment Performance Rating  Fair Value   Percentage   Fair Value   Percentage 
1  $149,761    14.4%  $146,699    12.0%
2   665,409    63.8    947,949    78.0 
3   179,113    17.2    121,444    10.0 
4   38,942    3.7    -    - 
5   9,266    0.9    -    - 
Total  $1,042,491    100.0%  $1,216,092    100.0%

  

Results of Operations

 

Operating results for the three and nine months ended June 30, 2016 and 2015 are as follows (dollars in thousands):

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Total investment income  $28,412   $35,964   $93,554   $112,588 
Total expenses, net   17,458    18,724    52,359    57,205 
Net investment income   10,954    17,240    41,195    55,383 
Net realized gains/(losses)   (29,177)   (9,010)   (23,699)   (18,628)
Net unrealized gains/(losses) on investments   32,285    427    (41,831)   (34,137)
Change in provision for deferred taxes on unrealized gains/(loss) on investments   (40)   (284)   (399)   (778)
Net increase in net assets resulting from operations  $14,022   $8,373   $(24,734)  $1,840 

 

Investment Income

 

For the three and nine months ended June 30, 2016, investment income totaled $28.4 million and $93.6 million, respectively, of which $27.8 and $88.1 million was attributable to portfolio interest and dividend income, and $0.6 million and $5.5 million to fee income.

 

For the three and nine months ended June 30, 2015, investment income totaled $36.0 million and $112.6 million, respectively, of which $33.9 and $103.9 million was attributable to portfolio interest and dividend income, and $2.1 million and $8.7 million to fee income.

 

 6 

 

 

Operating Expenses

 

Operating expenses for the three and nine months ended June 30, 2016 and 2015 are as follows (dollars in thousands):

  

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Base management fees  $4,657   $5,546   $14,880   $16,876 
Incentive fees   2,794    4,310    9,859    13,846 
Interest and financing expenses   7,680    6,160    22,571    18,765 
Administrator expenses   966    1,066    2,925    3,186 
Professional fees   638    905    1,827    2,277 
General and administrative   325    462    1,488    1,396 
Directors fees   133    135    397    433 
Insurance   124    140    395    426 

Expenses before management and incentive fee waivers

   17,317    18,724    54,342    57,205 

Management fee waiver

   (40)   -    (112)   - 

Incentive fee waiver

   181    -    (1,871)   - 

Expenses, net of management and incentive fee waivers

  $17,458   $18,724   $52,359   $57,205 

 

 7 

 

  

For the three months ended June 30, 2016, total operating expenses before management and incentive fee waivers decreased by $1.4 million, or (7.5%), compared to the three months ended June 30, 2015. For the nine months ended June 30, 2016, total operating expenses before management and incentive fee waivers decreased by $2.9 million, or (5.0%), compared to the nine months ended June 30, 2015. 

 

Interest and financing expenses were higher in the three and nine months ended June 30, 2016 than the three and nine months ended June 30, 2015 as a result of an 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“), an increase in commitment on a 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“), issuing $74.0 million in aggregate principal amount of 6.50% unsecured notes that mature on January 30, 2021 (the “2021 Notes”), and issuing SBA-guaranteed debentures (“SBA Debentures”).

 

Excluding interest and financing expenses, expenses decreased for the three and nine months ended June 30, 2016 compared to the three and nine months ended June 30, 2015 due to a decrease in base management fees, incentive fees, administrative service fees, professional fees, general and administrative expenses, insurance fees, and director’s fees. Base management fees, which are calculated based on average gross assets, decreased due to the decline in the portfolio throughout the period. The incentive fee decreased as a result of the decrease in pre-incentive fee net investment income. In addition, both the management and incentive fees decreased due to the fee waiver agreement described in the Investment Management Agreement section. Administrative service fees decreased due to lower administrator expenses. Professional fees have decreased due to lower legal, audit, and valuation service expenses.

 

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 nine months ended June 30, 2016, we recognized $29.2 and $23.7 of realized loss on our portfolio investments, respectively. During the three and nine months ended June 30, 2015, we recognized $9.0 million and $18.6 million of realized losses on our portfolio investments, respectively.

 

Net Unrealized Appreciation/Depreciation on Investments

 

Net change in unrealized appreciation or depreciation on investments reflects the net change in the fair value of our investment portfolio. For the three and nine months ended June 30, 2016, we had $32.3 of unrealized appreciation and $41.8 million of unrealized depreciation, respectively, on portfolio investments. For the three and nine months ended June 30, 2015, we had $0.4 million of unrealized appreciation and $34.1 million of unrealized depreciation, respectively, on portfolio investments.

 

Provision for Deferred 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, but are consolidated for GAAP 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 nine months ended June 30, 2016, the Company recognized a provision for deferred tax on unrealized gains of $40,378 and $0.4 million for consolidated subsidiaries, respectively. For the three and nine months ended June 30, 2015, the Company recognized a provision for deferred tax on unrealized gains of $0.3 million and $0.8 million for consolidated subsidiaries, respectively.

 

Changes in Net Assets from Operations

 

For the three months ended June 30, 2016, we recorded a net increase in net assets resulting from operations of $14.0 million, as a result of the factors discussed above. For the three months ended June 30, 2015, we recorded a net increase in net assets resulting from operations of $8.4 million. Based on 54,763,411 and 57,859,274 weighted average common shares outstanding for the three months ended June 30, 2016 and 2015, respectively, our per share net increase in net assets resulting from operations was $0.26 for the three months ended June 30, 2016 compared to a per share net increase in net assets resulting from operations of $0.14 for the three months ended June 30, 2015.

 

For the nine months ended June 30, 2016, we recorded a net decrease in net assets resulting from operations of $24.7 million. For the nine months ended June 30, 2015, we recorded a net increase in net assets resulting from operations of $1.8 million. Based on 55,618,719 and 58,363,128 weighted average common shares outstanding for the nine months ended June 30, 2016 and 2015, respectively, our per share net decrease in net assets resulting from operations was $0.44 for the nine months ended June 30, 2016 compared to a per share net increase in net assets resulting from operations of $0.03 for the nine months ended June 30, 2015.

 

 8 

 

 

Financial Condition, Liquidity and Capital Resources

 

As a RIC, 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 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 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”.

 

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 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 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 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 6,900,000 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 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.

 

On April 28, 2014 we completed a public offering of 6,000,000 shares of our common stock at a public offering price of $13.25 per share, raising approximately $76.9 million in net proceeds.

 

On August 1, 2014, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with Goldman, Sachs & Co., Barclays Capital Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, Janney Montgomery Scott LLC, Ladenburg Thalmann & Co. Inc., MLV & Co. LLC, Maxim Group LLC, National Securities Corporation and Gilford Securities Incorporated, through which the Company could sell shares of its common stock having an aggregate offering price of up to $100.0 million. During the period from August 5, 2014 to September 30, 2014, the Company sold 671,278 shares of its common stock at an average price of $12.87 per share, and raised $8.7 million in net proceeds, under the ATM Program.

 

 9 

 

  

On August 26, 2014, the Company completed a public offering of 5,000,000 shares of our common stock and an additional 750,000 shares of our common stock pursuant to the underwriters’ partial exercise of the over-allotment option at a public offering price of $13.02 per share, raising approximately $72.8 million in net proceeds.

 

On July 28, 2015, we entered into Amendment No. 7 to our existing Revolver Amendment and Amendment No. 7 to our existing Term Loan Amendment, each with certain lenders party thereto and ING Capital LLC, as administrative agent. The Amendments amend certain provisions of the Facilities.

 

The pricing in the case of the Term Loan Facility was reduced for LIBOR loans from LIBOR (with no minimum) plus 3.25% to LIBOR plus 3.00%. The pricing on the Revolving Credit Facility will remain the same at LIBOR (with no minimum) plus 2.75%. Both the Term Loan Facility and Revolving Credit Facility will decrease by an additional 25 basis points upon receiving an investment grade rating from Standard & Poor’s.

 

Additionally, the Term Loan Facility’s bullet maturity was extended from June 2019 to July 2020 and the Revolving Credit Facility’s revolving period was extended from June 2017 to July 2019, followed by a one-year amortization period and a final maturity in July 2020.

 

On December 17, 2015, the Company issued $70.8 million in aggregate principal amount of 6.50% unsecured notes that mature on January 30, 2021 (the ‘‘2021 Notes’’ and together with the 2019 Notes and 2023 Notes, the “Notes”). The 2021 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 January 30, 2019. The 2021 Notes bear interest at a rate of 6.50% per year, payable quarterly on January 30, April 30, July 30 and October 30 of each year, beginning January 30, 2016. The 2021 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol ‘‘MCX’’.

 

On January 14, 2016, the Company closed an additional $3.25 million in aggregate principal amount of the 2021 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes.

  

As of June 30, 2016, total commitments under the Facilities are $517.5 million, comprised of $343.5 million committed to the Revolving Credit Facility and $174.0 million funded under the Term Loan Facility.

 

As of June 30, 2016, we had $11.9 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 spill over certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, for each taxable year 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 Debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA Debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA Debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA 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 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 $150.0 million when it has at least $75.0 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 $150.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

 

As of June 30, 2016, SBIC LP had $75.0 million in regulatory capital and had $150.0 million SBA Debentures outstanding.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

 

As of June 30, 2016 and September 30, 2015, we had commitments under loan and financing agreements to fund up to $8.5 million to 7 portfolio companies and $28.1 million to 12 portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and a revolver and an analysis of their value is included in the Consolidated Schedule of Investments. 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 June 30, 2016 and September 30, 2015 is shown in the table below (dollars in thousands):

 

   As of 
   June 30, 2016   September 30, 2015 
Tenere Acquisition Corp.  $2,000   $2,000 
DHISCO Electronic Distribution, Inc. - Revolver   1,905    3,048 
Brantley Transportation LLC - Delayed Draw Term Loan   1,087    - 
RCS Management Corporation & Specialized Medical Services, Inc.   1,000    5,000 
Black Angus Steakhouses, LLC - Delayed Draw Term Loan   893    893 
Black Angus Steakhouses, LLC - Revolver   759    446 
Be Green Packaging, LLC - Revolver   479    479 
Access Media Holdings, LLC - Series AA Preferred Equity   336    - 
Red Skye Wireless LLC   -    7,500 
Autosplice, Inc.   -    3,026 
Freedom Powersports LLC - Delayed Draw Term Loan   -    1,800 
Point.360   -    1,600 
Be Green Packaging, LLC - Delayed Draw Term Loan   -    750 
Ship Supply Acquisition Corporation   -    622 
Meridian Behavioral Health, LLC - Term Loan B   -    500 
Access Media Holdings, LLC - Series A Preferred Equity   -    424 
Total  $8,459   $28,088 

 

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.

 

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The following table shows our payment obligations for repayment of debt and other contractual obligations at June 30, 2016 (dollars in thousands):

 

   Payment Due by Period 
   Total   Less than 1 year   1 - 3 years   3 - 5 years   More than 5
years
 
Revolving Facility  $27,800   $-   $-   $27,800   $- 
Term Loan Facility   174,000    -    -    174,000    - 
7.125% Notes   40,000    -    40,000    -    - 
6.50% Notes   74,013    -    -    74,013    - 
6.125% Notes   63,500    -    -    -    63,500 
SBA Debenture   150,000    -    -    -    150,000 
Total contractual obligations  $529,313   $-   $40,000   $275,813   $213,500 

 

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.

 

On March 27, 2015, Medley Capital Corporation and Great American Life Insurance Company (“GALIC”) entered into a limited liability company operating agreement to co-manage MCC Senior Loan Strategy JV I LLC (“MCC JV”). Medley Capital Corporation and GALIC have committed to provide $100 million of equity to MCC JV, with Medley Capital Corporation providing $87.5 million and GALIC providing $12.5 million. MCC JV commenced operations on July 15, 2015. On August 4, 2015, MCC JV entered into a senior secured revolving  credit facility (the “JV Facility”) led by Credit Suisse, AG with initial commitments of $100 million. As of June 30, 2016, MCC JV has drawn approximately $58.3 million on the JV Facility. As of June 30, 2016, MCC JV had total investments at fair value of $81.3 million. As of June 30, 2016, MCC JV’s portfolio was comprised of senior secured first lien loans to 25 different borrowers. As of June 30, 2016, none of these loans were on non-accrual status.

 

Medley Capital Corporation has determined that MCC JV is an investment company under ASC 946, however in accordance with such guidance, Medley Capital Corporation will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, Medley Capital Corporation does not consolidate its interest in MCC JV.

 

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 timely distribute at least 90 percent of the sum of our (i) investment company taxable income (which is generally our net 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, but we may also elect to periodically spill over certain excess undistributed taxable income from one tax year to the next tax year. To the extent that we retain our net capital gains or any investment company taxable income, we will 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

 

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  (3) income realized, but not distributed, in preceding years and on which we did not pay federal income tax.

  

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 a taxable year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. 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 dividend distributions during the nine months ended June 30, 2016:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
11/5/2015  11/25/2015  12/18/2015   0.30 
2/1/2016  2/24/2016  3/18/2016   0.30 
5/5/2016  5/25/2016  6/24/2016   0.30 

 

Stock Repurchase Program

 

The following table summarizes our share repurchases under our stock repurchase program for the three and nine months ended June 30, 2016 and 2015 (dollars in thousands):

 

   For the three months ended   For the nine months ended 
   June 30   June 30 
   2016   2015   2016   2015 
Dollar amount repurchased 

N/A(1)

   $1,576   $10,700   $9,506 
Shares Repurchased   

N/A(1)

    169,081    1,573,741    994,758 
Average price per share 

N/A(1)

   $9.32   $6.80   $9.56 
Weighted average discount to Net Asset Value   

N/A(1)

   20.0%   32.7%   18.9%

 

(1)The Company did not repurchase any shares for the three months ended June 30, 2016.

 

On February 5, 2015, our board of directors approved a share repurchase program pursuant to which we can purchase up to an aggregate amount of $30.0 million of our common stock between the period of the approval date and February 5, 2016. On December 4, 2015, the board of directors extended the duration of the share repurchase program through December 31, 2016, and increased the aggregate amount to $50.0 million. Any stock repurchases will be made through the open market at times, and in such amounts, as management deems appropriate. As of June 30, 2016, the Company has repurchased an aggregate of 3,969,873 shares of common stock at an average price of $8.04 per share with a total cost of approximately $31.9 million. The maximum dollar value of shares that may yet be purchased under the plan is $18.1 million. This program may be limited or terminated at any time without prior notice. Since the inception of the program, the Company's net asset value per share was increased by approximately $0.21 as a result of the share repurchases. 

 

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:

 

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  · 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.

 

Investment Management Agreement

 

Under the terms of our investment management agreement, MCC Advisors:

 

·determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
·identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and

·executes, closes, monitors and administers the investments we make, including the exercise of any voting or consent rights.

 

MCC Advisors’ services under the investment management agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

 

Pursuant to our investment management agreement, we pay MCC Advisors a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

 

On December 3, 2015, MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the investment management agreement. Beginning January 1, 2016, the base management fee will be reduced to 1.50% on gross assets above $1 billion. In addition, MCC Advisors will reduce its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee will include a netting mechanism and will be subject to a rolling three-year look back from January 1, 2016 forward. Under no circumstances will the new fee structure result in higher fees to MCC Advisors than fees under the current investment management agreement.

 

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The following discussion of our base management fee and two-part incentive fee reflects the terms of the fee waiver agreement executed by MCC Advisors on February 8, 2016 (the “Fee Waiver Agreement”). The terms of the Fee Waiver Agreement are effective as of January 1, 2016, and are a permanent reduction in the base management fee and incentive fee on net investment income payable to MCC Advisors for the investment advisory and management services it provides under the investment management agreement. The Fee Waiver Agreement does not change the second component of the incentive fee, which is the incentive fee on capital gains.

 

Base Management Fee

 

For providing investment advisory and management services to us, MCC Advisors receives a base management fee. The base management fee is calculated at an annual rate of 1.75% (0.4375% per quarter) of up to $1.0 billion of the Company’s gross assets and 1.50% (0.375% per quarter) of any amounts over $1.0 billion of the Company’s gross assets, and is payable quarterly in arrears. The base management fee will be calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and will be appropriately pro-rated for any partial quarter.

 

Incentive Fee

 

The incentive fee has two components, as follows:

 

Incentive Fee Based on Income

 

The first component of the incentive fee is payable quarterly in arrears and is based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee is being calculated. MCC Advisors is entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 1.5%. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter.

 

Beginning with the calendar quarter that commenced on January 1, 2016, the incentive fee on net investment income will be determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since January 1, 2016). We refer to such period as the “Trailing Twelve Quarters.”

 

The hurdle amount for the incentive fee on net investment income is determined on a quarterly basis, and is equal to 1.5% multiplied by the Company’s net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments to the Company’s net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The incentive fee for any partial period will be appropriately prorated. Any incentive fee on net investment income will be paid to MCC Advisors on a quarterly basis, and will be based on the amount by which (A) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company’s capital gains.

 

Quarterly Incentive Fee Based on Income

 

The incentive fee on net investment income for each quarter is determined as follows:

 

·No incentive fee on net investment income is payable to MCC Advisors for any calendar quarter for which there is no Excess Income Amount.
·100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 1.8182% multiplied by the Company’s net assets at the beginning of each applicable calendar quarter, as adjusted as noted above, comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee on net investment income; and
·17.5% of the Ordinary Income that exceeds the Catch-up Amount is included in the calculation of the incentive fee on net investment income.

 

The amount of the incentive fee on net investment income that will be paid to MCC Advisors for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as described below).

 

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The incentive fee on net investment income that is paid to MCC Advisors for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

 

“Cumulative Net Return” means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, the Company will pay no incentive fee on net investment income to MCC Advisors for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee on net investment income that is payable to MCC Advisors for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Company will pay an incentive fee on net investment income to MCC Advisors, calculated as described above, for such quarter without regard to the Incentive Fee Cap.

 

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company’s net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company’s net assets due to capital raising or capital action, in such period.

 

Dilution to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company’s net assets due to capital raising is calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company’s net assets due to other capital action is calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company.

 

For the avoidance of doubt, the purpose of the new incentive fee calculation under the Fee Waiver Agreement is to permanently reduce aggregate fees payable to MCC Advisors by the Company, effective as of January 1, 2016. In order to ensure that the Company will pay MCC Advisors lesser aggregate fees on a cumulative basis, as calculated beginning January 1, 2016, we will, at the end of each quarter, also calculate the base management fee and incentive fee on net investment income owed by the Company to MCC Advisors based on the formula in place prior to January 1, 2016. If, at any time beginning January 1, 2016, the aggregate fees on a cumulative basis, as calculated based on the formula in place after January 1, 2016, would be greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior to January 1, 2016, MCC Advisors shall only be entitled to the lesser of those two amounts.

 

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

 

Under GAAP, the Company calculates the second component of the incentive fee as if the Company had realized all assets at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive that is ultimately realized 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.

 

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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.

 

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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 June 30, 2016, seven investments were on non-accrual status with a combined fair value of approximately $68.5 million, or 6.6% of the fair value of our portfolio. At September 30, 2015, three investments were on non-accrual status with a combined fair value of approximately $25.5 million, or 2.1% of the fair value of our portfolio.

 

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 net ordinary income for 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 and any income realized, but not distributed, in preceding years and on which we did not pay federal income tax. 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. 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 August 7, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.22 per share payable on September 23, 2016, to stockholders of record at the close of business on August 24, 2016.

 

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 June 30, 2016, we did not engage in hedging activities.

 

As of June 30, 2016, 78.2% 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 June 30, 2016 was as follows (dollars in thousands):

 

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   June 30, 2016 
   Fair Value   % of Floating Rate Portfolio 
Under 1%  $150,874    20.8%
1% to under 2%   521,504    71.9 
2% to under 3%   35,922    4.9 
3%   17,500    2.4 
Total  $725,800    100.0%

 

Based on our Consolidated Statement of Assets and Liabilities as of June 30, 2016, the following table (dollars in thousands) 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     Interest Expense   Net Increase/(Decrease)  
100   $  3,300   $  2,000   $  1,300  
200      9,900      4,000      5,900  
300      16,900      6,100      10,800  
400      23,900      8,100      15,800  
500      30,900      10,100      20,800  

 

As of September 30, 2015, 78.8% 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, 2015 was as follows (dollars in thousands): 

 

   September 30, 2015 
   Fair Value   % of Floating Rate Portfolio 
Under 1%  $144,637    15.9%
1% to under 2%   669,130    73.7 
2% to under 3%   77,497    8.5 
3%   17,548    1.9 
Total  $908,812    100.0%

 

Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2015, the following table (dollars in thousands) 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     Interest Expense   Net Increase/(Decrease)  
100   $  2,600   $  5,200   $  (2,600 )
200      10,100      10,300      (200 )
300      18,900      15,500      3,400  
400      27,800      20,700      7,100  
500      36,600      25,800      10,800  

 

(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 June 30, 2016. 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 June 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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.

 

 

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Part II – Other Information

 

Item 1. Legal Proceedings.

  

From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us. Except as described below, we are not currently party to any material legal proceedings.

 

On May 29, 2015, Moshe Barkat and Modern VideoFilm Holdings, LLC filed a complaint against the Company, Medley Opportunity Fund II LP (“MOF II”), MCC Advisors LLC, Deloitte Transactions and Business Analytics LLP A/K/A Deloitte CRG (“Deloitte”), Scott Avila (“Avila”), Charles Sweet, and Modern VideoFilm, Inc. (“MVF”), seeking damages in excess of $100 million. The lawsuit is pending in the California Superior Court, Los Angeles County, Central District, as Case No. BC 583437. The Company, together with MOF II, Congruent, and Main Street, (and together with the Company, MOF II and Congruent, “Lenders”), had a loan to MVF. The outstanding balance on the loan was in excess of $66.5 million, of which $15 million was due to the Company. After MVF defaulted on its loan, the Lenders exercised voting rights under a stock pledge and appointed an independent director, Charles Sweet, as MVF’s sole director. Mr. Sweet subsequently appointed Scott Avila and Cooper Crouse of Deloitte CRG as chief restructuring officer and assistant chief restructuring officer, respectively. Mr. Barkat was the former chief executive officer and founder of MVF. MVF terminated Mr. Barkat’s employment. Mr. Barkat has asserted claims against MVF for breach of his employment contract and wrongful termination. Mr. Barkat has asserted claims against the Company and MOF II for breach of fiduciary duty, intentional interference with contract, unfair competition and defamation. Deloitte and Avila have settled the claims against them in exchange for payment of $1,475,000. On June 6, 2016, the court granted MCC and the other defendants’ demurrers on several counts and dismissed Mr. Barkat’s claims, except with respect to the intentional interference with contract claim. The Company and the other defendants continue to dispute the remaining claims and are vigorously defending the action, while pursuing affirmative counterclaims against Moshe Barkat and Modern VideoFilm Holdings, LLC.

 

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, 2015, filed with the SEC on December 4, 2015, which could materially affect our business, financial condition and/or operating results. There have been no material changes during the nine months ended June 30, 2016 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.

 

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

 

On December 3, 2015, the Board authorized an increase to the share repurchase program initially adopted on February 5, 2015, pursuant to which the Company can purchase up to an aggregate amount of $50 million of its common stock through December 31, 2016. Under this program, the Company has been authorized to programmatically buy stock at a price of up to NAV per share under a 10b5-1 program. As described more fully in the table below, as of June 30, 2016, the Company has purchased 3,969,873 shares of common stock pursuant to this repurchase plan.

 

Period  Total Number of
Shares
Purchased
   Average Price
per Share
   Total Shares
Purchased as
Part of Publicly
Announced Plan
   Maximum
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plan
 
January 1, 2016 through January 31, 2016   273,020   $6.96    2,812,501   $25,795,281 
February 1, 2016 through February 29, 2016   105,311    6.65    2,917,812    25,095,141 
March 1, 2016 through March 31, 2016   1,052,061    6.65    3,969,873    18,095,148 
April 1, 2016 through April 30, 2016   -    -    -    18,095,148 
May 1, 2016 through May 31, 2016   -    -    -    18,095,148 
June 1, 2016 through June 30, 2016   -    -    -    18,095,148 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

 

3.1   Certificate of Incorporation (Incorporated by reference to Exhibit 99.A.3 to the Registrant’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on November 22, 2010).
     
3.2   Form of Bylaws (Incorporated by reference to Exhibit 99.B.3 to the Registrant’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on November 22, 2010).
     
4.1   Form of Stock Certificate (Incorporated by reference to Exhibit 99.D to the Registrant’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2, filed on November 22, 2010).
     
4.2  

Dividend Reinvestment Plan (Incorporated by reference to Exhibit 99.E to the Registrant’s Pre-effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-166491), filed on November 22, 2010).

     
4.3  

Indenture, dated February 7, 2012, between Medley Capital Corporation and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 99.D.2 to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333- 179237), filed on February 13, 2012).

     
4.4  

First Supplemental Indenture, dated March 21, 2012, between Medley Capital Corporation and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 99.D.4 to the Registrant’s Post-Effective Amendment No. 2 to the Registrant Statement on Form N-2 (File No. 333-179237), filed on March 21, 2012).

     
4.5  

Second Supplemental Indenture, dated March 18, 2013, between Medley Capital Corporation and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 99.D.4 to the Registrant’s Post-Effective Amendment No. 7 to the Registrant Statement on Form N-2 (File No. 333-179237), filed on March 15, 2013).

     
4.6  

Third Supplemental Indenture, dated December 17, 2015, between Medley Capital Corporation and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 99.D.6 to the Registrant's Post-Effective Amendment No. 11 to the Registration Statement on Form N-2 (File No. 333-187324), filed on December 17, 2015).

     
10.1  

Letter from MCC Advisors LLC re: Waiver of Base Management Fee and Incentive Fee on Net Investment Income, dated February 8, 2016 (Incorporated by reference to Exhibit 99.K.5 to the Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-208746), filed on March 25, 2016).

     
11.1  

Statement re computation of per share earnings (Included in Note 11 to the financial statements contained herein).

     
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.*

  

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements 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: Medley Capital Corporation
August 9, 2016  
   
  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)

 

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