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PhenixFIN Corp - Quarter Report: 2013 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

   

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2013

 

OR

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number 1-35040

 

Medley Capital Corporation

 

(Exact name of registrant as specified in its charter)

 

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

 

375 Park Avenue, Suite 3304

New York, NY 10152

(Address of principal executive offices)

 

(212) 759-0777

(Registrant’s telephone number, including area code)

 

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

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

Yes x No ¨

 

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

 

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

 

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

 

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

 

As of July 31, 2013, the Registrant had 33,226,126 shares of common stock, $0.001 par value, outstanding. 

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
Part I.   Financial Information    
     
Item 1.   Financial Statements   F-1
     
  Consolidated Statements of Assets and Liabilities as of  June 30, 2013 (unaudited) and September 30, 2012   F-1
     
  Consolidated Statements of Operations for the three and nine months ended  June 30, 2013 and 2012 (unaudited)   F-2
     
  Consolidated Statements of Changes in Net Assets for the nine months ended  June 30, 2013 and 2012 (unaudited)   F-3
     
  Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012 (unaudited)   F-4
     
  Consolidated Schedules of Investments as of  June 30, 2013 (unaudited) and September 30, 2012   F-5
     
  Notes to Consolidated Financial Statements (unaudited)   F-10
     
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   1
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   13
     
Item 4.   Controls and Procedures   14
     
Part II.   Other Information    
     
Item 1.   Legal Proceedings   15
     
Item 1A. Risk Factors 15
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   15
     
Item 3.   Defaults Upon Senior Securities   15
     
Item 4.   Mine Safety Disclosures   15
     
Item 5.   Other Information   15
     
Item 6.   Exhibits   16
     
SIGNATURES   17

 

 
 

   

Part I. Financial Information

 

Item 1. Financial Statements

 

Medley Capital Corporation

 

Consolidated Statements of Assets and Liabilities 

 

   As of 
   June 30, 2013   September 30, 2012 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-controlled/non-affiliated investments (amortized cost of $686,448,197 and $394,482,053, respectively)  $677,350,840   $393,741,357 
Affiliated investments (amortized cost of $9,126,612 and $8,678,596, respectively)   9,024,065    8,208,006 
Total investments at fair value   686,374,905    401,949,363 
Cash and cash equivalents   13,458,925    4,893,616 
Interest receivable   9,941,064    3,940,148 
Deferred financing costs, net   8,295,305    4,651,724 
Fees receivable   1,625,000    - 
Other assets   345,460    232,496 
Receivable for investments sold   4,568,652    - 
Deferred offering costs   241,510    103,671 
Total assets  $724,850,821   $415,771,018 
           
LIABILITIES          
Revolving credit facility payable  $54,700,000   $15,000,000 
Term loan payable   115,000,000    55,000,000 
Notes payable   103,500,000    40,000,000 
SBA debentures   5,000,000    - 
Payable for investments purchased   15,000,000    10,212,300 
Management and incentive fees payable, net   5,984,655    3,514,772 
Accounts payable and accrued expenses   1,635,812    924,152 
Administrator expenses payable   681,924    465,412 
Deferred revenue   181,315    173,627 
Interest and fees payable   2,813,939    1,048,205 
Due to affiliate   24,028    13,246 
Offering costs payable   83,054    80,073 
Total liabilities  $304,604,727   $126,431,787 
           
NET ASSETS          
Common stock, par value $.001 per share, 100,000,000 common shares authorized,
33,226,126 and 23,110,242 common shares issued and outstanding, respectively
  $33,226   $23,110 
Capital in excess of par value   422,205,081    285,012,499 
Accumulated undistributed net investment income   7,014,978    5,559,635 
Accumulated net realized gain (loss) from investments   192,713    (44,727)
Net unrealized appreciation (depreciation) on investments   (9,199,904)   (1,211,286)
Total net assets   420,246,094    289,339,231 
Total liabilities and net assets  $724,850,821   $415,771,018 
           
NET ASSET VALUE PER SHARE  $12.65   $12.52 

 

See accompanying notes to consolidated financial statements.

 

F-1
 

 

Medley Capital Corporation

 

Consolidated Statements of Operations

 

   For the three months
ended June 30
   For the nine months
ended June 30
 
   2013   2012   2013   2012 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
INVESTMENT INCOME                    
Interest from investments                    
Non-controlled/Non-affiliated investments  $19,572,407   $10,179,522   $50,383,033   $23,962,160 
Affiliated investments   376,790    239,761    1,112,503    2,013,461 
Total interest income   19,949,197    10,419,283    51,495,536    25,975,621 
Interest from cash and cash equivalents   2,677    781    6,192    3,513 
Other fee income (See note 9)   3,639,234    1,832,307    10,016,301    4,475,777 
Total investment income   23,591,108    12,252,371    61,518,029    30,454,911 
                     
EXPENSES                    
Base management fees   2,977,097    1,498,212    7,606,894    3,782,158 
Incentive fees   3,007,559    1,552,011    8,010,952    4,110,844 
Interest and financing expenses   4,032,337    1,781,455    9,283,079    2,890,872 
Administrator expenses   681,924    395,689    1,773,348    1,074,173 
Professional fees   319,982    469,650    1,160,684    1,102,278 
Directors fees   71,125    131,125    314,786    377,504 
Insurance   69,758    121,506    210,517    343,325 
General and administrative   398,785    94,678    963,046   371,505 
Organizational expense   2,305    -    150,916    - 
Expenses before management fee waiver   11,560,872    6,044,326    29,474,222    14,052,659 
Management fee waiver   -    -    -    (41,126)
Total expenses net of management fee waiver   11,560,872    6,044,326    29,474,222    14,011,533 
Net investment income before excise taxes   12,030,236    6,208,045    32,043,807    16,443,378 
Excise tax expense   -    -    -    (35,501)
NET INVESTMENT INCOME   12,030,236    6,208,045    32,043,807    16,407,877 
                     
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                    
Net realized gain/(loss) from investments   (136,914)   (15,016)   237,440    93,552 
Net unrealized appreciation/(depreciation) on investments   (8,736,445)   (1,353,281)   (7,988,618)   (1,434,400)
Net gain/(loss) on investments   (8,873,359)   (1,368,297)   (7,751,178)   (1,340,848)
                     
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS  $3,156,877   $4,839,748   $24,292,629   $15,067,029 
                     
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.10   $0.28   $0.85   $0.87 
WEIGHTED AVERAGE - BASIC AND DILUTED NET INVESTMENT INCOME PER COMMON SHARE  $0.37   $0.36   $1.12   $0.95 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED (SEE NOTE 11)   32,658,336    17,320,468    28,684,229    17,320,468 
                     
DIVIDENDS DECLARED PER COMMON SHARE  $0.36   $0.31   $1.08   $0.84 

 

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, 2013
   For the nine months ended 
June 30, 2012
 
   (unaudited)   (unaudited) 
INCREASE FROM OPERATIONS:          
Net investment income  $32,043,807   $16,407,877 
Net realized gain/(loss) from investments   237,440    93,552 
Net unrealized appreciation/(depreciation) on investments   (7,988,618)   (1,434,400)
Net increase/(decrease) in net assets from operations   24,292,629    15,067,029 
SHAREHOLDER DISTRIBUTIONS:          
Distributions declared from income ($1.08 and $0.84 per share, respectively)   (30,588,465)   (14,549,193)
Net decrease in net assets from shareholder distributions   (30,588,465)   (14,549,193)
CAPITAL SHARE TRANSACTIONS:          
Issuance of common stock, net of underwriting costs   137,696,574    - 
Offering costs   (493,875)   - 
Net increase in net assets from common share transactions   137,202,699    - 
Total increase/(decrease) in net assets   130,906,863    517,836 
Net assets at beginning of period   289,339,231    217,652,696 
Net assets at end of period including accumulated undistributed net investment
income of $7,014,978 and $5,078,773, respectively
  $420,246,094   $218,170,532 
           
Net asset value per common share  $12.65   $12.60 
Common shares outstanding at end of period   33,226,126    17,320,468 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

 

Medley Capital Corporation

 

Consolidated Statements of Cash Flows

 

   For the nine
months ended 
June 30, 2013
   For the nine
months ended
June 30, 2012
 
   (unaudited)   (unaudited) 
Cash flows from operating activities          
NET INCREASE IN NET ASSETS FROM OPERATIONS  $24,292,629   $15,067,029 
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:
          
Paid-in-kind interest income   (6,522,188)   (2,545,968)
Net amortization of premium (discount) on investments   (565,649)   (23,574)
Amortization of deferred financing costs   1,029,597    432,836 
Net realized (gain) loss from investments   (237,440)   (93,552)
Net unrealized (appreciation) depreciation on investments   7,988,618    1,434,400 
Proceeds from sale and redemption of investments   140,693,504    26,637,386 
Purchase of investments   (425,782,387)   (189,295,850)
(Increase) decrease in operating assets:          
Interest receivable   (6,000,916)   (1,597,551)
Fees receivable   (1,625,000)   - 
Other assets   (112,964)   621,928 
Receivable for investments sold   (4,568,652)   - 
Increase (decrease) in operating liabilities:          
Payable for investments purchased   4,787,700    - 
Accounts payable and accrued expenses   711,660    362,159 
Management and incentive fees payable, net   2,469,883    1,566,472 
Administrator expenses payable   216,512    49,396 
Interest and fees payable   1,765,734    1,209,482 
Deferred revenue   7,688    79,780 
Due to affiliate   10,782    81,391 
NET CASH USED BY OPERATING ACTIVITIES   (261,440,889)   (146,014,236)
           
Cash flows from financing activities          
Proceeds from issuance of common stock, net of underwriting costs   137,696,574    - 
Offering cost paid   (628,734)   (82,666)
Borrowings on debt   335,300,000    159,400,000 
Paydowns on debt   (167,100,000)   (10,700,000)
Financing cost paid   (4,673,177)   (2,135,443)
Payments of cash dividends   (30,588,465)   (14,549,193)
NET CASH PROVIDED BY FINANCING ACTIVITIES   270,006,198    131,932,698 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   8,565,309    (14,081,538)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   4,893,616    17,201,643 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $13,458,925   $3,120,105 
           
Supplemental Information:          
Interest paid during the period  $6,437,602   $1,248,554 
Excise tax paid during the period  $-   $35,501 
Supplemental non-cash information          
Paid-in-kind interest income  $6,522,188   $2,545,968 
Net amortization of premium (discount) on investments  $565,649   $23,574 
Amortization of deferred financing costs  $(1,029,597)  $(432,836)
Issuance of common stock in connection with dividend reinvestment plan  $1,764,174   $- 

 

See accompanying notes to consolidated financial statements. 

 

F-4
 

  

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

June 30, 2013

(unaudited)

  

Company (1)  Industry  Type of Investment  Maturity   Par Amount (2)   Cost   Fair Value   % of
Net Assets (3)
 
Non-Controlled/ Non-Affiliated Investments:                            
                                
Accupac, Inc.  Containers, Packaging and Glass  Senior Secured Second Lien Term Loan (12.29%)   11/10/2018   $12,000,000   $12,000,000   $12,000,000    2.9%
               12,000,000    12,000,000    12,000,000      
                                
Aderant North America, Inc.  Electronics  Senior Secured Second Lien Term Loan (LIBOR + 8.75%, 1.25% LIBOR Floor)   6/20/2019    4,550,000    4,550,000    4,550,000    1.1%
               4,550,000    4,550,000    4,550,000      
                                
American Apparel, Inc.(8)  Retail Stores  Senior Secured Note (13.00%)   4/15/2020    13,000,000    12,618,046    13,064,500    3.1%
               13,000,000    12,618,046    13,064,500      
                                
American Gaming Systems LLC  Hotels, Motels, Inns and Gaming  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.50% LIBOR Floor)   8/15/2016    10,750,000    10,750,000    10,793,294    2.6%
               10,750,000    10,750,000    10,793,294      
                                
ARBOC Specialty Vehicles LLC  Automobile  Senior Secured First Lien Term Loan (LIBOR + 12.50% Cash, 1.00% LIBOR Floor)   3/21/2018    25,000,000    25,000,000    25,000,000    5.9%
               25,000,000    25,000,000    25,000,000      
                                
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan
(11.25% Cash, 2.00% PIK)
   3/16/2014    15,727,315    15,727,315    15,839,603    3.8%
               15,727,315    15,727,315    15,839,603      
                                
BayDelta Maritime LLC  Cargo Transport  Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)   6/30/2016    6,669,293    6,566,855    6,686,440    1.6%
      Fee Note (14.88%)(6)   6/30/2016    250,000    164,853    164,853    0.0%
      Warrants to purchase 10% of the outstanding equity   6/30/2016    N/A    25,000    468,307    0.1%
               6,919,293    6,756,708    7,319,600      
                                
Brantley Transportation LLC  Oil and Gas  Senior Secured First Lien Term Loan (12.00%)   8/2/2017    10,762,500    10,956,185    10,762,500    2.6%
               10,762,500    10,956,185    10,762,500      
                                
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (12.00% PIK)   9/30/2014    24,121,937    23,797,201    19,075,382    4.5%
      Warrants to purchase 15% of the outstanding equity   9/30/2014    N/A    68,433    -    0.0%
               24,121,937    23,865,634    19,075,382      
                                
Caregiver Services, Inc.  Healthcare, Education and Childcare  Senior Secured Second Lien Term Loan (12.45% Cash, 2.00% PIK)   12/29/2017    15,283,238    15,283,238    15,268,801    3.6%
               15,283,238    15,283,238    15,268,801      
                                
Cenegenics LLC  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (10.00% Cash, 2.25% PIK)   12/20/2017    19,601,755    19,601,755    19,666,529    4.7%
               19,601,755    19,601,755    19,666,529      
                                
Dispensing Dynamics International(8)  Personal and Nondurable Consumer Products (Manufacturing Only)  Senior Secured Note (12.50%)   1/1/2018    4,800,000    4,711,076    4,833,389    1.2%
               4,800,000    4,711,076    4,833,389      
                                
DLR Restaurants LLC  Restaurant & Franchise  Senior Secured First Lien Term Loan (11.00% Cash, 2.50% PIK)   4/18/2018    9,622,039    9,622,039    9,622,039    2.3%
      Unsecured Debt (12.00% Cash, 4.00% PIK)   4/18/2018    252,060    252,060    252,060    0.1%
               9,874,099    9,874,099    9,874,099      
                                
Exide Technologies (9)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured Note (8.63%)   2/1/2018    11,000,000    9,006,908    6,668,750    1.6%
               11,000,000    9,006,908    6,668,750      
                                
FC Operating LLC  Retail Stores  Senior Secured First Lien Term Loan (LIBOR + 10.75%, 1.25% LIBOR Floor)   11/14/2017    11,212,500    11,212,500    11,230,794    2.7%
               11,212,500    11,212,500    11,230,794      
                                
Geneva Wood Fuels LLC (4)(10)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (4.50% Cash, 10.50% PIK)   12/31/2014    8,199,184    8,143,385    4,090,000    1.0%
               8,199,184    8,143,385    4,090,000      
                                
Harrison Gypsum LLC  Mining, Steel, Iron and Nonprecious Metals  Senior Secured First Lien Term Loan (LIBOR + 8.50% Cash, 0.50% PIK, 1.50% LIBOR Floor)   12/21/2017    24,408,401    24,408,401    24,425,174    5.8%
               24,408,401    24,408,401    24,425,174      
                                
HD Vest, Inc.  Finance  Senior Secured Second Lien Term Loan (LIBOR + 8.00% Cash, 1.25% LIBOR Floor)   6/18/2019    8,750,000    8,750,000    8,640,625    2.1%
               8,750,000    8,750,000    8,640,625      
                                
Help/Systems LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)   6/28/2020    15,000,000    15,000,000    14,400,000    3.4%
               15,000,000    15,000,000    14,400,000      
                                
HGDS Acquisition LLC  Business Services  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.50% PIK)   3/28/2018    13,625,087    13,625,087    13,552,421    3.2%
               13,625,087    13,625,087    13,552,421      
                                
Hoffmaster Group, Inc.  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan
(LIBOR + 9.50% Cash, 1.50% LIBOR Floor)
   1/3/2019    6,000,000    6,000,000    6,007,167    1.4%
      Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)   1/3/2019    2,000,000    1,982,405    1,942,667    0.5%
               8,000,000    7,982,405    7,949,834      
                                
Ingenio Acquisition LLC  Personal, Food and Miscellaneous Services  Senior Secured First Lien Term Loan (12.75%)   5/9/2018    25,000,000    25,000,000    25,000,000    5.9%
               25,000,000    25,000,000    25,000,000      

 

F-5
 

Insight Pharmaceuticals LLC  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)   8/25/2017    7,724,138    7,724,138    7,816,705    1.9%
               7,724,138    7,724,138    7,816,705      
                                
Integra Telecom  Telecommunications  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)   2/22/2020    12,132,000    12,158,858    12,480,795    3.0%
               12,132,000    12,158,858    12,480,795      
                                
Interface Security Systems(8)  Electronics  Senior Secured Note (9.25%)   1/15/2018    3,333,000    3,333,000    3,399,660    0.8%
               3,333,000    3,333,000    3,399,660      
                                
JD Norman Industries, Inc.  Diversified/Conglomerate Manufacturing  Senior Secured Second Lien Term Loan (13.50%)   6/28/2018    12,500,000    12,500,000    12,500,000    3.0%
               12,500,000    12,500,000    12,500,000      
                                
Kelley Amerit Holdings, Inc.  Business Services  Senior Secured Second Lien Term Loan
(LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)
   12/21/2016    8,990,555    8,990,555    8,956,595    2.1%
               8,990,555    8,990,555    8,956,595      
                                
Linc Energy Finance (USA), Inc.(8)  Oil and Gas  Senior Secured Note (12.50%)   10/31/2017    3,500,000    3,387,276    3,832,500    0.9%
               3,500,000    3,387,276    3,832,500      
                                
Meridian Behavioral Health LLC  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan A (14.00% )   11/14/2016    6,139,141    5,729,463    6,294,461    1.5%
      Senior Secured First Lien Term Loan B (14.00%)   11/14/2016    3,750,000    3,750,000    3,750,000    0.9%
      Warrants to purchase 8% of the outstanding membership units   11/14/2016    N/A    536,296    1,063,521    0.2%
               9,889,141    10,015,759    11,107,982      
                                
Modern VideoFilm, Inc.  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 3.00% PIK, 1.50% LIBOR Floor)   9/25/2017    11,561,601    11,263,485    9,422,705    2.2%
      Warrants to purchase 4.5%
of the outstanding equity
   9/25/2017    N/A    339,572    8,932    0.0%
               11,561,601    11,603,057    9,431,637      
                                
Physicians Care Alliance LLC  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (10.00% Cash, 1.00% PIK)   12/28/2017    15,813,580    15,813,580    15,989,111    3.8%
      Senior Secured First Lien Revolver (10.50%)(7)   12/28/2017    N/A    N/A    N/A    0.0%
               15,813,580    15,813,580    15,989,111      
                                
Prestige Industries LLC  Business Services  Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)   1/31/2017    5,983,801    5,862,075    5,470,885    1.3%
      Warrants to purchase 0.63% of the outstanding common units   1/31/2017    N/A    151,855    -    0.0%
               5,983,801    6,013,930    5,470,885      
                                
Prince Mineral Holdings Corp.(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (11.50%)   12/15/2019    6,800,000    6,724,437    7,276,000    1.7%
               6,800,000    6,724,437    7,276,000      
                                
RCS Management Corporation & Specialized Medical Services, Inc.  Diversified/Conglomerate Service  Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)   9/23/2015    25,442,201    25,442,201    25,644,399    6.1%
               25,442,201    25,442,201    25,644,399      
                                
Red Skye Wireless LLC  Retail Stores  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)   6/27/2017    15,001,667    15,001,667    15,001,667    3.6%
               15,001,667    15,001,667    15,001,667      
                                
Reddy Ice Corporation  Beverage, Food and Tobacco  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.25% LIBOR Floor)   10/1/2019    17,000,000    17,000,000    16,668,477    4.0%
               17,000,000    17,000,000    16,668,477      
                                
Revstone Aero LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.00% PIK)   11/1/2013    15,465,235    15,273,301    15,465,235    3.7%
      Fee Note   11/1/2013    500,000    263,297    470,000    0.1%
               15,965,235    15,536,598    15,935,235      
                                
Santa Cruz Nutritional  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan (14.50%)   5/25/2015    15,000,000    15,000,000    15,555,833    3.7%
               15,000,000    15,000,000    15,555,833      
                                
Sequel Youth and Family Services LLC  Healthcare, Education and Childcare  Senior Secured Second Lien Term Loan (14.00%)   12/23/2014    10,500,000    10,500,000    10,815,000    2.6%
               10,500,000    10,500,000    10,815,000      
                                
SESAC HOLDCO II  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 8.75%, 1.25% LIBOR Floor)   7/12/2019    2,500,000    2,463,944    2,546,505    0.6%
               2,500,000    2,463,944    2,546,505      
                                
Sizzling Platter LLC(8)  Restaurant & Franchise  Senior Secured Note (12.25% )   4/15/2016    10,867,000    11,083,728    11,356,015    2.7%
               10,867,000    11,083,728    11,356,015      
                                
Strike Holdings LLC  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)   8/31/2017    16,018,032    16,018,032    16,979,114    4.0%
               16,018,032    16,018,032    16,979,114      
                                
Taylored Freight Services LLC  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 2.00% PIK, 1.50% LIBOR Floor)   11/1/2017    14,164,938    14,164,938    14,246,030    3.4%
               14,164,938    14,164,938    14,246,030      
                                
Tempel Steel Company(8)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (12.00%)   8/15/2016    12,000,000    11,815,899    11,520,000    2.7%
               12,000,000    11,815,899    11,520,000      
                                
Tenere Acquisition Corp.  Diversified/Conglomerate Manufacturing  Senior Secured First Lien Term Loan (11.00% Cash, 2.00% PIK)   12/15/2017    10,853,764    10,853,764    10,974,026    2.6%
               10,853,764    10,853,764    10,974,026      

 

F-6
 

 

The Great Atlantic & Pacific Tea Company, Inc.  Grocery  Senior Secured First Lien Term Loan (LIBOR + 9.00%, 2.00% LIBOR Floor)   3/13/2017    7,897,491    7,897,491    8,055,441    1.9%
               7,897,491    7,897,491    8,055,441      
                                
Tower International, Inc.(8)  Automobile  Senior Secured Note (10.63%)   9/1/2017    725,000    737,092    761,250    0.2%
               725,000    737,092    761,250      
                                
Travelclick, Inc.  Hotels, Motels, Inns and Gaming  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.25% LIBOR Floor)   3/26/2018    15,000,000    15,000,000    15,150,000    3.6%
               15,000,000    15,000,000    15,150,000      
                                
U.S. Well Services LLC (9)  Oil and Gas  Senior Secured Note (14.50%)   2/15/2017    21,558,808    21,423,536    21,593,509    5.1%
      Warrants to purchase 3.48% of the outstanding common membership interests   2/15/2017    N/A    11,370    326,467    0.1%
               21,558,808    21,434,906    21,919,976      
                                
United Restaurant Group L.P.  Restaurant & Franchise  Senior Secured Second Lien Term Loan (LIBOR + 11.50% Cash, 3.50% PIK)   12/31/2016    10,736,470    10,736,470    10,712,683    2.5%
               10,736,470    10,736,470    10,712,683      
                                
United Road Towing Inc.  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan
(11.50% Cash, 3.50% PIK)
   10/21/2016    15,835,461    15,835,461    14,378,553    3.4%
               15,835,461    15,835,461    14,378,553      
                                
Velum Global Credit Management LLC  Finance  Senior Secured First Lien Term Loan (15.00%)   3/31/2014    8,300,000    8,346,788    8,300,000    2.0%
               8,300,000    8,346,788    8,300,000      
                                
Water Capital USA, Inc.  Finance  Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)   1/3/2015    24,704,104    24,704,104    24,704,104    5.9%
               24,704,104    24,704,104    24,704,104      
                                
Westport Axle Corp  Automobile  Senior Secured First Lien Term Loan (11.50% Cash, 1.50% PIK)   11/17/2018    19,011,875    19,011,875    19,011,875    4.5%
               19,011,875    19,011,875    19,011,875      
                                
YRCW Receivables LLC  Cargo Transport  Senior Secured Second Lien Term Loan (LIBOR + 9.75%, 1.50% LIBOR Floor)   9/30/2014    4,860,416    4,775,907    4,847,492    1.1%
               4,860,416    4,775,907    4,847,492      
                                
Subtotal Non-Controlled / Non-Affiliated Investments       $689,755,587   $ 686,448,197   $677,350,840      
                                
Affiliated Investments:                               
                                
Cymax Stores, Inc.(9)  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)   8/1/2015    8,892,509    8,448,458    8,350,911    2.0%
      190 Class B Common Units (5)        N/A    678,154    673,154    0.2%
                                
Subtotal Affiliated Investments          $8,892,509   $9,126,612   $9,024,065      
                                
Total Investments, June 30, 2013          $698,648,096   $695,574,809   $686,374,905    163.3%

 

 

 

 

(1)All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada.
(2)Par amount includes accumulated PIK interest and is net of repayments.
(3)Percentage is based on net assets of $420,246,094 as of June 30, 2013.
(4)Investment is held via participation agreements with affiliated entities (See note 7).
(5)190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.
(6)Fee note is a zero coupon note, which is considered as a senior secured first lien term loan due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.
(7)The entire commitment was unfunded at June 30, 2013. As such, no interest is being earned on this investment.
(8)Securities are exempt from registration under Rule 144a of the Securities Act of 1933. These securities represent $56.0 million and 13.3% of net assets as of June 30, 2013 and are considered restricted.
(9)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended.
(10)Investment was on PIK non-accrual status as of June 30, 2013.

 

See accompanying notes to consolidated financial statements.

 

F-7
 

  

Medley Capital Corporation

 

Consolidated Schedule of Investments

 

September 30, 2012(8)

 

Company (1)  Industry  Type of
Investment
  Maturity   Par Amount (2)   Cost   Fair Value   % of
Net Assets (3)
 
Non-Controlled/ Non-Affiliated Investments:                         
                                
American Gaming Systems LLC  Hotels, Motels, Inns and Gaming  Senior Secured First Lien Term Loan (LIBOR + 10.00%, 1.50% LIBOR Floor)   8/15/2016   $9,509,615   $9,509,615   $9,509,615    3.3%
               9,509,615    9,509,615    9,509,615      
                                
Atkore International, Inc. (7)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (9.88%)   1/1/2018    5,000,000    4,825,086    4,875,000    1.7%
               5,000,000    4,825,086    4,875,000      
                                
Aurora Flight Sciences Corporation  Aerospace & Defense  Senior Secured Second Lien Term Loan (11.25% Cash, 2.00% PIK)   3/16/2014    15,490,782    15,490,782    15,490,782    5.3%
               15,490,782    15,490,782    15,490,782      
                                
BayDelta Maritime LLC  Cargo Transport  Senior Secured First Lien Term Loan (11.25% Cash, 2.50% Deferred)   6/30/2016    6,669,293    6,547,553    6,669,293    2.3%
      Fee Note (14.88%)(6)   6/30/2016    250,000    148,611    148,611    0.1%
      Warrants to purchase 10% of the outstanding equity   6/30/2016    N/A    25,000    216,387    0.1%
               6,919,293    6,721,164    7,034,291      
                                
Bennu Glass, Inc.  Containers, Packaging and Glass  Senior Secured First Lien Term Loan (15.00%)   4/30/2013    10,000,000    10,062,296    10,000,000    3.4%
               10,000,000    10,062,296    10,000,000      
                                
Brantley Transportation LLC  Oil and Gas  Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 2.50% PIK, 1.50% LIBOR Floor)   8/2/2017    10,920,360    10,920,360    10,920,360    3.8%
               10,920,360    10,920,360    10,920,360      
                                
Calloway Laboratories, Inc.  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (10.00% Cash , 2.00% PIK)   9/30/2014    20,041,029    19,973,752    19,743,006    6.8%
      Warrants to purchase 2.4% of the outstanding equity   9/30/2014    N/A    68,433    68,433    0.0%
               20,041,029    20,042,185    19,811,439      
                                
Caregiver Services, Inc.  Healthcare, Education and Childcare  Senior Secured Second Lien Term Loan (12.45% Cash, 2.00% PIK)   12/29/2017    15,053,384    15,053,384    15,053,384    5.2%
               15,053,384    15,053,384    15,053,384      
                                
Exide Technologies (7)  Machinery (Nonagriculture, Nonconstruction, Nonelectric)  Senior Secured Note (8.63%)   2/1/2018    10,000,000    8,669,210    8,662,500    3.0%
               10,000,000    8,669,210    8,662,500      
                                
Flexera Software LLC  Electronics  Senior Secured First Lien Term Loan (LIBOR + 6.25%,
1.25% LIBOR Floor)
   9/30/2017    3,920,000    3,920,000    3,920,000    1.3%
      Senior Secured Second Lien Term Loan (LIBOR + 9.75%, 1.25% LIBOR Floor)   9/30/2018    6,000,000    6,000,000    5,819,983    2.0%
               9,920,000    9,920,000    9,739,983      
                                
Geneva Wood Fuels LLC (4)   Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured First Lien Term Loan (LIBOR + 13.00%, 2.50% LIBOR Floor)   12/31/2012    7,500,000    7,500,000    6,937,502    2.4%
               7,500,000    7,500,000    6,937,502      
                                
Gulf Coast Asphalt Company, Inc. (7)  Oil and Gas  Senior Secured Second Lien Term Loan (LIBOR + 11.00% Cash, 1.00% LIBOR Floor, 3.50% PIK)   6/14/2017    11,180,191    11,180,191    11,180,191    3.9%
               11,180,191    11,180,191    11,180,191      
                                
Hilex Poly Co.  Chemicals, Plastics and Rubber  Senior Secured First Lien Term Loan (LIBOR + 9.25%, 2.00% LIBOR Floor)   11/19/2015    1,533,848    1,533,848    1,533,848    0.5%
               1,533,848    1,533,848    1,533,848      
                                
Hoffmaster Group, Inc.  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan (LIBOR + 9.50% Cash, 1.50% LIBOR Floor)   1/3/2019    6,000,000    6,000,000    5,935,052    2.0%
      Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.25% LIBOR Floor)   1/3/2019    2,000,000    1,980,714    1,913,402    0.7%
               8,000,000    7,980,714    7,848,454      
                                
Insight Pharmaceuticals LLC  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan (LIBOR + 11.75%, 1.50% LIBOR Floor)   8/25/2017    10,000,000    10,000,000    10,000,000    3.4%
               10,000,000    10,000,000    10,000,000      
                                
Integra Telecom, Inc. (7)  Telecommunications  Senior Secured Note (10.75%)   4/15/2016    7,250,000    7,113,784    7,113,784    2.5%
               7,250,000    7,113,784    7,113,784      
                                
Kelley Amerit Holdings, Inc.  Business Services  Senior Secured Second Lien Term Loan (LIBOR + 9.70% Cash, 1.00% LIBOR Floor, 1.50% PIK)   12/22/2016    9,242,940    9,242,940    9,242,940    3.2%
               9,242,940    9,242,940    9,242,940      
                                
Meridian Behavioral Health LLC  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan A (12.00% Cash, 2.00% PIK)   11/14/2016    6,107,870    5,635,807    6,199,931    2.1%
      Senior Secured First Lien Term Loan B (12.00%)   11/14/2016    3,000,000    3,000,000    2,830,434    1.0%
      Warrants to purchase 8% of the outstanding membership units   11/14/2016    N/A    536,296    786,118    0.3%
               9,107,870    9,172,103    9,816,483      
                                
Modern VideoFilm, Inc. (7)  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 3.00% PIK, 1.50% LIBOR Floor)   9/25/2017    16,000,000    15,522,547    15,522,547    5.4%
      Warrants to purchase 5% of the outstanding equity   9/25/2017    N/A    480,000    480,000    0.2%
               16,000,000    16,002,547    16,002,547      
                                
Prestige Industries LLC  Business Services  Senior Secured Second Lien Term Loan (10.00% Cash, 3.00% PIK)   1/31/2017    5,849,374    5,709,063    5,537,365    1.9%
      Warrants to purchase 3.04% of the outstanding common units   1/31/2017    N/A    151,855    119,406    0.0%
               5,849,374    5,860,918    5,656,771      

 

F-8
 

 

RCS Management Corporation & Specialized Medical Services, Inc.  Diversified/Conglomerate Service  Senior Secured Second Lien Term Loan ( LIBOR + 11.00% Cash, 1.50% LIBOR Floor, 0.50% PIK)   9/23/2015    19,346,687    19,346,687    19,346,687    6.7%
               19,346,687    19,346,687    19,346,687      
                                
Renaissance Learning LLC  Healthcare, Education and Childcare  Senior Secured First Lien Term Loan (LIBOR + 6.25%,
1.50% LIBOR Floor)
   10/19/2017    2,970,000    2,865,919    2,865,919    1.0%
      Senior Secured Second Lien Term Loan (LIBOR + 10.50%, 1.50% LIBOR Floor)   10/19/2018    2,000,000    1,927,002    1,927,002    0.7%
               4,970,000    4,792,921    4,792,921      
                                
Revstone Aero LLC  Aerospace & Defense  Senior Secured First Lien Term Loan (LIBOR + 12.00% Cash, 3.00% PIK)   6/30/2017    15,117,806    14,901,459    14,901,459    5.2%
      Fee Note (17.38%) (6)   6/30/2017    500,000    233,561    233,561    0.1%
               15,617,806    15,135,020    15,135,020      
                                
Santa Cruz Nutritional (7)  Personal and Nondurable Consumer
Products (Manufacturing Only)
  Senior Secured Second Lien Term Loan (14.50%)   5/25/2015    15,000,000    15,000,000    15,000,000    5.2%
               15,000,000    15,000,000    15,000,000      
                                
Sequel Youth and Family Services LLC  Healthcare, Education and Childcare  Senior Secured Second Lien Term Loan (14.00%)   12/23/2014    10,500,000    10,500,000    10,500,000    3.6%
               10,500,000    10,500,000    10,500,000      
                                
Sizzling Platter LLC (7)  Restaurant & Franchise  Senior Secured Note (12.25% )   4/15/2016    3,630,000    3,529,636    3,757,050    1.3%
               3,630,000    3,529,636    3,757,050      
                                
Strike Holdings LLC  Leisure, Amusement, Motion Pictures, Entertainment  Senior Secured First Lien Term Loan (LIBOR + 10.00% Cash, 2.00% PIK, 1.00% LIBOR Floor)   8/31/2017    15,777,126    15,777,126    15,777,126    5.4%
               15,777,126    15,777,126    15,777,126      
                                
Tempel Steel Company (7)  Mining, Steel, Iron and Nonprecious Metals  Senior Secured Note (12.00%)   8/15/2016    12,000,000    11,781,691    11,879,995    4.1%
               12,000,000    11,781,691    11,879,995      
                                
The Great Atlantic & Pacific Tea Company, Inc. (7)  Grocery  Senior Secured First Lien Term Loan (LIBOR + 9.00%, 2.00% LIBOR Floor)   3/13/2017    7,960,000    7,960,000    7,960,000    2.8%
               7,960,000    7,960,000    7,960,000      
                                
Tower International, Inc. (7)  Automobile  Senior Secured Note (10.63%)   9/1/2017    6,101,000    6,216,917    6,216,916    2.1%
               6,101,000    6,216,917    6,216,916      
                                
U.S. Well Services LLC (7)  Oil and Gas  Senior Secured Note (14.50% PIK until 8/15/12, 14.50%  Cash therafter)   2/15/2017    13,393,941    13,244,727    13,244,727    4.6%
      Warrants to purchase 2.29% of the outstanding common membership interests   2/15/2017    N/A    10,697    -    0.0%
               13,393,941    13,255,424    13,244,727      
                                
United Restaurant Group L.P.  Restaurant & Franchise  Senior Secured Second Lien Term Loan (LIBOR + 11.50% Cash, 3.50% PIK)   12/31/2016    10,455,664    10,455,664    10,246,510    3.5%
               10,455,664    10,455,664    10,246,510      
                                
United Road Towing Inc.  Personal, Food and Miscellaneous Services  Senior Secured Second Lien Term Loan (11.50% Cash, 3.50% PIK)   10/21/2016    15,421,293    15,421,293    14,997,196    5.2%
               15,421,293    15,421,293    14,997,196      
                                
Velum Global Credit Management LLC  Finance  Senior Secured First Lien Term Loan (15.00%)   3/31/2014    10,000,000    10,106,822    10,000,000    3.5%
               10,000,000    10,106,822    10,000,000      
                                
Water Capital USA, Inc. (7)  Finance  Senior Secured First Lien Term Loan (7.00% Cash, 7.00% PIK)   1/3/2013    23,437,803    23,437,803    23,437,803    8.1%
               23,437,803    23,437,803    23,437,803      
                                
Welocalize, Inc. (7)  Business Services  Senior Secured First Lien Term Loan A (LIBOR + 8.00%, 2.00% LIBOR Floor)   11/19/2015    4,716,740    4,716,740    4,716,740    1.6%
      Senior Secured First Lien Term Loan B (LIBOR + 9.00%, 2.00% LIBOR Floor, 1.25% PIK)   11/19/2015    5,478,728    5,478,728    5,478,728    1.9%
               10,195,468    10,195,468    10,195,468      
                                
YRCW Receivables LLC  Cargo Transport  Senior Secured Second Lien Term Loan (LIBOR + 9.75%, 1.50% LIBOR Floor)   9/30/2014    4,897,519    4,768,454    4,824,064    1.7%
               4,897,519    4,768,454    4,824,064      
                                
Subtotal Non-Controlled / Non-Affiliated Investments       $397,222,993   $394,482,053   $393,741,357      
                                
Affiliated Investments:                               
                                
Cymax Stores, Inc.  Home and Office Furnishings, Housewares, and Durable Consumer Products  Senior Secured First Lien Term Loan (10.00% Cash, 5.00% PIK)   8/1/2015    8,562,329    8,000,442    7,534,852    2.6%
      190 Class B Common Units (5)        N/A    678,154    673,154    0.2%
                                
Subtotal Affiliated Investments          $8,562,329   $8,678,596   $8,208,006      
                                
Total Investments, September 30, 2012          $405,785,322   $403,160,649   $401,949,363    138.9%

 

 

 

(1)All of our investments are domiciled in the United States except for Cymax Stores, Inc. which is domiciled in Canada.
(2)Par amount includes accumulated PIK interest and is net of repayments.
(3)Percentage is based on net assets of $289,339,231 as of September 30, 2012.
(4)Investment is held via participation agreements with affiliated entities (See note 7).
(5)190 Class B Common Units represent 19% ownership of Cymax Stores, Inc.
(6)Fee note is a zero coupon note, which is considered as a senior secured first lien term loan due at the earlier of prepayment or maturity and stated interest rate represents an effective interest rate.
(7)An affiliated fund that is managed by an affiliate of MCC Advisors LLC also holds an investment in this security.
(8)The September 30, 2012 presentation has been revised to conform to the current period presentation.

 

See accompanying notes to consolidated financial statements.

 

F-9
 

  

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements

June 30, 2013

(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 our investment adviser, MCC Advisors LLC (“MCC Advisors”) a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to an investment management agreement.

 

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

 

On January 20, 2011, the Company consummated its IPO, sold 11,111,112 shares of common stock at $12.00 per share and commenced its operations and investment activities. On February 24, 2011, an additional 450,000 shares of common stock were issued at a price of $12.00 per share pursuant to the partial exercise of the underwriters’ over-allotment option. 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 March 26, 2013, our wholly-owned subsidiary, Medley SBIC LP (“SBIC LP“), a Delaware limited partnership, received a license from Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Company Act of 1958.

 

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

 

Note 2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, MOF I BDC and SBIC LP. All references made to the “Company,” “we,” and “us” herein include Medley Capital Corporation and its consolidated subsidiaries, except as stated otherwise. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended September 30, 2012, which was filed with the U.S. Securities and Exchange Commission on December 10, 2012. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2013.

 

F-10
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Cash and Cash Equivalents

 

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

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Organizational Expenses

 

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

 

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.

 

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

 

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

 

 

Deferred Financing Costs

 

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

 

Indemnification

 

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

 

Revenue Recognition

 

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

 

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to such fees. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Other fee income for the three and nine months ended June 30, 2013 was approximately $3.6 million and $10.0 million, respectively. For the three and nine months ended June 30, 2012 other fee income was approximately $1.8 million and $4.5 million, respectively.

 

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

 

Administrative agent fee received by the Company are recorded as income when the services are rendered.

 

F-11
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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, 2013, the Company earned approximately $2.4 million and $6.5 million in PIK, respectively. For the three and nine months ended June 30, 2012, the Company earned approximately $1.0 million and $2.5 million in PIK interest, respectively.

 

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

 

Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although 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, 2013, one portfolio company was on PIK non-accrual status with a fair value of approximately $4.1 million, or 0.6% of the fair value of our portfolio. At September 30, 2012, we had no portfolio company on non-accrual status.

 

Investment Classification

 

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

 

Valuation of Investments

 

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

 

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

 

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

 

F-12
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

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

 

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

 

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

 

Management reviews preliminary valuations and their own independent assessment;

 

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

 

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

 

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

 

Fair Value of Financial Instruments

 

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

 

Federal Income Taxes

  

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

 

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the calendar year ended December 31, 2011, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and subsequently paid $35,501 in federal excise taxes. There is no provision for federal excise tax for 2012 accrued at June 30, 2013. 

 

F-13
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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, 2013. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

 

Segments

 

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

 

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

 

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

 

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

 

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

 

Note 3. Investments

 

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

 

F-14
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

   Investments at
Amortized
Cost
   Percentage   Investments at
Fair Value
   Percentage 
Senior Secured First Lien Term Loans  $336,222    48.3%  $327,836    47.8%
Senior Secured Second Lien Term Loans   272,449    39.2    271,441    39.5 
Senior Secured Notes   84,841    12.2    84,306    12.2 
Unsecured Debt   252    0.1    252    0.1 
Equity/Warrants   1,811    0.2    2,540    0.4 
Total  $695,575    100.0%  $686,375    100.0%

  

The composition of our investments as of September 30, 2012 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Investments at
Amortized
Cost
   Percentage   Investments at
Fair Value
   Percentage 
Senior Secured First Lien Term Loans  $187,753    46.6%  $186,841    46.5%
Senior Secured Second Lien Term Loans   158,076    39.2    157,015    39.0 
Senior Secured Notes   55,381    13.7    55,750    13.9 
Equity/Warrants   1,951    0.5    2,343    0.6 
Total  $403,161    100.0%  $401,949    100.0%

 

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

 

   Investments at
Fair Value
   Percentage 
Personal, Food and Miscellaneous Services  $66,862    9.8%
Business Services   59,173    8.6 
Healthcare, Education and Childcare   56,267    8.2 
Personal and Nondurable Consumer Products (Manufacturing Only)   48,418    7.1 
Automobile   44,773    6.5 
Mining, Steel, Iron and Nonprecious Metals   43,221    6.3 
Finance   41,645    6.1 
Retail Stores   39,297    5.7 
Oil and Gas   36,515    5.3 
Restaurant & Franchise   31,943    4.7 
Aerospace & Defense   31,775    4.6 
Leisure, Amusement, Motion Pictures, Entertainment   26,411    3.8 
Hotels, Motels, Inns and Gaming   25,943    3.8 
Diversified/Conglomerate Service   25,644    3.7 
Diversified/Conglomerate Manufacturing   23,474    3.4 
Beverage, Food and Tobacco   16,668    2.4 
Telecommunications   12,481    1.8 
Cargo Transport   12,167    1.8 
Containers, Packaging and Glass   12,000    1.7 
Home and Office Furnishings, Housewares, and Durable Consumer Products   9,024    1.3 
Grocery   8,055    1.2 
Electronics   7,950    1.2 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   6,669    1.0 
Total  $686,375    100.0%

 

F-15
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Healthcare, Education and Childcare  $59,974    14.9%
Oil and Gas   35,345    8.8 
Finance   33,438    8.3 
Leisure, Amusement, Motion Pictures, Entertainment   31,780    7.9 
Aerospace & Defense   30,626    7.6 
Personal and Nondurable Consumer Products (Manufacturing Only)   29,786    7.4 
Business Services   25,095    6.2 
Personal, Food and Miscellaneous Services   24,997    6.2 
Diversified/Conglomerate Service   19,347    4.8 
Mining, Steel, Iron and Nonprecious Metals   16,755    4.2 
Restaurant & Franchise   14,003    3.5 
Cargo Transport   11,858    3.0 
Containers, Packaging and Glass   10,000    2.5 
Electronics   9,740    2.4 
Hotels, Motels, Inns and Gaming   9,510    2.4 
Machinery (Nonagriculture, Nonconstruction, Nonelectric)   8,662    2.2 
Home and Office Furnishings, Housewares, and Durable Consumer Products   8,208    2.0 
Grocery   7,960    2.0 
Telecommunications   7,114    1.8 
Automobile   6,217    1.5 
Chemicals, Plastics and Rubber   1,534    0.4 
Total  $401,949    100.0%

 

The Company invests in portfolio companies principally located in North America. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business. The following table shows the portfolio composition by geographic location at fair value at June 30, 2013 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Midwest  $225,515    32.9%
West   177,409    25.9 
Southwest   102,239    14.9 
Northeast   62,570    9.1 
Mid-Atlantic   59,895    8.7 
Southeast   49,723    7.2 
International   9,024    1.3 
Total  $686,375    100.0%

 

The following table shows the portfolio composition by geographic location at fair value at September 30, 2012 (dollars in thousands):

 

   Investments at
Fair Value
   Percentage 
Midwest  $119,473    29.7%
West   101,098    25.2 
Mid-Atlantic   59,549    14.8 
Northeast   42,526    10.6 
Southeast   35,750    8.9 
Southwest   35,345    8.8 
International   8,208    2.0 
Total  $401,949    100.0%

  

Transactions With Affiliated Companies

 

During the nine months ended June 30, 2013, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

Name of Investment   Fair Value at
September 30, 2012
    Purchases (Sales)
of/Advances
(Distributions) to
Affiliates
    Transfers
In/(Out) of
Affiliates
    Income
Earned
    Fair Value at
June 30, 2013
    Capital Loss  
Non-Controlled Affiliates                                                
Cymax Stores, Inc.   $ 8,208,006     $     $     $ 1,112,503     $ 9,024,065     $  
Total Non-Controlled Affiliates   $ 8,208,006     $     $     $ 1,112,503     $ 9,024,065     $  

  

F-16
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

During the nine months ended June 30, 2012, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows:

 

Name of Investment  Fair Value at
September 30, 2011
   Purchase (Sales)
of/Advances
(Distributions) to
Affiliates
   Transfers
In/(Out) of
Affiliates
   Income
Earned
   Fair Value at
June 30, 2012
   Capital Loss 
Non-Controlled Affiliates                              
Cymax Stores, Inc. 1  $   $2,419,901   $6,782,696   $459,390   $8,058,646   $ 
Allied Cash Holdings LLC 2   20,000,000        (20,000,000)   1,191,205         
Applied Natural Gas Fuels, Inc. 2   15,663,762        (15,663,762)   698,588         
Bennu Glass, Inc. 2   10,157,220        (10,133,291)   347,887         
Total Non-Controlled Affiliates  $45,820,982   $2,419,901   $(39,014,357)  $2,697,070   $8,058,646   $ 

   

1Became a non-controlled affiliate on January 30, 2012.

2Became a non-controlled/non-affiliated investment on February 23, 2012.

  

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, 2013 and June 30, 2012, respectively. Transfers in/(out) of affiliates represents the fair value for the month an investment became or was removed as an affiliated investment. Income received from affiliates is included in total investment income on the consolidated statements of operations for the nine months ended June 30, 2013 and June 30, 2012, respectively.

 

Loan Participations

 

In August of 2012 and during the six months ended June 30, 2013, the Company sold portions of certain investments via participation agreements in an aggregate amount of approximately $47.2 million. Under the terms of the participation agreements, the Company will make periodic payments to the sub-participant equal to the sub-participant's proportionate share of any principal and interest payments received by the Company from the underlying investee companies.

  

Note 4. Fair Value Measurements

 

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

  

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

 

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

 

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

 

F-17
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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

 

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

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $   $   $327,836   $327,836 
Senior Secured Second Lien Term Loans           271,441    271,441 
Senior Secured Notes       6,669    77,637    84,306 
Unsecured Debt           252    252 
Equity/Warrants           2,540    2,540 
Total  $   $6,669   $679,706   $686,375 

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2012 (dollars in thousands):

 

   Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $   $   $186,841   $186,841 
Senior Secured Second Lien Term Loans           157,015    157,015 
Senior Secured Notes       13,537    42,213    55,750 
Equity/Warrants           2,343    2,343 
Total  $   $13,537   $388,412   $401,949 

  

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, 2013 (dollars in thousands):

 

   Senior
Secured
First
Lien Term
Loans
   Senior
Secured
Second
Lien Term
Loans
   Senior
Secured
Notes
   Unsecured
Debt
   Equities /
Warrants
   Total 
Balance as of September 30, 2012  $186,841   $157,015   $42,213   $   $2,343   $388,412 
Purchases and other adjustments to cost   24,931    77,652    49,544    2    4    152,133 
Originations   216,991    59,500        250        276,741 
Sales   (47,203)       (3,053)       (144)   (50,400)
Settlements   (46,367)   (22,843)   (13,314)           (82,524)
Net realized gains (losses) from investments   118    64    770            952 
Net change in unrealized gains (losses)   (7,475)   53    1,477        337    (5,608)
Balance as of June 30, 2013  $327,836   $271,441   $77,637   $252   $2,540   $679,706 

 

F-18
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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, 2012 (dollars in thousands):

 

   Senior
Secured
First
Lien Term
Loans
   Senior
Secured
Second
Lien Term
Loans
   Senior
Secured
Notes
   Equities /
Warrants
   Total 
Balance as of September 30, 2011  $107,255   $79,415   $11,832   $705   $199,207 
Purchases and other adjustments to cost   18,184    13,737    23,193        55,114 
Issuance   52,420    82,970        1,361    136,751 
Sales                    
Settlements   (7,352)   (15,915)   (3,370)       (26,637)
Net realized gains (losses) from investments   (11)   (7)   111        93 
Net change in unrealized gains (losses)   (291)   (936)   (48)   (159)   (1,434)
Balance as of June 30, 2012  $170,205   $159,264   $31,718   $1,907   $363,094 

 

Net change in unrealized loss related to investments still held as of June 30, 2013 and 2012, was approximately $8.8 million and $1.7 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.

 

No transfers between levels have occurred during the periods presented.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in/out of the level 3 category as of the beginning of the quarter in which the reclassifications occur.

  

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

 

    Fair value     Valuation
techniques
  Unobservable input   Range (weighted
average)
 
Senior Secured First Lien Term Loans    323,111     Market approach   Market yield     10.3% - 42.4 %
                      (14.6 %)
                         
Senior Secured First Lien Term Loans   $ 4,090     Cost recovery   EV coverage     N/A  
                         
Senior Secured First Lien Term Loans - Fee Note    635     Market approach   Market yield     14.9% - 20.0 %
                       (18.7 %)
                         
Senior Secured Second Lien Term Loans    271,441     Market approach   Market yield     9.2% - 19.0 %
                      (12.4 %)
                         
Senior Secured Notes    77,637     Market approach   Market yield     8.7% - 14.4 %
                      (12.4 %)
                         
Unsecured Debt   $ 252     Market approach   Market Yield     16.0 %
                         
Equity/Warrants   $ 2,540     Enterprise valuation analysis   EBITDA multiple (1)     0.2x – 6.5x (3.9x )
                         
Total   $ 679,706                  

  

F-19
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The following table presents the quantitative information about level 3 fair value measurements of our investments, as of September 30, 2012 (dollars in thousands):

 

    Fair value     Valuation
techniques
  Unobservable input   Range (weighted
average)
 
Senior Secured First lien Term Loan    186,841     Market approach   Market yield     7.5% - 21.0
                      (14.1 %)
                         
Senior Secured Second Lien Term Loan    157,015     Market approach   Market yield     11.3% - 16.0
                      (13.9 %)
                         
Senior Secured Notes    42,213     Market approach   Market yield     10.1% - 14.9
                      (12.5 %)
                         
Equity/Warrants   $ 2,343     Enterprise valuation analysis   EBITDA multiple (1)     0.2x – 6.0x (4.0x )
                         
Total   $ 388,412                  

  

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

 

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

 

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

 

Note 5. Borrowings

 

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

 

Credit Facility

 

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

 

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

 

Amendment No. 1 to the Revolving Facility revised the Revolving Facility, to, among other things, increase the amount available for borrowing from $125.0 million to $132.5 million; permit the Term Loan Facility; and extend the maturity date from August 4, 2015 to August 31, 2016. Amendment No. 1 to the Revolving Facility also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR + 3.75% per annum, with a 1% LIBOR floor, to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, LIBOR plus 3.75% per annum, with no LIBOR floor, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, LIBOR plus 3.25% per annum, with no LIBOR floor, and (b) alternative base rate loans based, or ABR, on 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5%, LIBOR for a period of three months plus 1% or the ABR Floor of 2% to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, 2.25% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%. In addition to the stated interest expense, the Company is required to pay a commitment fee of between 0.50% and 1.00% depending on the usage level on any unused portion of the Revolving Facility. A significant percentage of our total assets have been pledged under the Revolving Facility to secure our obligations thereunder. The Revolving Facility contains commercially reasonable limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Revolving Facility also includes certain commercially reasonable requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder.

 

F-20
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

On September 25, 2012, the Company closed $5.0 million of additional commitment to the Revolving Facility resulting in total commitments to the Revolving Facility of $137.5 million.

 

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

 

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

 

Amendment No. 1 to the Term Loan Facility revised the Term Loan Facility, to, among other things, increase the amount available for borrowing from $55.0 million to $80.5 million. The Term Loan Facility matures on August 31, 2017 and bears interest at LIBOR plus 4.00% (with no LIBOR Floor, rounded upwards, if necessary, to the next 1/16 of 1%).

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2013, $3.7 million of financing costs related to the Revolving Facility and $2.0 million of financing costs related to the Term Loan Facility have been capitalized and are being amortized over their respective terms. For the nine months ended June 30, 2013, we recorded $5.7 million of interest and financing expenses related to the Facilities, of which $0.8 million was attributable to interest related to the Revolving Facility, $1.2 million to commitment fees related to the Revolving Facility, $2.9 million to interest related to the Term Loan Facility and $0.8 million of amortization of deferred financing costs related to the Facilities. As of June 30, 2013, there was $54.7 million and $115.0 million outstanding under the Revolving Facility and Term Loan Facility, respectively. For the nine months ended June 30, 2013, our weighted average outstanding debt balance and our weighted average stated interest rate on the Facilities were $118.1 million and 4.21%, respectively. As of June 30, 2012, $2.0 million of financing costs related to the Revolving Facility had been capitalized and are being amortized over its respective terms. For the nine months ended June 30, 2012, we recorded $2.1 million of interest and financing expenses related to the facility, of which, $1.3 million was attributable to interest related to the Revolving Facility, $0.4 million to commitment fees related to the Revolving Facility and $0.4 million of amortization of deferred financing costs related to the Revolving Facility. As of June 30, 2012, there was $108.7 million outstanding under the Revolving Facility. For the nine months ended June 30, 2012, our weighted average outstanding debt balance and our weighted average stated interest rate on the Facilities were $35.5 million and 4.9%, respectively.

 

F-21
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Unsecured Notes

 

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

 

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

 

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

 

As of June 30, 2013, the carrying amount and fair value of the 2019 Notes was $40.0 million and $41.2 million, respectively. The carrying amount and fair value of the 2023 Notes was $63.5 million and $62.2 million, respectively. The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Unsecured Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. At June 30, 2013 the Unsecured Notes would be deemed to be level 1, as defined in Note 4.

 

As of June 30, 2013, $1.5 million of financing costs related to the 2019 Notes and $2.2 million of financing costs related to the 2023 Notes have been deferred and are being amortized over their respective terms. For the nine months ended June 30, 2013, we recorded $3.4 million of interest and financing expenses related to the Unsecured Notes, of which $2.1 million to interest related to the 2019 Notes, $1.1 million to interest related to the 2023 Notes and $0.2 million of amortization of deferred financing costs related to the Unsecured Notes. As of June 30, 2013, $40.0 million and $63.5 million in aggregate principal amount of the 2019 Notes and the 2023 notes were outstanding, respectively. For the nine months ended June 30, 2013, our weighted average outstanding debt balance and our weighted average stated interest rate on the Unsecured Notes were $64.3 million and 6.76%, respectively. As of June 30, 2012, $1.5 million of financing costs related to the 2019 Notes had been capitalized and are being amortized over their respective terms. For the nine months ended June 30, 2012, we recorded $0.8 million of interest expense and $57,700 of amortization of deferred financing costs related to the Unsecured Notes. As of June 30, 2012, $40.0 million in aggregate principal amount of the 2019 Notes were outstanding. For the nine months ended June 30, 2012, our weighted average outstanding debt balance and our weighted average stated interest rate on the Unsecured Notes were $14.9 million and 7.10%, respectively.

 

SBA Debentures

  

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

 

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

 

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

 

F-22
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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

 

As of June 30, 2013, SBIC LP had $50.0 million in regulatory capital and had $5.0 million SBA-guaranteed debentures outstanding with an interim interest rate of 1.3%.

 

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

 

For the three and nine months ended June 30, 2013, we recorded $20,177 and $20,177, respectively, of interest and financing expenses related to the SBA guaranteed debenture, of which $1,114 and $1,114, respectively, was attributable to interest expense and $19,063 and $19,063, respectively, of amortization of commitment fee and upfront fees. The weighted average interest rate for all SBA-guaranteed debentures as of June 30, 2013 was 1.3%.

 

Note 6. Agreements

 

Investment Management Agreement

 

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

 

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

 

The incentive fee consists of the following two parts:

 

The first, payable quarterly in arrears is based on our pre-incentive fee net investment income for the immediately preceding calendar quarter and will be 20.0% of the amount, if any, by which our pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate, measured as a percentage value of the preceding calendar quarter’s net assets and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MCC Advisers receives no incentive fee until our net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, our investment adviser will receive 20% of our pre-incentive fee net investment income as if the hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter including the base management fee, expenses payable under the administration agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation, unrealized capital depreciation or excise tax expense. Since the hurdle rate is fixed, as interest rates rise, it will be easier for the MCC Advisors to surpass the hurdle rate and receive an incentive fee based on net investment income.

 

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 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 are previously made to MCC Advisers.

 

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

 

F-23
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

For the three and nine month periods ended June 30, 2013, the Company incurred net base management fees to MCC Advisors of $3.0 million and $7.6 million, respectively. For the three and nine month periods ended June 30, 2013, we incurred $3.0 million and $8.0 million in incentive fees related to pre-incentive fee net investment income, respectively. For the three and nine months ended June 30, 2012, the Company incurred net base management fees payable to MCC Advisors of $1.5 million and $3.7 million, respectively. For the three and nine months ended June 30, 2012, the Company incurred $1.6 million and $4.1 million in incentive fees related to pre-incentive fee net investment income, respectively.

 

Administration Agreement

 

On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. Pursuant to this agreement, MCC Advisors furnishes us with office facilities and equipment, clerical, bookkeeping, recordkeeping and other administrative services related to the operations of the Company. We reimburse MCC Advisors for our allocable portion of overhead and other expenses incurred by our administrator in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of certain of our officers and their respective staff. From time to time, our administrator may pay amounts owed by us to third-party service providers and we will subsequently reimburse our administrator for such amounts paid on our behalf. For the three and nine months ended June 30, 2013, we incurred $0.7 million and $1.8 million in administrator expenses, respectively. For the three and nine months ended June 30, 2012, we incurred $0.4 million and $1.1 million in administrator expenses, respectively. 

 

Note 7. Related Party Transactions

 

Loan Participations

 

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

 

The Company holds its investment in Geneva Wood Fuels LLC through a participation agreement with an affiliated entity, which represents 0.6% of the Company’s investments as of June 30, 2013. By virtue of owning loans through a participation agreement, the Company has a contractual relationship with the affiliate, not the borrower. As a result, the Company is subject to the credit risk of the affiliate as well as that of the borrower. As of June 30, 2013, the principal amount related to this loan participation was $8.2 million and for the three and nine months ended June 30, 2013 total investment income related to this loan participation was $0.1 million and $0.6 million, respectively. For the three and nine months ended June 30, 2012, total investment income related to this loan participation was $0.3 million and $0.9 million, respectively.

 

Due to Affiliate

 

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

 

Other Related Party Transactions

 

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

 

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

 

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

  

Note 8. Commitments and Contingencies

 

As of June 30, 2013, we had commitments under loan and financing agreements to fund up to $21.9 million to four portfolio companies. These commitments are primarily composed of senior secured term loans and a revolver. As of September 30, 2012, we had commitments under loan and financing agreements to fund up to $17.3 million to six portfolio companies. These commitments are primarily composed of senior secured term loans and preferred equity. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.

 

F-24
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

Note 9. Other fee income

 

The other fee income consists of origination/closing fee, amendment fee, prepayment penalty, administrative agent fee, transaction break-up fee and other miscellaneous fees. The following table summarizes the Company’s other fee income for the three and nine months ended June 30, 2013 and 2012 (dollars in thousands):

 

   For the three months ended 
   June 30, 2013   June 30, 2012 
Origination fee  $2,798   $1,523 
Prepayment fee   26    62 
Amendment fee   550    80 
Transaction break-up fee   200    123 
Administrative agent fee   65    19 
Other fees       25 
Other fee income  $3,639   $1,832 

 

   For the nine months ended 
   June 30, 2013   June 30, 2012 
Origination fee  $6,441   $3,842 
Prepayment fee   1,496    122 
Amendment fee   1,370    318 
Transaction break-up fee   200    123 
Administrative agent fee   197    46 
Other fees   312    25
Other fee income  $10,016   $4,476 

 

Note 10. Directors Fees

 

The independent directors receive an annual fee of $35,000. They also receive $7,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $25,000 and the chairman of each other committee receives an annual fee of $10,000 for their additional services in these capacities. In addition, other members of the audit committee receive an annual fee of $12,500 and other members of each other committee receive an annual fee of $6,000. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three and nine months ended June 30, 2013, we accrued $0.1 million and $0.3 million for directors’ fees expense, respectively. For the three and nine months ended June 30, 2012, 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 (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and nine months ended June 30, 2013 (dollars in thousands except share and per share amounts):

 

Basic and diluted  Three
months ended
June 30, 2013
   Nine months ended
June 30, 2013
 
Net increase in net assets from operations  $3,157   $24,293 
Weighted average common shares outstanding   32,658,336    28,684,229 
Earnings per common share-basic and diluted  $0.10   $0.85 

  

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

  

Basic and diluted  Three
months ended
June 30, 2012
   Nine months ended
June 30, 2012
 
Net increase in net assets from operations  $4,840   $15,067 
Weighted average common shares outstanding   17,320,468    17,320,468 
Earnings per common share-basic and diluted  $0.28   $0.87 

  

Note 12. Financial Highlights

 

The following is a schedule of financial highlights for the nine months ended June 30, 2013 and 2012:

 

   For the nine months ended 
   June 30, 2013   June 30, 2012 
Per share data:        
Net asset value per share at beginning of period  $12.52   $12.57 
           
Issuance of common stock, net of underwriting costs   0.33     
Shares issued pursuant to dividend reinvestment plan   0.00     
Offering cost   (0.01)    
Net investment income (1)   1.12    0.95 
Net realized gains on investments   0.03    0.00 
Net unrealized appreciation/(depreciation) on investments   (0.28)   (0.08)
Net increase in net assets   1.19    0.87 
           
Distributions declared from net investment income   (1.06)   (0.84)
Distributions declared from net realized capital gains        
Total distributions to stockholders   (1.06)   (0.84)
           
Net asset value at end of period  $12.65   $12.60 
Net assets at end of period  $420,246,094   $218,170,532 
Shares outstanding at end of period   33,226,126    17,320,468 
           
Per share market value at end of period  $13.58   $12.04 
Total return based on market value (2)   4.36%   28.73%
Total return based on net asset value (3)   9.25%   8.03%
Portfolio turnover rate   20.32%   10.30%

 

F-25
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

The following is a schedule of ratios and supplemental data for the nine months ended June 30, 2013 and 2012:

 

   For the nine months ended 
   June 30, 2013   June 30, 2012 
Ratios: (4) (5)        
Ratio of net investment income net of management fee waiver to average net assets   11.91%   10.05%
Ratio of total expenses net of management fee waiver to average net assets   10.96%   8.60%
Ratio of incentive fees to average net assets   2.98%   2.52%
           
Supplemental Data:          
Ratio of operating expenses net of management fee waiver and credit facility related expenses to average net assets   7.98%   6.06%
Average debt outstanding (6)  $182,431,190   $50,345,620 
Average debt outstanding per common share  $6.36   $2.91 
Asset coverage ratio per unit (7)   2,511    2,467 
Average market value per unit          
Facilities (8)   N/A    N/A 
SBA debentures (8)   N/A    N/A 
Notes due 2019  $26.24    24.96 
Notes due 2023  $24.95    N/A 

 

(1)Net investment income based on total weighted average common stock outstanding equals $1.12 per share for the nine months ended June 30, 2013 and net investment income excluding management fee waiver based on total weighted average common stock outstanding equals $0.94 per share for the nine months ended June 30, 2012. MCC Advisors agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through December 31, 2011.
(2)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.
(3)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.
(4)Ratios are annualized.
(5)For the nine months ended June 30, 2012, excluding the management fee waiver, the ratio of net investment income, operating expenses, incentive fees, credit facility related expenses and total expenses to average net assets is 10.03%, 4.32%, 2.52%, 1.77% and 8.63%, respectively.
(6)Based on daily weighted average balance of debt outstanding during the period.
(7)Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(8)The Facilities and SBA debentures are not registered for public trading.

 

Note 13. Dividends

 

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

 

F-26
 

 

MEDLEY CAPITAL CORPORATION

Notes to Consolidated Financial Statements (Continued)

 

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

 

The following table summarizes the Company’s dividend declarations and distributions during the nine months ended June 30, 2013 and 2012:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
For the nine months ended June 30, 2013           
11/1/2012  11/23/2012  12/14/2012   0.36 
1/30/2013  2/27/2013  3/15/2013   0.36 
5/1/2013  5/24/2013  6/14/2013   0.36 
         $1.08 

  

Date Declared  Record Date  Payment Date  Amount Per Share 
For the nine months ended June 30, 2012           
11/29/2011  12/15/2011  12/30/2011   0.25 
2/2/2012  2/24/2012  3/15/2012   0.28 
5/2/2012  5/25/2012  6/15/2012   0.31 
         $0.84 

 

Note 14. Subsequent Events

 

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

  

On July 31, 2013, the Company’s board of directors declared a quarterly dividend of $0.37 per share payable on September 13, 2013, to stockholders of record at the close of business on August 23, 2013.

 

F-27
 

 

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

 

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

Overview

 

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

 

1
 

 

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

 

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

 

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

 

Revenues

 

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

 

Expenses

 

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

 

·our organization;

 

·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;

 

2
 

 

·costs of preparing and filing reports or other documents required by governmental bodies (including the SEC and the SBA);
  
·the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;
  
·our fidelity bond;
  
·directors and officers/errors and omissions liability insurance, and any other insurance premiums;
  
·indemnification payments;
  
·direct costs and expenses of administration, including audit and legal costs; and
  
·all other expenses reasonably incurred by us or MCC Advisors in connection with administering our business, such as the allocable portion of overhead under our administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs (including travel expenses).

 

Portfolio and Investment Activity

 

As of June 30, 2013, our portfolio consisted of investments in 56 portfolio companies with a fair value of approximately $686.4 million. During the three months ended June 30, 2013, we invested $117.1 million in eight new portfolio companies and $1.9 million in two existing portfolio companies, and we had $22.5 million in aggregate amount of exits and repayments, resulting in net investments of $96.5 million for the period. During the three months ended June 30, 2012, we invested $63.2 million in five new portfolio companies and $4.3 million in three existing portfolio companies. Also, during the three months ended June 30, 2012, we had $10.3 million in aggregate amount of exits and repayments, resulting in net investments of $57.2 million for the period.

 

During the nine months ended June 30, 2013, we invested $324.0 million in 27 new portfolio companies and $51.4 million in 12 existing portfolio companies, and we had $92.3 million in aggregate amounts of exits and repayments, resulting in net investments of $283.1 million for the period. During the nine months ended June 30, 2012 we invested $177.0 million in seventeen new portfolio companies and $12.3 million in five existing portfolio companies, and we had $26.6 million in aggregate amount of exits and repayments, resulting in net investments of $162.7 million for the period.

 

As of June 30, 2013, our average portfolio company investment and our largest portfolio company investment at amortized cost and fair value was approximately $12.4 million and $12.3 million, and $25.4 million and $25.6 million, respectively, and the Company had approximately $13.5 million of cash and cash equivalents.

 

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

 

   Amortized
Cost
   Percentage
of Total
   Fair Value   Percentage
of Total
 
Senior Secured First Lien Term Loans  $336,222    47.4%  $327,836    46.8%
Senior Secured Second Lien Term Loans   272,449    38.4    271,441    38.8 
Senior Secured Notes   84,841    12.0    84,306    12.0 
Unsecured Debt   252    0.1    252    0.1 
Equity/Warrants   1,811    0.2    2,540    0.4 
Cash and Cash Equivalents   13,459    1.9    13,459    1.9 
Total  $709,034    100.0%  $699,834    100.0%

 

The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as of September 30, 2012 (dollars in thousands):

 

   Amortized
Cost
   Percentage
of Total
   Fair Value   Percentage
of Total
 
Senior Secured First Lien Term Loans  $187,753    46.0%  $186,841    45.9%
Senior Secured Second Lien Term Loans   158,076    38.7    157,015    38.6 
Senior Secured Notes   55,381    13.6    55,750    13.7 
Equity/Warrants   1,950    0.5    2,343    0.6 
Cash and Cash Equivalents   4,894    1.2    4,894    1.2 
Total  $408,054    100.0%  $406,843    100.0%

 

3
 

 

As of June 30, 2013, the weighted average loan to value ratio (“LTV”) of our portfolio investments was approximately 56.4%. We believe that the LTV ratio for a portfolio investment is a useful indicator of the riskiness of the portfolio investment, or its likelihood of default. As part of our investment strategy, we seek to structure transactions with downside protection and seek LTVs of lower than 65%. We regularly evaluate the LTV of our portfolio investments and believe that LTV is a useful indicator for management and investors.

 

As of June 30, 2013, our income-bearing investment portfolio, which represented nearly 99.5% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 13.8%, and 44.6% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR, and 55.4% bore interest at fixed rates.

 

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

 

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

 

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

 

Investment
Performance
Rating
    Investments at
Fair Value
   Percentage 
1    $45,339    6.6%
2      587,391    85.6 
3     42,886    6.2 
4      6,669    1.0 
5     4,090    0.6 
Total    $686,375    100.0%

 

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of September 30, 2012 (dollars in thousands):

 

Investment
Performance
Rating
    Investments at
Fair Value
   Percentage 
1    $17,230    4.3%
2      354,577    88.2 
3      30,142    7.5 
4           
5          
Total    $401,949    100.0%

  

4
 

 

Results of Operations

 

Operating results for the three and nine months ended June 30, 2013 and 2012 are as follows (dollars in thousands):

 

   For the three months ended 
   June 30, 2013   June 30, 2012 
Total investment income  $23,591   $12,252 
Total expenses, net   11,561    6,044 
Net investment income before excise taxes   12,030    6,208 
Excise tax expense        
Net investment income   12,030    6,208 
Net realized gains (losses)   (137)   (15)
Net unrealized gains (losses)   (8,736)   (1,353)
Net increase in net assets resulting from operations  $3,157   $4,840 

 

   For the nine months ended 
   June 30, 2013   June 30, 2012 
Total investment income  $61,518   $30,455 
Total expenses, net   29,474    14,011 
Net investment income before excise taxes   32,044    16,444 
Excise tax expense       36 
Net investment income   32,044    16,408 
Net realized gains (losses)   237    93 
Net unrealized gains (losses)   (7,988)   (1,434)
Net increase in net assets resulting from operations  $24,293   $15,067 

 

Investment Income

 

For the three and nine months ended June 30, 2013, investment income totaled $23.6 million and $61.5 million, respectively, of which $20.0 million and $51.5 million was attributable to portfolio interest and $3.6 million and $10.0 million to other fee income.

 

For the three and nine months ended June 30, 2012, investment income totaled $12.3 million and $30.5 million, respectively, of which $10.4 million and $26.0 million was attributable to portfolio interest and $1.9 million and $4.5 million to other fee income.

 

Operating Expenses

 

Operating expenses for the three and nine months ended June 30, 2013 and 2012 were as follows (dollars in thousands):

 

   For the three months ended 
   June 30, 2013   June 30, 2012 
Base management fees  $2,977   $1,498 
Incentive fees   3,008    1,552 
Interest and financing expenses   4,032    1,781 
Administrator expenses   682    396 
Professional fees   320    470 
Directors fees   71    131 
Insurance   70    121 
General and administrative   399    95 
Organizational Expense   2     
Expenses before management fee waiver (1)  $11,561   $6,044 

 

   For the nine months ended 
   June 30, 2013   June 30, 2012 
Base management fees  $7,607   $3,782 
Incentive fees   8,011    4,111 
Interest and financing expenses   9,283    2,891 
Administrator expenses   1,773    1,074 
Professional fees   1,161    1,102 
Directors fees   315    378 
Insurance   210    343 
General and administrative   963    372 
Organizational Expense   151     
Expenses before management fee waiver (1)  $29,474   $14,053 

 

(1) For the three and nine months ended June 30, 2013, there was no waiver of management fees.

 

5
 

 

For the three months ended June 30, 2013, total operating expenses before manager expense waiver and reimbursement increased by $5.5 million, or 91.3%, compared to the three months ended June 30, 2012. For the nine months ended June 30, 2013, total operating expenses before manager expense waiver and reimbursement increased by $15.4 million, or 109.7%, compared to the nine months ended June 30, 2012.

 

Interest and financing expenses were higher in the three and nine months ended June 30, 2013 than the three and nine months ended June 30, 2012 as a result of increase in commitment on a four-year senior secured revolving credit facility, issuing $40.0 million in aggregate principal amount of 7.125% unsecured notes that mature on March 30, 2019, entering into a new five-year senior secured term loan credit facility, issuing $63.5 million in aggregate principal amount of 6.125% unsecured notes that mature on March 30, 2023 and issuing SBA-guaranteed debentures.

 

Excluding interest and financing expenses, expenses increased for both the three and nine months ended June 30, 2013, due to an increase in base management fees, incentive fees, administrative service fees, general administrative expenses and organizational expenses. Base management fees, which are calculated based on average gross assets, increased due to the growth in the portfolio throughout the period. The incentive fee increased as a result of the increase in pre-incentive fee net investment income.

 

Net Realized Gains/Losses from Investments

 

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

 

During the three and nine months ended June 30, 2013, we recognized $0.1 million of realized losses and $0.2 million realized gains on our portfolio investments, respectively. During the three and nine months ended June 30, 2012, we recognized $15,016 of realized losses and $0.1 million of realized gains, respectively, on portfolio investments.

 

Net Unrealized Appreciation/Depreciation on Investments

 

Net change in unrealized appreciation on investments reflects the net change in the fair value of our investment portfolio. For the three and nine months ended June 30, 2013, we had $8.7 million and $8.0 million of unrealized depreciation, respectively, on portfolio investments. For the three and nine months ended June 30, 2012, we had $1.4 million and $1.4 million of unrealized depreciation, respectively, on portfolio investments.

 

Changes in Net Assets from Operations

 

For the three months ended June 30, 2013, we recorded a net increase in net assets resulting from operations of $3.2 million versus a net increase in net assets resulting from operations of $4.8 million for the three months ended June 30, 2012. The difference is attributable to an increase in total investment income offset by an increase in total operating expenses, resulting from portfolio growth and an increase in net unrealized depreciation for the three months ended June 30, 2013, as compared to the same period in the prior year. Based on 32,658,336 and 17,320,468 weighted average common shares outstanding for the three months ended June 30, 2013 and 2012, respectively, our per share net increase in net assets resulting from operations was $0.10 for the three months ended June 30, 2013, versus a per share net increase in net assets from operations of $0.28 for the three months ended June 30, 2012.

 

For the nine months ended June 30, 2013, we recorded a net increase in net assets resulting from operations of $24.3 million versus a net increase in net assets resulting from operations of $15.1 million for the nine months ended June 30, 2012. The difference is attributable to an increase in total investment income offset by an increase in total operating expenses, resulting from portfolio growth and an increase in net unrealized depreciation for the nine months ended June 30, 2013, as compared to the same period in the prior year. Based on 28,684,229 and 17,320,468 weighted average common shares outstanding for the nine months ended June 30, 2013 and 2012, respectively, our per share net increase in net assets resulting from operations was $0.85 for the nine months ended June 30, 2013, versus a per share net increase in net assets from operations of $0.87 for the nine months ended June 30, 2012.

 

Financial Condition, Liquidity and Capital Resources

 

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

 

6
 

 

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

 

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

 

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

  

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

 

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

 

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

 

Amendment No. 1 to the Revolving Facility revised the Revolving Facility, to, among other things, increase the amount available for borrowing from $125.0 million to $132.5 million; permit the Term Loan Facility; and extend the maturity date from August 4, 2015 to August 31, 2016. Amendment No. 1 to the Revolving Facility also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR + 3.75% per annum, with a 1% LIBOR floor, to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, LIBOR plus 3.75% per annum, with no LIBOR floor, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, LIBOR plus 3.25% per annum, with no LIBOR floor, and (b) alternative base rate loans based, or ABR, on 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5%, LIBOR for a period of three months plus 1% or the ABR Floor of 2% to (i) when the Company’s stockholders’ equity is less than or equal to $350.0 million and the step-down condition is not satisfied, 2.75% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%, and (ii) when the Company’s stockholders’ equity exceeds $350.0 million and the step-down condition is satisfied, 2.25% per annum plus the greatest of the Prime Rate in effect on such day, the federal funds effective rate for such day plus 0.5% or LIBOR for a period of three months plus 1%. As of June 30, 2013, there was $54.7 million outstanding under the Revolving Facility.

 

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

 

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

 

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

 

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

 

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

 

Amendment No. 1 to the Term Loan Facility revised the Term Loan Facility, to, among other things, increase the amount available for borrowing from $55.0 million to $80.5 million. The Term Loan Facility matures on August 31, 2017, bears interest at LIBOR plus 4.00% (with no LIBOR floor, rounded upwards, if necessary, to the next 1/16 of 1%).

 

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

 

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

 

7
 

 

On March 18, 2013, the Company issued $60.0 million in aggregate principal amount of 6.125% 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 March 28, 2013, we entered into Amendment No. 3 to the Revolving Facility, and entered into Amendment No. 3 to the Term Loan Facility.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2013, we had $13.5 million in cash and cash equivalents. 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.

 

If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price unless our stockholders approve such a sale and our Board of Directors makes certain determinations. A proposal, approved by our stockholders at our reconvened 2013 Annual Meeting of Stockholders, authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings (subject to certain conditions, including that the number of shares issued in such offerings does not exceed 25% of our then outstanding common stock, at a price below, but no more than 20% below, our then current net asset value) for a period expiring on the earlier of the anniversary of the date of the 2013 Annual Meeting or the date of our 2014 Annual Meeting of Stockholders.

 

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

 

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

 

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

 

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

 

8
 

 

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

 

As of June 30, 2013, SBIC LP had $50.0 million in regulatory capital and had $5.0 million SBA-guaranteed debentures outstanding.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized on our balance sheet. As of June 30, 2013, we had commitments under loan and financing agreements to fund up to $21.9 million to four portfolio companies. These commitments are primarily composed of senior secured term loans and preferred equity. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.

 

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

 

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

  

The following table shows our payment obligations for repayment of debt and other contractual obligations at June 30, 2013 (dollars in thousands):

  

   Payment Due by Period 
   Total   Less than
1 year
   1 – 3 years   3 – 5 years   More than
5 years
 
Revolving Facility  $54,700   $   $   $54,700   $ 
Term Loan Facility   115,000            115,000     
7.125% Notes   40,000                40,000 
6.125% Notes   63,500                63,500 
SBA Debenture   5,000                5,000 
Total contractual obligations  $278,200   $   $   $169,700   $108,500 

 

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

 

Distributions

 

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

 

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

 

  (1) at least 98.0 percent of our ordinary income (not taking into account any capital gains or losses) for the calendar year;

 

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  (2) at least 98.2 percent of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period ending  on October 31st of the calendar year; and

 

  (3) income realized, but not distributed, in preceding years.

 

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

 

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

 

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

 

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

 

On May 11, 2011, the Company’s board of directors declared a quarterly dividend of $0.16 per share payable on June 15, 2011 to stockholders of record at the close of business on June 1, 2011.

 

On August 4, 2011, the Company’s board of directors declared a quarterly dividend of $0.21 per share payable on September 15, 2011 to stockholders of record at the close of business on September 1, 2011.

 

On November 29, 2011, the Company’s board of directors declared a quarterly dividend of $0.25 per share payable on December 30, 2011 to stockholders of record at the close of business on December 15, 2011.

 

On February 2, 2012, the Company’s board of directors declared a quarterly dividend of $0.28 per share payable on March 15, 2012 to stockholders of record at the close of business on February 24, 2012.

 

On May 2, 2012, the Company’s board of directors declared a quarterly dividend of $0.31 per share payable on June 15, 2012, to stockholders of record at the close of business on May 25, 2012.

 

On August 1, 2012, the Company’s board of directors declared a quarterly dividend of $0.36 per share payable on September 14, 2012, to stockholders of record at the close of business on August 24, 2012.

  

On November 1, 2012, the Company’s board of directors declared a quarterly dividend of $0.36 per share payable on December 14, 2012, to stockholders of record at the close of business on November 23, 2012.

 

On January 31, 2013, the Company’s board of directors declared a quarterly dividend of $0.36 per share payable on March 15, 2013, to stockholders of record at the close of business on February 27, 2013.

 

On May 1, 2013, the Company’s board of directors declared a quarterly dividend of $0.36 per share payable on June 14, 2013 to stockholders of record at the close of business on May 24, 2013.

 

Related Party Transactions

 

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

 

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

 

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

 

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

 

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

 

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

 

Management Fee

 

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

 

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

 

The investment management agreement also provides that MCC Advisors is entitled to an incentive fee of 20.0%. The incentive fee consists of two parts: (1) the first component, which is payable quarterly in arrears, equals 20.0% of the excess, if any, of the pre-incentive fee net investment income over a hurdle rate (2.0% quarterly) and subject to a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MCC Advisors receives no incentive fee until our net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up”, 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, MCC Advisors will receive 20% of our pre-incentive fee net investment income as if the hurdle rate did not apply; and (2) the second component, which is payable in arrears at the end of each calendar year (or upon termination of the investment management agreement, as of the termination date), commencing with the year ending December 31, 2011, 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 MCC Advisers.

 

Critical Accounting Policies

 

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

 

Valuation of Portfolio Investments

 

We value investments for which market quotations are readily available at their market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, a readily available market value is not expected to exist for many of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. We may seek pricing information with respect to certain of our investments from pricing services or brokers or dealers in order to value such investments. We also employ independent third party valuation firms for all of our investments for which there is not a readily available market value.

 

Valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will consider the pricing indicated by the external event to corroborate the private equity valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Revenue Recognition

 

Our revenue recognition policies are as follows:

 

Investments and Related Investment Income . We account for investment transactions on a trade-date basis and interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. For investments with contractual PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. Origination, closing and/or commitment fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. We report changes in the fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in our consolidated statement of operations.

 

Non-accrual. We place loans on non-accrual status when principal and interest payments are past due by 90 days or more, or when there is reasonable doubt that we will collect principal or interest. Accrued interest is generally reversed when a loan is placed on non-accrual. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in our management’s judgment, are likely to remain current. At June 30, 2013, one portfolio company was on PIK non-accrual status with a fair value of approximately $4.1 million, or 0.6% of the fair value of our portfolio. At September 30, 2012, we had no portfolio company on non-accrual status.

 

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Federal Income Taxes

 

The Company has elected and qualified to be treated for U.S. federal income tax purposes as a RIC under subchapter M of the Code, commencing with its first taxable year as a corporation, and it intends to operate in a manner so as to maintain its RIC tax treatment. As a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements. Once qualified as a RIC, the Company must timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year distributions into the next tax year and pay a 4% excise tax on such excess. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

 

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

 

Recent Developments

 

On July 31, 2013, the Company’s board of directors declared a quarterly dividend of $0.37 per share payable on September 13, 2013, to stockholders of record at the close of business on August 23, 2013.

 

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, 2013, we did not engage in hedging activities.

 

As of June 30, 2013, 44.6% 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, 2013 was as follows:

 

   June 30, 2013 
   Fair Value
(thousands)
   % of Floating Rate
Portfolio
 
Under 1%  $39,730    13.0%
1% to under 2%   256,750    84.3 
2% to under 3%   8,056    2.7 
Total  $304,536    100.0%

 

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

 

Basis point increase (1)  Interest
Income
(thousands)
   Interest
Expense
(thousands)
   Net Increase
(Decrease)
(thousands)
 
100  $600   $1,700   $(1,100)
200   3,200    3,500    (300)
300   6,300    5,200    1,100 
400   9,400    7,000    2,400 
500   12,400    8,700    3,700 

 

As of September 30, 2012, 45.2% 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 September 30, 2012 was as follows:

 

   September 30, 2012 
   Fair Value
(thousands)
   % of Floating Rate
Portfolio
 
Under 1%  $25,148    13.9%
1% to under 2%   128,705    71.3 
2% to under 3%   26,627    14.8 
Total  $180,480    100.0%

 

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Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2012, the following table shows the approximate increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure.

 

Basis point increase (1)  Interest
Income
(thousands)
   Interest
Expense
(thousands)
   Net Increase
(Decrease)
(thousands)
 
100  $300   $700   $(400)
200   1,700    1,400    300 
300   3,500    2,100    1,400 
400   5,300    2,800    2,500 
500   7,100    3,500    3,600 

 

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

  

Item 4: Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. 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, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

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

 

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Part II - Other Information

 

Item 1: Legal Proceedings.

 

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

 

Item 1A:   Risk Factors.

 

In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2012, filed with the SEC on December 10, 2012, which could materially affect our business, financial condition and/or operating results. Except as set forth below, there have been no material changes during the nine months ended June 30, 2013 to the risk factors discussed in “Item 1A. Risk Factors” of our annual report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

 

Risks Related to Our Business

 

It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition.

 

As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and there are ongoing investigations by regulators and governmental authorities in various jurisdictions. Following a review of LIBOR conducted at the request of the U.K. government, on September 28, 2012, recommendations for reforming the setting and governing of LIBOR were released, which are referred to as the Wheatley Review. The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of S-5 statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of the compilation of lending rates and new regulatory oversight and enforcement mechanisms for rate-setting and a reduction in the number of currencies and tenors for which LIBOR is published. Based on the Wheatley Review and on a subsequent public and governmental consultation process, on March 25, 2013, the U.K. Financial Services Authority published final rules for the U.K. Financial Conduct Authority’s regulation and supervision of LIBOR, which are referred to as the FCA Rules. In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013. It is uncertain what additional regulatory changes or what changes, if any, in the method of determining LIBOR may be required or made by the U.K. government or other governmental or regulatory authorities. Accordingly, uncertainty as to the nature of such changes may adversely affect the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

 

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

 

None.

 

Item 3:   Defaults Upon Senior Securities.

 

None.

 

Item 4:   Mine Safety Disclosures.

 

None.

 

Item 5:   Other Information.

 

None.

 

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Item 6:   Exhibits.

 

EXHIBIT INDEX

 

Number   Description
     
10.1   Amendment No. 4 to the Senior Secured Revolving Credit Agreement among Medley Capital Corporation, as borrower, the Lenders party thereto, and ING Capital LLC, as Administrative Agent, dated May 1, 2013 (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 7, 2013)
10.2   Amendment No. 4 to the Senior Secured Term Loan Credit Agreement among Medley Capital Corporation, as borrower, the Lenders party thereto, and ING Capital LLC, as Administrative Agent, dated May 1, 2013 (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May 7, 2013)
31.1   Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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:  August 1, 2013 Medley Capital Corporation.
   
  By /s/ Brook Taube
    Brook Taube
    Chief Executive Officer
     (Principal Executive Officer)
     
Dated:  August 1, 2013 By /s/ Richard T. Allorto, Jr.
    Richard T. Allorto, Jr.
    Chief Financial Officer
     (Principal Accounting and Financial Officer)

 

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