Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 included in this Form 10-K.
Overview
We are an asset management firm offering yield solutions to retail and institutional investors. We focus on credit-related investment strategies, primarily originating senior secured loans to private middle market companies in the U.S. that have revenues between $50 million and $1 billion. We generally hold these loans to maturity. Our national direct origination franchise, with over 85 people, provides capital to the middle market in the U.S. Over the past 15 years, we have provided capital to over
350 companies across 35 industries
in North America.
We manage two permanent capital vehicles, both of which are BDCs, as well as long-dated private funds and SMAs, focusing on senior secured credit.
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Permanent capital vehicles: MCC and SIC, have a total AUM of
$2.5 billion
as of
December 31, 2016
.
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Long-dated private funds and SMAs: MOF II, MOF III, MCOF, Aspect and SMAs, have a total AUM of
$2.8 billion
as of
December 31, 2016
.
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As of
December 31, 2016
, we had over
$5.3 billion
of AUM in two business development companies, MCC and SIC, as well as private investment vehicles. Our year over year AUM growth as of
December 31, 2016
was
12%
and was driven in large part by the growth of our long-dated private funds and SMAs. Our compounded annual AUM growth rate from December 31, 2010 through
December 31, 2016
was
32%
and our compounded annual Fee Earning AUM growth rate of
23%
, both of which have been driven in large part by the growth in our permanent capital vehicles.
Since September 2015, we received over $1.5 billion of new institutional capital commitments, bringing AUM to over
$5.3 billion
. Typically the investment periods of our institutional commitments range from 18 to 24 months and we expect our Fee Earning AUM to increase as capital commitments included in AUM are invested.
In general, our institutional investors do not have the right to withdraw capital commitments and, to date, we have not experienced any withdrawals of capital commitments. For a description of the risk factor associated with capital commitments, see “Risk Factors – Third-party investors in our private funds may not satisfy their contractual obligation to fund capital calls when requested, which could adversely affect a fund’s operations and performance.”
Direct origination, careful structuring and active monitoring of the loan portfolios we manage are important success factors in our business, which can be adversely affected by difficult market and political conditions, such as the turmoil in the global capital markets from 2007 to 2009. Since our inception in 2006, we have adhered to a disciplined investment process that employs these principles with the goal of delivering strong risk-adjusted investment returns while protecting investor capital. We believe that our ability to directly originate, structure and lead deals enables us to consistently lend at higher yields with better terms. In addition, the loans we manage generally have a contractual maturity of between three and seven years and are typically floating rate, which we believe positions our business well for rising interest rates.
Our senior management team has, on average, over 20 years of experience in credit, including originating, underwriting, principal investing and loan structuring. We have made significant investments in our corporate infrastructure and have over
85
employees, including over
45
investment, origination and credit management professionals, and over
40
operations, accounting, legal, compliance and marketing professionals, each with extensive experience in their respective disciplines.
The significant majority of our revenue is derived from management fees, which include base management fees earned on all of our investment products as well as Part I incentive fees earned from our permanent capital vehicles and from certain of our long-dated private funds. Our base management fees are generally calculated based upon fee earning assets and paid quarterly in cash. Our Part I incentive fees are typically calculated based upon net investment income, subject to a hurdle rate, and are also paid quarterly in cash.
We also generally earn performance fees from our long-dated private funds and SMAs. Typically, these performance fees are 15.0% to 20.0% of the total return above a hurdle rate. These performance fees are accrued quarterly and paid after return of all invested capital and an amount sufficient to achieve the hurdle rate of return.
We also receive incentive fees related to realized capital gains in our permanent capital vehicles and certain of our long-dated private funds that we refer to as Part II incentive fees. Part II incentive fees are payable annually and are calculated at the end of each applicable year by subtracting (i) the sum of cumulative realized capital losses and unrealized capital depreciation from (ii) cumulative aggregate realized capital gains. If the amount calculated is positive, then the Part II incentive fee for such year is equal to 20% of such amount, less the aggregate amount of Part II incentive fees paid in all prior years. If such amount is negative, then no Part II incentive fee will be payable for such year. As our investment strategy is focused on generating yield from senior secured credit, historically we have not generated Part II incentive fees.
For the years ended December 31, 2016, 2015 and 2014,
89%
,
89%
and
88%
, respectively, of our revenues were generated from management fees and performance fees derived primarily from net interest income on senior secured loans.
Our primary expenses are compensation to our employees, performance fee compensation and general, administrative and other expenses. Compensation includes salaries, discretionary bonuses, stock-based compensation and benefits paid and payable to our employees. Performance fee compensation is related to performance fees, generally consisting of incentive allocations in our long-dated private funds that we grant to certain of our professionals. General and administrative expenses include costs primarily related to professional services, office rent and related expenses, expense support agreement expenses related to SIC, depreciation and amortization, travel and related expenses, information technology, communication and information services, placement fees and third-party marketing expenses and other general operating items.
Reorganization and Initial Public Offering
Medley Management Inc. was incorporated on June 13, 2014 and commenced operations on September 29, 2014 upon the completion of its IPO of its Class A common stock. We raised $100.4 million, net of underwriting discounts, through the issuance of 6,000,000 shares of Class A common stock at a public offering price of $18.00 per share. The offering proceeds were used to purchase 6,000,000 newly issued LLC Units from Medley LLC. Prior to the IPO, Medley Management Inc. had not engaged in any business or other activities except in connection with its formation and IPO.
In connection with the IPO, Medley Management Inc. issued 100 shares of Class B common stock to Medley Group LLC (“Medley Group”), an entity wholly owned by the pre-IPO members of Medley LLC. For so long as the pre-IPO members and then-current Medley personnel hold at least 10% of the aggregate number of shares of Class A common stock and LLC Units (excluding those LLC Units held by Medley Management Inc.) then outstanding, the Class B common stock entitles Medley Group to a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of membership units held by such holder.
In connection with the IPO, Medley LLC amended and restated its limited liability agreement to modify its capital structure by reclassifying the 23,333,333 interests held by the pre-IPO members into a single new class of units. The pre-IPO members also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, subject to the terms of the exchange agreement, to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. In addition, pursuant to the amended and restated limited liability agreement, Medley Management Inc. became the sole managing member of Medley LLC.
Our Structure
Medley Management Inc. is a holding company and its sole asset is a controlling equity interest in Medley LLC. Medley Management Inc. operates and controls all of the business and affairs and consolidates the financial results of Medley LLC and its subsidiaries. We and our pre-IPO owners have also entered into an exchange agreement under which they (or certain permitted transferees) have the right (subject to the terms of the exchange agreement), to exchange their LLC Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.
Medley Group LLC, an entity wholly-owned by our pre-IPO owners, holds all 100 issued and outstanding shares of our Class B common stock. For so long as our pre-IPO owners and then-current Medley personnel hold at least 10% of the aggregate number of shares of Class A common stock and LLC Units (excluding those LLC Units held by Medley Management Inc.), which we refer to as the “Substantial Ownership Requirement,” the Class B common stock entitles Medley Group LLC, without regard to the number of shares of Class B common stock held by it, to a number of votes that is equal to 10 times the aggregate number
of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of LLC Units held by such holder. For purposes of calculating the Substantial Ownership Requirement, (1) shares of Class A common stock deliverable to our pre-IPO owners and then-current Medley personnel pursuant to outstanding equity awards will be deemed then outstanding and (2) shares of Class A common stock and LLC Units held by any estate, trust, partnership or limited liability company or other similar entity of which any pre-IPO owner or then-current Medley personnel, or any immediate family member thereof, is a trustee, partner, member or similar party will be considered held by such pre-IPO owner or other then-current Medley personnel. From and after the time that the Substantial Ownership Requirement is no longer satisfied, the Class B common stock will entitle Medley Group LLC, without regard to the number of shares of Class B common stock held by it, to a number of votes that is equal to the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to the number of LLC Units held by such holder. At the completion of our IPO, our pre-IPO owners were comprised of all of the non-managing members of Medley LLC. However, Medley LLC may in the future admit additional non-managing members that would not constitute pre-IPO owners. If at any time the ratio at which LLC Units are exchangeable for shares of our Class A common stock changes from one-for-one as set forth in the Exchange Agreement, the number of votes to which Class B common stockholders are entitled will be adjusted accordingly. Holders of shares of our Class B common stock will vote together with holders of our Class A common stock as a single class on all matters on which stockholders are entitled to vote generally, except as otherwise required by law.
Other than Medley Management Inc., holders of LLC Units, including our pre-IPO owners, are, subject to limited exceptions, prohibited from transferring any LLC Units held by them upon consummation of our IPO, or any shares of Class A common stock received upon exchange of such LLC Units, until the third anniversary of our IPO without our consent. Thereafter and prior to the fourth and fifth anniversaries of our IPO, such holders may not transfer more than 33 1/3% and 66 2/3%, respectively, of the number of LLC Units held by them upon consummation of our IPO, together with the number of any shares of Class A common stock received by them upon exchange therefor, without our consent. While this agreement could be amended or waived by us, our pre-IPO owners have advised us that they do not intend to seek any waivers of these restrictions.
The diagram below depicts our organizational structure (excluding those operating subsidiaries with no material operations or assets) as of
March 15, 2017
:
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(1)
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The Class B common stock provides Medley Group LLC with a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC. From and after the time that the Substantial Ownership Requirement is no longer satisfied, the Class B common stock will provide Medley Group LLC with a number of votes that is equal to the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock.
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(2)
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If our pre-IPO owners exchanged all of their LLC Units for shares of Class A common stock, they would hold
80.07%
of the outstanding shares of Class A common stock, entitling them to an equivalent percentage of economic interests and voting power in Medley Management Inc., Medley Group LLC would hold no voting power or economic interests in Medley Management Inc. and Medley Management Inc. would hold 100% of outstanding LLC Units and 100% of the voting power in Medley LLC.
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(3)
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Strategic Capital Advisory Services, LLC owns 20% of SIC Advisors LLC and is entitled to receive distributions of up to 20% of the gross cash proceeds received by SIC Advisors LLC from the management and incentive fees payable by Sierra
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Income Corporation to SIC Advisors LLC, net of certain expenses, as well as 20% of the returns of the investments held at SIC Advisors LLC.
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(4)
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Medley LLC holds 96.5% of the Class B economic interests in each of MCOF Management LLC, and Medley (Aspect) Management LLC.
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(5)
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Pursuant to the Master Investment Agreement among Medley LLC, Medley Seed Funding I LLC, Medley Seed Funding II LLC, Medley Seed Funding III LLC, DB MED Investor I LLC and DB MED Investor II LLC, dated June 3, 2016, Medley LLC holds 100% of the outstanding Common Interest and DB MED Investor I LLC holds 100% of the outstanding Preferred Interest in this entity.
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(6)
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As of March 1, 2017, certain employees, former employees and former members of Medley LLC hold approximately 40% of the limited liability company interests in MOF II GP LLC, the entity that serves as general partner of MOF II, entitling the holders to share the performance fees earned from MOF II.
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(7)
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Medley GP Holdings LLC holds 96.5% of the Class B economic interests in each of MCOF GP LLC, and Medley (Aspect) GP LLC.
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Trends Affecting Our Business
We believe that our disciplined investment philosophy contributes to the stability of our firm’s performance. Our results of operations, including the fair value of our AUM, are affected by a variety of factors, including conditions in the global financial markets as well as economic and political environments, particularly in the U.S.
During the first half of fiscal year 2016, economic conditions continued to be unpredictable and volatile as it was during fiscal year 2015. However, during the second half of fiscal year 2016, broad economic markets showed stability and loan volumes across the lending spectrum improved. Loan funds received significant inflows while CLO issuances continued to increase in the second half of 2016. Both these factors drove significant volume in the loan market and drove pricing lower. As a result, the opportunity set for appropriate risk-adjusted investments reduced. Our platform provides us the ability to lend across the capital structure and at varying interest rates providing our firm access to a larger borrower subset over time; however, we believe the deployment of capital during fiscal year 2016, was prudent and cautious in-light of the prevailing market conditions.
In addition to these macroeconomic trends and market factors, our future performance is dependent on our ability to attract new capital. We believe the following factors will influence our future performance:
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The extent to which investors favor directly originated private credit investments.
Our ability to attract additional capital is dependent on investors’ views of directly originated private credit investments relative to traditional assets. We believe fundraising efforts will continue to be impacted by certain fundamental asset management trends that include: (i) the increasing importance of directly originated private credit investment strategies for institutional investors; (ii) increasing demand for directly originated private credit investments from retail investors; (iii) recognition by the consultant channel, which serves endowment and pension fund investors, that directly originated private credit is an important component of asset allocation; (iv) increasing demand from insurance companies seeking alternatives to investing in the liquid credit markets; and (v) de-leveraging of the global banking system, bank consolidation and increased bank regulatory requirements.
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Our ability to generate strong, stable returns and retain investor capital throughout market cycles.
The capital we are able to attract and retain drives the growth of our AUM, fee earning AUM and management fees. We believe we are well positioned to invest through market cycles given our AUM is in either permanent capital vehicles or long-dated private funds and SMAs.
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Our ability to source investments with attractive risk-adjusted returns.
Our ability to grow our revenue is dependent on our continued ability to source attractive investments and deploy the capital that we have raised. We believe that the current economic environment provides attractive investment opportunities. Our ability to identify attractive investments and execute on those investments is dependent on a number of factors, including the general macroeconomic environment, valuation, size and the liquidity of these investment opportunities. A significant decrease in the quality or quantity of investment opportunities in the directly originated private credit market, a substantial increase in corporate default rates, an increase in competition from new entrants providing capital to the private debt market and a decrease in recovery rates of directly originated private credit could adversely affect our ability to source investments with attractive risk-adjusted returns.
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The attractiveness of our product offering to investors.
We believe defined contribution plans, retail investors, public institutional investors, pension funds, endowments, sovereign wealth funds and insurance companies are increasing exposure to directly originated private credit investment products to seek differentiated returns and current yield. Our permanent capital vehicles and long-dated private funds and SMAs benefit from this demand by offering
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institutional and retail investors the ability to invest in our private credit investment strategy. We believe that the breadth, diversity and number of investment vehicles we offer allow us to maximize our reach with investors.
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The strength of our investment process, operating platform and client servicing capabilities.
Following the most recent financial crisis, investors in alternative investments, including those managed by us, have heightened their focus on matters such as manager due diligence, reporting transparency and compliance infrastructure. Since inception, we have invested heavily in our investment monitoring systems, compliance and enterprise risk management systems to proactively address investor expectations and the evolving regulatory landscape. We believe these investments in operating infrastructure will continue to support our growth in AUM.
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Components of Our Results of Operations
Management Fees.
Management fees include both base management fees as well as Part I incentive fees.
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Base Management Fees.
Base management fees are generally based on a defined percentage of (i) average or total gross assets, including assets acquired with leverage, (ii) total commitments, (iii) net invested capital, (iv) NAV or (v) lower of cost or market value of a fund’s portfolio investments. These fees are calculated quarterly and are paid in cash in advance or in arrears depending on each specific fund. Base management fees are recognized as revenue in the period advisory services are rendered, subject to our assessment of collectability.
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In addition, we also receive non asset-based management fees that may include special fees such as origination fees, transaction fees and similar fees paid to us in connection with portfolio investments of our funds. These fees are specific to particular transactions and the contractual terms of the portfolio investments, and are recognized when earned.
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Part I Incentive Fees.
We also include Part I incentive fees that we receive from our permanent capital vehicles and certain of our long-dated private funds in management fees. Part I incentive fees are paid quarterly, in cash, and are driven primarily by net interest income on senior secured loans. Effective January 1, 2016, as it relates to MCC, these fees are subject to netting against realized and unrealized losses. We are primarily an asset manager of yield-oriented products and our incentive fees are primarily derived from spread income rather than trading or capital gains. In addition, we also carefully manage interest rate risk. We are generally positioned to benefit from a raising rate environment, which should benefit fees paid to us from our vehicles and funds.
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Performance Fees.
Our long-dated private funds and SMAs may have industry standard carried interest performance fee structures and are typically 15% to 20% of the total return over a 6.0% to 8.0% annualized preferred return. We record these fees on an accrual basis, to the extent such amounts are contractually due but not paid, and we present this revenue as a separate line item on our consolidated statements of operations. These fees are subject to repayment (clawback).
The timing and amount of performance fees generated by our funds is uncertain. If we were to have a realization event in a particular quarter or year, it may have a significant impact on our results for that particular quarter or year that may not be replicated in subsequent periods. Refer to “Risk Factors — Risks Related to Our Business and Industry.”
Generally, if at the termination of a fund (and sometimes at interim points in the life of a fund), the fund has not achieved investment returns that (in most cases) exceed the preferred return threshold or (in all cases) the general partner receives net profits over the life of the fund in excess of its allocable share under the applicable partnership agreement, we will be obligated to repay an amount equal to the extent to which carried interest that was previously distributed to us exceeds the amounts to which we are ultimately entitled. Medley had not received any distributions of performance fees through
December 31, 2016
, other than tax distributions, a portion of which is subject to clawback. As of
December 31, 2016
, we accrued
$7.1 million
for clawback obligations that would need to be paid if the funds were liquidated at fair value as of the end of the reporting period. Our actual obligation, however, would not become payable or realized until the end of a fund’s life.
For any given period, performance fee revenue on our consolidated statements of operations may include reversals of previously recognized performance fees due to a decrease in the value of a particular fund that results in a decrease of cumulative performance fees earned to date. Since fund return hurdles are cumulative, previously recognized fees also may be reversed in a period of appreciation that is lower than the particular fund's hurdle rate. For the year ended December 31, 2016, we did not reverse previously recognized performance fees. For the year ended December 31, 2015, we reversed
$24.0 million
of previously recognized performance fees. For the year ended December 31, 2014, we reversed
$4.4 million
and
$2.3 million
of previously recognized performance fees on a standalone and consolidated basis, respectively. As of
December 31, 2016
, we recognized cumulative performance fees of
$7.1 million
.
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Part II Incentive Fees
. For our permanent capital vehicles and certain of our long-dated private funds, Part II incentive fees generally represent 20.0% of each fund’s cumulative realized capital gains (net of realized capital losses and unrealized capital depreciation). We have not received these fees historically, and do not expect such fees to be material in the future given our focus on senior secured lending.
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Other Revenues and Fees.
We provide administrative services to certain of our vehicles that are reported as other revenues and fees. Such fees are recognized as revenue in the period that administrative services are rendered. These fees are generally based on expense reimbursements for the portion of overhead and other expenses incurred by certain professionals directly attributable to each respective fund. These fees are reported within total revenues in our audited consolidated financial statements included in this Form 10-K.
In certain cases, the entities that receive management and incentive fees from our funds are owned by Medley LLC together with other persons. See “Critical Accounting Policies” and Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in this Form 10-K for additional information regarding the manner in which management fees, performance fees and other fees are generated.
Expenses
Compensation and Benefits.
Compensation and benefits generally includes salaries, discretionary bonuses and benefits paid and payable to our employees. Compensation also includes stock-based compensation associated with the grants of equity-based awards to our employees. Compensation expense relating to restricted stock units that are expected to vest are measured at fair value as of the grant date, and are expensed over the vesting period on a straight-line basis. Bonuses are accrued over the service period to which they relate.
Guaranteed payments made to our senior professionals who are members of Medley LLC are recognized as compensation expense. The guaranteed payments to our Co-Chief Executive Officers are performance based and periodically set subject to maximums based on our total assets under management. Such maximums aggregated to
$5.0 million
,
$3.0 million
and
$3.0 million
for the years ended
December 31, 2016
,
2015
and 2014. Commencing with the fourth quarter of 2014 and for the years ended
December 31, 2016
and
2015
, neither of our Co-Chief Executive Officers received any guaranteed payments.
Performance Fee Compensation.
Performance fee compensation includes compensation related to performance fees, which generally consists of profit interests that we grant to our employees. Depending on the nature of each fund, the performance fee participation is generally structured as a fixed percentage or as an annual award. The liability is recorded subject to the vesting of the profit interests granted and is calculated based upon the net present value of the projected performance fees. Payments to profit interest holders are payable when the performance fees are paid to Medley LLC by the respective fund. It is possible that we may record performance fee compensation during a period in which we do not record any performance fee revenue or we have a reversal of previously recognized performance fee revenue. We have an obligation to pay our employees a portion of the performance fees earned from certain funds.
Consolidated Funds Expenses.
Consolidated Funds expenses consist primarily of costs incurred by our Consolidated Funds during the year ended December 31, 2014, including professional fees, research expenses, trustee fees and other costs associated with administering these funds. These expenses are generally attributable to the related funds’ limited partners and are allocated to non-controlling interests. As such, these expenses have no material impact on the net income attributable to Medley and its consolidated subsidiaries.
General, Administrative and Other Expenses.
General and administrative expenses include costs primarily related to professional services, office rent, depreciation and amortization, general insurance, recruiting, travel and related expenses, information technology, communication and information services, placement fees, SIC expenses under an investment advisory and expense support and reimbursement agreements and other general operating items.
Other Income (Expense)
Dividend Income.
Dividend income consists of dividends associated with our equity method investment in SIC and our available-for-sale securities. Dividends are recognized on an accrual basis to the extent that such amounts are declared and expected to be collected.
Interest Expense.
Interest expense consists primarily of interest expense relating to debt incurred by us.
Other Income (Expenses), Net.
Other income (expenses), net consists primarily of expenses associated with our revenue share payable, equity income (loss) and unrealized gains (losses) associated with our equity method investments.
Interest and Other Income of Consolidated Funds.
Interest and other income of Consolidated Funds relates to interest and dividend income generated from the underlying investments securities. Interest and other income are recognized on an accrual basis to the extent such amounts are expected to be collected. These sources of revenue are generally attributable to the related funds’ limited partners and are allocated to non-controlling interests. As such, these sources of revenue have no direct material impact on the net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC.
Interest Expense of Consolidated Funds.
Interest expense of Consolidated Funds relates to interest and dividend income generated from the underlying investments securities attributable to the counterparty to the loan participations. Interest expense on secured borrowings of our Consolidated Funds is recognized on the same basis as the underlying interest and other income. As such, this interest expense has no direct material impact on the net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC.
Net Realized Gain (Loss) on Investments of Consolidated Funds.
Net realized gain (loss) on investments of Consolidated Funds consists of realized gains and losses arising from dispositions of investments held by our Consolidated Funds. Substantially all of the net investment gains (losses) of our Consolidated Funds are generally attributable to the related funds’ limited partners and allocated to non-controlling interests.
Net Change in Unrealized Appreciation (Depreciation) on Investments of Consolidated Funds.
Net change in unrealized appreciation (depreciation) on investments of Consolidated Funds reflects both unrealized gains and losses on investments from periodic changes in fair value of investments held by our Consolidated Funds and the reversal upon disposition of investments of unrealized gains and losses previously recognized for those investments. The net change in unrealized appreciation (depreciation) on investments of Consolidated Funds is generally attributable to the related funds’ limited partners and allocated to non-controlling interests.
Net Change in Unrealized Depreciation (Appreciation) on Secured Borrowings of Consolidated Funds.
Net change in unrealized depreciation (appreciation) on secured borrowings of Consolidated Funds reflects both unrealized gains and losses from periodic changes in the fair value of these secured borrowings attributable to loan participations of our Consolidated Funds and the reversal upon repayments of these secured borrowings of unrealized gains and losses previously recognized for these secured borrowings. The net change in unrealized depreciation (appreciation) on secured borrowings of Consolidated Funds is attributable to the counterparty to the loan participations. As such, these unrealized gains and losses have no material impact on the net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC.
Provision for (Benefit From) Income Taxes.
Prior to our Reorganization and IPO, our business was organized as a partnership for tax purposes and was not subject to United States federal, state and local corporate income taxes. A provision for income taxes was made for certain entities that were subject to New York City's unincorporated business tax. As a result of the Reorganization and IPO, Medley Management Inc. is subject to U.S. federal, state and local corporate income taxes on its allocable portion of the income of Medley LLC at prevailing corporate tax rates. Medley LLC and its subsidiaries are not subject to U.S. federal, state and local corporate income taxes since all gains and losses are passed through to its members. However, Medley LLC and its subsidiaries are subject to New York City’s unincorporated business tax on its taxable income allocated to New York City. Our effective income tax rate is dependent on many factors, including the impact of nondeductible items and a rate benefit attributable to the fact that a portion of our earnings are not subject to corporate level taxes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent it is more likely than not that the deferred tax assets will not be recognized, a valuation allowance is provided to offset their benefit.
We recognize the benefit of an income tax position only if it is more likely than not that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% percent likelihood of being realized upon ultimate settlement. Interest expense and penalties related to income tax matters are recognized as a component of the provision for income taxes.
Net Income Attributable to Non-Controlling Interests in Consolidated Funds.
Net income (loss) attributable to non-controlling interests in Consolidated Funds represents the ownership interests that third parties hold in Consolidated Funds that are consolidated in our financial statements.
Net Income (Loss) Attributable to Redeemable Non-Controlling Interests and Non-Controlling Interests in Consolidated Subsidiaries.
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries represents the ownership interests that third parties hold in our consolidated subsidiaries.
Net Income Attributable to Non-Controlling Interests in Medley LLC.
Net income attributable to non-controlling interests in Medley LLC represents the ownership interests that non-managing members’ hold in Medley LLC.
Our private funds are closed-end funds, and accordingly do not permit investors to redeem their interests other than in limited circumstances that are beyond our control, such as instances in which retaining the limited partnership interest could cause the limited partner to violate a law, regulation or rule. In addition, SMAs for a single investor may allow such investor to terminate the investment management agreement at the discretion of the investor pursuant to the terms of the applicable documents. We manage assets for MCC and SIC, both of which are BDCs. The capital managed by MCC and SIC is permanently committed to these funds and cannot be redeemed by investors.
Managing Business Performance
Non-GAAP Financial Information
In addition to analyzing our results on a GAAP basis, management also makes operating decisions and assesses business performance based on the financial and operating metrics and data that are presented without the impact of consolidation of any funds. Core Net Income, Core EBITDA, Core Net Income Per Share and Core Net Income Margin are non-GAAP financial measures that are used by management to assess the performance of our business. There are limitations associated with the use of non-GAAP financial measures as compared to the use of the most directly comparable U.S. GAAP financial measure and these measures supplement and should be considered in addition to and not in lieu of the results of operations discussed further under ‘‘— Results of Operations,’’ which are prepared in accordance with U.S. GAAP. Furthermore, such measures may be inconsistent with measures presented by other companies. For a reconciliation of these measures to the most comparable measure in accordance with U.S. GAAP, see ‘‘— Reconciliation of Certain Non-GAAP Performance Measures to Consolidated U.S. GAAP Financial Measures.’’
Core Net Income.
Core Net Income is an income measure that is used by management to assess the performance of our business through the removal of non-core items, as well as non-recurring expenses associated with our IPO. It is calculated by adjusting net income attributable to Medley Management Inc. and net income attributable to non-controlling interests in Medley LLC to exclude reimbursable expenses associated with the launch of funds, amortization of stock-based compensation expense associated with grants of restricted stock units at the time of our IPO, other non-core items, the income tax impact of these adjustments and, for periods prior to January 1, 2015, adjustments to reverse the effect of the consolidation of Consolidated Funds.
Core Earnings Before Interest, Income Taxes, Depreciation and Amortization (Core EBITDA).
Core EBITDA is an income measure also used by management to assess the performance of our business. Core EBITDA is calculated as Core Net Income before interest expense, income taxes, depreciation and amortization.
Pro-Forma Weighted Average Shares Outstanding.
The calculation of Pro-Forma Weighted Average Shares Outstanding assumes
the conversion by the pre-IPO holders of 23,333,333 LLC Units for 23,333,333 shares of Class A common stock at the beginning of each period presented, the vesting of the weighted average number of restricted stock units during each of the periods presented and, at the beginning of the year ended December 31, 2014, the issuance of 6,000,000 shares of Class A common stock in connection with our IPO.
Core Net Income Per Share.
Core Net Income Per Share is Core Net Income adjusted for corporate income taxes assuming that all of our pre-tax earnings are subject to federal, state and local corporate income taxes, divided by Pro-Forma Weighted Average Shares Outstanding (as defined above). In determining corporate income taxes we used an annual effective corporate tax rate of 43.0%. Please refer to the calculation of Core Net Income Per Share in “— Reconciliation of Certain Non-GAAP Performance Measures to Consolidated U.S. GAAP Financial Measures.”
Core Net Income Margin.
Core Net Income Margin equals Core Net Income Per Share divided by total revenue per share and, for periods prior to January 1, 2015, total standalone revenue per share.
Prior to January 1, 2015, under U.S. GAAP, we were required to consolidate entities in which we hold a majority voting interest or have majority ownership and control over the operational, financial and investing decisions of that entity, including affiliated funds, for which we are the general partner and are presumed to have control, and entities that we conclude are VIEs, for which we are deemed the primary beneficiary. See “Critical Accounting Policies — Principles of Consolidation” and Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in this Form 10-K. We refer to “standalone financial information” or information presented on a “standalone basis” as information derived from our consolidated balance sheets and statements of operations for periods prior to January 1, 2015 that has been adjusted to eliminate the effects of the Consolidated Funds on our statements of operations. For the year ended December 31, 2014 , revenues from management fees, performance fees and investment income on a standalone basis were greater than those presented on a consolidated basis in accordance with U.S. GAAP because certain revenues recognized from Consolidated Funds were eliminated in consolidation. Furthermore, for that year, expenses on a standalone basis were lower than related amounts presented on a consolidated basis in accordance with U.S. GAAP due to the exclusion of the expenses of the Consolidated Funds.
Key Performance Indicators
When we review our performance we focus on the indicators described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Amounts in thousands, except AUM, share and per share amounts)
|
Consolidated Financial Data:
|
|
|
|
|
|
|
|
|
Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC
|
|
$
|
7,403
|
|
|
$
|
21,517
|
|
|
$
|
37,750
|
|
Net income per Class A common stock
(1)
|
|
$
|
0.02
|
|
|
$
|
0.46
|
|
|
$
|
0.24
|
|
Net Income Margin
(2)
|
|
9.7
|
%
|
|
31.9
|
%
|
|
45.7
|
%
|
Weighted average shares - Basic and Diluted
|
|
5,804,042
|
|
|
6,002,422
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
Non-GAAP Data:
|
|
|
|
|
|
|
|
Core Net Income
(3)
|
|
$
|
25,531
|
|
|
$
|
29,747
|
|
|
$
|
40,882
|
|
Core EBITDA
|
|
38,481
|
|
|
41,721
|
|
|
47,957
|
|
Core Net Income Per Share
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
0.79
|
|
Core Net Income Margin
|
|
21.7
|
%
|
|
27.7
|
%
|
|
29.2
|
%
|
Pro-Forma Weighted Average Shares Outstanding
|
|
30,689,412
|
|
|
30,459,958
|
|
|
30,491,417
|
|
|
|
|
|
|
|
|
Other Data (at period end, in millions):
|
|
|
|
|
|
|
|
AUM
|
|
$
|
5,335
|
|
|
$
|
4,779
|
|
|
$
|
3,682
|
|
Fee Earning AUM
|
|
3,190
|
|
|
3,302
|
|
|
3,058
|
|
____________
|
|
(1)
|
With respect to the year ended December 31, 2014, Net income per Class A common stock is based on net income attributable to Medley Management Inc. for the period September 29, 2014 through December 31, 2014.
|
|
|
(2)
|
Net Income Margin equals Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC divided by total revenue and, for periods prior to January 1, 2015, total standalone revenue.
|
|
|
(3)
|
With respect to the year ended December 31, 2014, Core Net Income includes a pro-forma adjustment to reflect guaranteed payments to Medley LLC members as compensation expense. Prior to the Company's Reorganization and IPO these payments were recorded as distributions from members' capital.
|
AUM
AUM refers to the assets of our funds. We view AUM as a metric to measure our investment and fundraising performance as it reflects assets generally at fair value plus available uncalled capital. For our funds, our AUM equals the sum of the following:
|
|
•
|
Gross asset values or NAV of such funds;
|
|
|
•
|
the drawn and undrawn debt (at the fund-level, including amounts subject to restrictions); and
|
|
|
•
|
uncalled committed capital (including commitments to funds that have yet to commence their investment periods).
|
The table below provides the roll forward of AUM.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of AUM
|
|
Permanent
Capital
Vehicles
|
|
Long-dated
Private Funds
and SMAs
|
|
Total
|
|
Permanent
Capital
Vehicles
|
|
Long-dated
Private Funds
and SMAs
|
|
(Dollars in millions)
|
|
|
|
|
Beginning balance, December 31, 2013
|
$
|
1,279
|
|
|
$
|
1,004
|
|
|
$
|
2,283
|
|
|
56
|
%
|
|
44
|
%
|
Commitments
(1)
|
1,037
|
|
|
704
|
|
|
1,741
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
—
|
|
|
(185
|
)
|
|
(185
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
(109
|
)
|
|
(33
|
)
|
|
(142
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
46
|
|
|
(61
|
)
|
|
(15
|
)
|
|
|
|
|
|
|
Ending balance, December 31, 2014
|
$
|
2,253
|
|
|
$
|
1,429
|
|
|
$
|
3,682
|
|
|
61
|
%
|
|
39
|
%
|
Commitments
(1)
|
485
|
|
|
874
|
|
|
1,359
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
(23
|
)
|
|
(17
|
)
|
|
(40
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
(137
|
)
|
|
(75
|
)
|
|
(212
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
(32
|
)
|
|
22
|
|
|
(10
|
)
|
|
|
|
|
|
|
Ending balance, December 31, 2015
|
$
|
2,546
|
|
|
$
|
2,233
|
|
|
$
|
4,779
|
|
|
53
|
%
|
|
47
|
%
|
Commitments
(1)
|
33
|
|
|
858
|
|
|
891
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
(12
|
)
|
|
—
|
|
|
(12
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
(125
|
)
|
|
(315
|
)
|
|
(440
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
85
|
|
|
32
|
|
|
117
|
|
|
|
|
|
|
|
Ending balance, December 31, 2016
|
$
|
2,527
|
|
|
$
|
2,808
|
|
|
$
|
5,335
|
|
|
47
|
%
|
|
53
|
%
|
____________
|
|
(1)
|
With respect to permanent capital vehicles, represents increases during the period through equity and debt offerings, subject to restrictions, as well as any increases in available undrawn borrowings or capital commitments. With respect to long-dated private funds and SMAs, represents new commitments or gross inflows, respectively, as well as any increases in available undrawn borrowings.
|
|
|
(2)
|
Represents the permanent reduction in equity or leverage during the period.
|
|
|
(3)
|
With respect to permanent capital vehicles, represents distributions of income. With respect to long-dated private funds and SMAs, represents return of capital, given our funds’ stage in their respective life cycle and the prioritization of capital distributions.
|
|
|
(4)
|
Includes interest income, realized and unrealized gains (losses), fees and/or expenses.
|
AUM increased by
$555.2 million
, or
12%
, to
$5.3 billion
as of December 31, 2016 compared to AUM as of December 31, 2015. Our permanent capital vehicles remained consistent at $2.5 billion as of December 31, 2016. Our long-dated private funds and SMAs increased AUM by
$575.1 million
, or
26%
, primarily associated with new capital commitments from our long-dated private funds and SMAs, partly offset by distributions by our long-dated private funds and SMAs as some of our vehicles are no longer in the investment period.
AUM increased by $1.1 billion, or 30%, to $4.8 billion as of December 31, 2015 compared to AUM as of December 31, 2014. Our permanent capital vehicles increased AUM by $293.0 million, or 13%, primarily associated with new equity issuances at SIC and increased leverage capacity at both MCC and SIC during the period. Our long-dated private funds and SMAs increased AUM by $804.3 million, or 56%, primarily associated with new capital commitments from our SMAs.
AUM increased by $1.4 billion, or 61%, to $3.7 billion as of December 31, 2014 compared to AUM as of December 31, 2013. Our permanent capital vehicles increased AUM by $974.9 million, or 76%, primarily associated with new equity issuances and increased leverage capacity at both MCC and SIC during the period. Our long-dated private funds and SMAs increased AUM by $424.4 million, or 42%, primarily associated with new capital commitments from our SMAs.
Fee Earning AUM
Fee earning AUM refers to assets under management on which we directly earn base management fees. We view fee earning AUM as a metric to measure changes in the assets from which we earn management fees. Our fee earning AUM is the sum of all the individual fee earning assets of our funds that contribute directly to our management fees and generally equals the sum of:
|
|
•
|
for our permanent capital vehicles, the average or total gross asset value, including assets acquired with the proceeds of leverage (see “Fee earning AUM based on gross asset value” in the “Components of Fee Earning AUM” table below for the amount of this component of fee earning AUM as of each period);
|
|
|
•
|
for certain funds within the investment period in the long-dated private funds, the amount of limited partner capital commitments (see “Fee earning AUM based on capital commitments” in the “Components of Fee Earning AUM” table below for the amount of this component of fee earning AUM as of each period); and
|
|
|
•
|
for the aforementioned funds beyond the investment period and certain managed accounts within their investment period, the amount of limited partner invested capital or the NAV of the fund (see “Fee earning AUM based on invested capital or NAV” in the “Components of Fee Earning AUM” table below for the amount of this component of fee earning AUM as of each period).
|
Our calculations of fee earning AUM and AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by others. In addition, our calculations of fee earning AUM and AUM may not be based on any definition of fee earning AUM or AUM that is set forth in the agreements governing the investment funds that we advise.
Components of Fee Earning AUM
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in millions)
|
Fee earning AUM based on gross asset value
|
$
|
2,207
|
|
|
$
|
2,238
|
|
Fee earning AUM based on capital commitments
|
113
|
|
|
113
|
|
Fee earning AUM based on invested capital or NAV
|
870
|
|
|
951
|
|
Total fee earning AUM
|
$
|
3,190
|
|
|
$
|
3,302
|
|
As of
December 31, 2016
, fee earning AUM based on gross asset value decreased by
$31.5 million
, or
1%
, compared to
December 31, 2015
. The decrease in fee earning AUM based on gross asset value was due primarily to a decrease at MCC that resulted from lower leverage capacity, a decline in portfolio asset valuations and share repurchases, partly offset by new equity issuances at SIC.
As of
December 31, 2016
, fee earning AUM based on capital commitments remained consistent compared to
December 31, 2015
.
As of
December 31, 2016
, fee earning AUM based on invested capital or NAV decreased by
$80.7 million
, or
8%
, compared to
December 31, 2015
. The decrease in fee earning AUM based on invested capital or NAV was due primarily to distributions of income and return of capital by our long-dated private funds and SMAs as some of our vehicles are no longer in the investment period, partly offset by new capital commitments from our long-dated private funds and SMAs.
The table below presents the roll forward of Fee Earning AUM.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Fee Earning AUM
|
|
|
Permanent
Capital
Vehicles
|
|
Long-dated
Private Funds
and SMAs
|
|
Total
|
|
Permanent
Capital
Vehicles
|
|
Long-dated
Private Funds
and SMAs
|
|
|
(Dollars in millions)
|
|
|
|
|
Beginning balance, December 31, 2013
|
|
$
|
1,072
|
|
|
$
|
934
|
|
|
$
|
2,006
|
|
|
53
|
%
|
|
47
|
%
|
Commitments
(1)
|
|
1,036
|
|
|
439
|
|
|
1,475
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
|
—
|
|
|
(253
|
)
|
|
(253
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
|
(107
|
)
|
|
(49
|
)
|
|
(156
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
|
46
|
|
|
(60
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
Ending balance, December 31, 2014
|
|
$
|
2,047
|
|
|
$
|
1,011
|
|
|
$
|
3,058
|
|
|
67
|
%
|
|
33
|
%
|
Commitments
(1)
|
|
383
|
|
|
221
|
|
|
604
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
|
(23
|
)
|
|
(17
|
)
|
|
(40
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
|
(137
|
)
|
|
(95
|
)
|
|
(232
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
|
(32
|
)
|
|
(56
|
)
|
|
(88
|
)
|
|
|
|
|
|
|
Ending balance, December 31, 2015
|
|
$
|
2,238
|
|
|
$
|
1,064
|
|
|
$
|
3,302
|
|
|
68
|
%
|
|
32
|
%
|
Commitments
(1)
|
|
22
|
|
|
194
|
|
|
216
|
|
|
|
|
|
|
|
Capital reduction
(2)
|
|
(12
|
)
|
|
—
|
|
|
(12
|
)
|
|
|
|
|
|
|
Distributions
(3)
|
|
(126
|
)
|
|
(285
|
)
|
|
(411
|
)
|
|
|
|
|
|
|
Change in fund value
(4)
|
|
85
|
|
|
10
|
|
|
95
|
|
|
|
|
|
|
|
Ending balance, December 31, 2016
|
|
$
|
2,207
|
|
|
$
|
983
|
|
|
$
|
3,190
|
|
|
69
|
%
|
|
31
|
%
|
____________
|
|
(1)
|
With respect to permanent capital vehicles, represents increases or temporary reductions during the period through equity and debt offerings, as well as any increases in capital commitments. With respect to long-dated private funds and SMAs, represents new commitments or gross inflows, respectively.
|
|
|
(2)
|
Represents the permanent reduction in equity or leverage during the period.
|
|
|
(3)
|
Represents distributions of income, return of capital and return of portfolio investment capital to the fund.
|
|
|
(4)
|
Includes interest income, realized and unrealized gains (losses), fees and/or expenses.
|
Total fee earning AUM decreased by
$112.2 million
, or
3%
, to
$3.2 billion
as of
December 31, 2016
compared to total fee earning AUM as of
December 31, 2015
, due primarily to distributions of income and return of capital by our long-dated private funds and SMAs as some of our vehicles are no longer in the investment period.
Total fee earning AUM increased by $243 million, or 8%, to $3.3 billion as of December 31, 2015 compared to total fee earning AUM as of December 31, 2014 and was due primarily to increased commitments from SIC and SMAs.
Total fee earning AUM increased by $1.0 billion, or 52%, to $3.0 billion as of December 31, 2014 compared to total fee earning AUM as of December 31, 2013 and was due primarily to increased commitments from permanent capital vehicles.
Returns
The following section sets forth historical performance for our active funds.
Sierra Income Corporation (SIC)
We launched SIC, our first public non-traded permanent capital vehicle, in April 2012. SIC primarily focuses on direct lending to middle market borrowers in the U.S. Since inception, we have provided capital for a total of 253 investments and have invested a total of $1.6 billion. As of
December 31, 2016
, the fee earning AUM was
$1.2 billion
. The performance for SIC as of
December 31, 2016
is summarized below:
|
|
|
|
Annualized Net Total Return
(1)
:
|
6.6
|
%
|
Annualized Realized Losses on Invested Capital:
|
0.6
|
%
|
Average Recovery:
|
75.6
|
%
|
Medley Capital Corporation (MCC)
We launched MCC, our first permanent capital vehicle in January 2011. MCC primarily focuses on direct lending to private middle market borrowers in the U.S. Since inception, we have provided capital for a total of 173 investments and have invested a total of $1.9 billion. As of
December 31, 2016
, excluding Medley SBIC LP, the fee earning AUM was
$796 million
. The performance for MCC as of
December 31, 2016
is summarized below:
|
|
|
|
Annualized Net Total Return
(2)
:
|
6.7
|
%
|
Annualized Realized Losses on Invested Capital:
|
1.3
|
%
|
Average Recovery
(3)
:
|
NM
|
|
Medley SBIC LP (Medley SBIC)
We launched Medley SBIC in March 2013 as a wholly owned subsidiary of MCC. Medley SBIC lends to smaller middle market private borrowers that we otherwise would not target in our other funds, due primarily to size. Since inception, we have provided capital for a total of 31 investments and have invested a total of $330 million. As of
December 31, 2016
, the fee earning AUM was
$237 million
. The performance for Medley SBIC fund as of
December 31, 2016
is summarized below:
|
|
|
|
Gross Portfolio Internal Rate of Return
(4)
:
|
14.0
|
%
|
Net Investor Internal Rate of Return
(5)
:
|
16.0
|
%
|
Annualized Realized Losses on Invested Capital:
|
0.0%
|
|
Average Recovery:
|
N/A
|
|
Medley Opportunity Fund II LP (MOF II)
MOF II is a long-dated private investment fund that we launched in December 2010. MOF II lends to middle market private borrowers, with a focus on providing senior secured loans. Since inception, we have provided capital for a total of 68 investments and have invested a total of $903 million. As of
December 31, 2016
, the fee earning AUM was
$409 million
. MOF II is currently fully invested and actively managing its assets. The performance for MOF II as of
December 31, 2016
, is summarized below:
|
|
|
|
Gross Portfolio Internal Rate of Return
(4)
:
|
11.6
|
%
|
Net Investor Internal Rate of Return
(6)
:
|
7.0
|
%
|
Annualized Realized Losses on Invested Capital:
|
1.7
|
%
|
Average Recovery
(3)
:
|
NM
|
|
Medley Opportunity Fund III LP (MOF III)
MOF III is a long-dated private investment fund that we launched in December 2014. MOF III lends to middle market private borrowers in the U.S., with a focus on providing senior secured loans. Since inception, we have provided capital for a total of 23 investments and have invested a total of $129 million. As of
December 31, 2016
, the fee earning AUM was
$113 million
. The performance for MOF III as of
December 31, 2016
is not meaningful given the fund’s limited operations and capital invested to date.
Other Long-Dated Private Funds
We launched Medley Credit Opportunity Fund (“MCOF”) in July 2016 to meet the current demand for equity capital solutions in the traditional corporate debt-backed collateralized loan obligation (“CLO”) market. Its investment objective is to generate current income, and also to generate capital appreciation through investing in CLO equity, as well as, equity and junior debt tranches trading in the secondary market.
We launched Aspect-Medley Investment Platform A LP (“Aspect”) in November 2016 to meet the current demand for equity capital solutions in the traditional corporate debt-backed collateralized loan obligation (“CLO”) market. Its investment objective is to generate current income, and also to generate capital appreciation through investing in CLO equity, as well as, equity and junior debt tranches trading in the secondary market.
The performance of MCOF and Aspect as of
December 31, 2016
is not meaningful given the funds' limited operations and capital invested to date.
Separately Managed Accounts (SMAs)
In the case of our SMAs, the investor, rather than us, may control the assets or investment vehicle that holds or has custody of the related investments. Certain subsidiaries of Medley LLC serve as the investment adviser for our SMAs. Since inception, we have provided capital for a total of 116 investments and have invested a total of $705 million. As of
December 31, 2016
, the fee earning AUM in our SMAs was
$420 million
. The aggregate performance of our SMAs as of
December 31, 2016
, is summarized below:
|
|
|
|
Gross Portfolio Internal Rate of Return
(4)
:
|
9.7
|
%
|
Net Investor Internal Rate of Return
(7)
:
|
7.7
|
%
|
Annualized Realized Losses on Invested Capital:
|
0.2
|
%
|
Average Recovery
(3)
:
|
NM
|
|
____________
|
|
(1)
|
Annualized Net Total Return for SIC represents the annualized return assuming an investment at the initial public offering price, reinvestments of all dividends and distributions at prices obtained under SIC’s dividend reinvestment plan and selling at the NAV as of the measurement date.
|
|
|
(2)
|
Annualized Net Total Return for MCC, including Medley SBIC, represents the annualized return assuming an investment at the initial public offering price, reinvestments of all dividends and distributions at prices obtained under MCC's dividend reinvestment plan and selling at NAV as of the measurement date.
|
|
|
(3)
|
Average Recovery includes only those realized investments in which we experience a loss of principal on a cumulative cash flow basis and is calculated by dividing the total actual cash inflows for each respective investment, including all interest, principal and fee note repayments, dividends and transactions fees, if applicable, by the total actual cash outflows for each respective investment. For MCC, MOF II and the SMAs, we have presented the Average Recovery as “NM” or “Not Meaningful” because we believe the number of realized losses for each respective vehicle is not sufficient to provide an accurate representation of the expected Average Recovery for each vehicle.
|
|
|
(4)
|
For MOF II, SMAs and Medley SBIC, the Gross Portfolio Internal Rate of Return represents the cumulative investment performance from inception of each respective fund through
December 31, 2016
. The Gross Portfolio Internal Rate of Return includes both realized and unrealized investments and excludes the impact of base management fees, incentive fees and other fund related expenses. For realized investments, the investment returns were calculated based on the actual cash outflows and inflows for each respective investment and include all interest, principal and fee note repayments, dividends and transactions fees, if applicable. For unrealized investments, the investment returns were calculated based on the actual cash outflows and inflows for each respective investment and include all interest, principal and fee note repayments, dividends and transactions fees, if applicable. The investment return assumes that the remaining unrealized portion of the investment is realized at the investment’s most recent fair value, as calculated in accordance with U.S. GAAP. There can be no assurance that the investments will be realized at these fair values and actual results may differ significantly.
|
|
|
(5)
|
Earnings from Medley SBIC are paid to MCC. The Net Internal Rate of Return for Medley SBIC was calculated based upon i) the actual cash contribution and distributions to/from MCC and Medley SBIC ii) an allocable portion of MCC’s management and incentive fees and general fund related expenses and iii) assumes the NAV as of the measurement date is distributed to MCC. As of
December 31, 2016
, Medley SBIC Net Internal Rate of Return as described above assuming only the inclusion of management fees was 21.0%.
|
|
|
(6)
|
Net Investor Internal Rate of Return for MOF II was calculated net of all management fees and carried interest allocation since inception and was computed based on the actual dates of capital contributions and the ending aggregate partners’ capital at the end of the period.
|
|
|
(7)
|
Net Investor Internal Rate of Return for our SMAs was calculated using the Gross Portfolio Internal Rate of Return, as described in note 4, and includes the actual management fees, incentive fees and general fund related expenses.
|
Results of Operations
The following table and discussion sets forth information regarding our consolidated results of operations for the years ended December 31, 2016, 2015 and 2014.
The consolidated financial statements of Medley have been prepared on substantially the same basis for all historical periods presented; however, for the year ended December 31, 2014, our results of operations included the impact of our Consolidated Funds. Effective January 1, 2015, we deconsolidated our Consolidated Funds as a result of the early adoption of ASU 2015-02,
Consolidation (Topic 810) - Amendments to the Consolidation Analysis
. For the year ended December 31, 2014, we consolidated funds where through our management contract and other interests we were deemed to have the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance. As previously described, the consolidation of these funds had the impact of increasing interest and other income of Consolidated Funds, interest and other expenses of Consolidated Funds and net investment gains (losses) of Consolidated Funds, but had no net effect on the net income attributable to our consolidated results for the year ended December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(Amounts in thousands, except AUM data)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
$
|
65,496
|
|
|
$
|
75,675
|
|
|
61,252
|
|
Performance fees
|
|
|
2,421
|
|
|
(15,685
|
)
|
|
2,050
|
|
Other revenues and fees
|
|
|
8,111
|
|
|
7,436
|
|
|
8,871
|
|
Total revenues
|
|
|
76,028
|
|
|
67,426
|
|
|
72,173
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
27,800
|
|
|
26,768
|
|
|
20,322
|
|
Performance fee compensation
|
|
|
(319
|
)
|
|
(8,049
|
)
|
|
(1,543
|
)
|
Consolidated Funds expenses
|
|
|
—
|
|
|
—
|
|
|
1,670
|
|
General, administrative and other expenses
|
|
|
28,540
|
|
|
16,836
|
|
|
16,312
|
|
Total expenses
|
|
|
56,021
|
|
|
35,555
|
|
|
36,761
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
1,304
|
|
|
886
|
|
|
886
|
|
Interest expense
|
|
|
(9,226
|
)
|
|
(8,469
|
)
|
|
(5,520
|
)
|
Other income (expenses), net
|
|
|
(1,070
|
)
|
|
(1,641
|
)
|
|
(1,773
|
)
|
Interest and other income of Consolidated Funds
|
|
|
—
|
|
|
—
|
|
|
71,468
|
|
Interest expense of Consolidated Funds
|
|
|
—
|
|
|
—
|
|
|
(9,951
|
)
|
Net realized gain (loss) on investments of Consolidated Funds
|
—
|
|
|
—
|
|
|
789
|
|
Net change in unrealized appreciation (depreciation) on investments of Consolidated Funds
|
—
|
|
|
—
|
|
|
(20,557
|
)
|
Net change in unrealized depreciation (appreciation) on secured borrowings of Consolidated Funds
|
—
|
|
|
—
|
|
|
1,174
|
|
Total other income (expense), net
|
|
|
(8,992
|
)
|
|
(9,224
|
)
|
|
36,516
|
|
Income (loss) before income taxes
|
|
|
11,015
|
|
|
22,647
|
|
|
71,928
|
|
Provision for (benefit from) income taxes
|
|
|
1,063
|
|
|
2,015
|
|
|
2,528
|
|
Net income (loss)
|
|
|
9,952
|
|
|
20,632
|
|
|
69,400
|
|
Net income attributable to non-controlling interests in Consolidated Funds
|
—
|
|
|
—
|
|
|
29,717
|
|
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
2,549
|
|
|
(885
|
)
|
|
1,933
|
|
Net income attributable to non-controlling interests in Medley LLC
|
6,406
|
|
|
18,406
|
|
|
36,055
|
|
Net income attributable to Medley Management Inc.
|
$
|
997
|
|
|
$
|
3,111
|
|
|
$
|
1,695
|
|
|
|
|
|
|
|
|
|
Other data (at period end, in millions):
|
|
|
|
|
|
|
|
AUM
|
|
|
$
|
5,335
|
|
|
$
|
4,779
|
|
|
$
|
3,682
|
|
Fee earning AUM
|
|
|
$
|
3,190
|
|
|
$
|
3,302
|
|
|
$
|
3,058
|
|
We refer to “standalone financial information” or information presented on a “standalone basis” as information derived from our consolidated statements of operations for the period prior to January 1, 2015 that has been adjusted to eliminate the effects of the Consolidated Funds on our consolidated statements of operations. For the year ended December 31, 2014, revenues from management fees, performance fees and investment income on a standalone basis were greater than those presented on a consolidated basis in accordance with U.S. GAAP because certain revenues recognized from Consolidated Funds were eliminated in consolidation. Furthermore, during this period, expenses on a standalone basis were lower than related amounts presented on a consolidated basis in accordance with U.S. GAAP due to the exclusion of the expenses of the Consolidated Funds.
The following table reconciles the Company's standalone results to its consolidated results for the year ended December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standalone
|
|
Consolidation and Reconciling Items
|
|
Consolidated
|
|
|
(Amounts in thousands)
|
Revenues
|
|
|
|
|
|
|
Management fees
|
|
$
|
65,765
|
|
|
$
|
(4,513
|
)
|
|
$
|
61,252
|
|
Performance fees
|
|
7,884
|
|
|
(5,834
|
)
|
|
2,050
|
|
Other revenues and fees
|
|
8,871
|
|
|
|
|
8,871
|
|
Total revenues
|
|
82,520
|
|
|
(10,347
|
)
|
|
72,173
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Compensation and benefits
|
|
20,322
|
|
|
—
|
|
|
20,322
|
|
Performance fee compensation
|
|
(1,543
|
)
|
|
—
|
|
|
(1,543
|
)
|
Consolidated Funds expenses
|
|
—
|
|
|
1,670
|
|
|
1,670
|
|
General, administrative and other expenses
|
|
16,312
|
|
|
—
|
|
|
16,312
|
|
Total expenses
|
|
35,091
|
|
|
1,670
|
|
|
36,761
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
Dividend income
|
|
886
|
|
|
—
|
|
|
886
|
|
Interest expense
|
|
(5,520
|
)
|
|
—
|
|
|
(5,520
|
)
|
Other income (expenses), net
|
|
(2,097
|
)
|
|
324
|
|
|
(1,773
|
)
|
Interest and other income of Consolidated Funds
|
|
—
|
|
|
71,468
|
|
|
71,468
|
|
Interest expense of Consolidated Funds
|
|
—
|
|
|
(9,951
|
)
|
|
(9,951
|
)
|
Net realized gain (loss) on investments of Consolidated Funds
|
—
|
|
|
789
|
|
|
789
|
|
Net change in unrealized appreciation (depreciation) on investments of Consolidated Funds
|
—
|
|
|
(20,557
|
)
|
|
(20,557
|
)
|
Net change in unrealized depreciation (appreciation) on secured borrowings of Consolidated Funds
|
—
|
|
|
1,174
|
|
|
1,174
|
|
Total other expense, net
|
|
(6,731
|
)
|
|
43,247
|
|
|
36,516
|
|
Income (loss) before income taxes
|
|
40,698
|
|
|
31,230
|
|
|
71,928
|
|
Provision for (benefit from) income taxes
|
|
1,015
|
|
|
1,513
|
|
|
2,528
|
|
Net income (loss)
|
|
39,683
|
|
|
29,717
|
|
|
69,400
|
|
Net income attributable to non-controlling interests in Consolidated Funds
|
—
|
|
|
29,717
|
|
|
29,717
|
|
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
1,933
|
|
|
—
|
|
|
1,933
|
|
Net income attributable to non-controlling interests in Medley LLC
|
36,055
|
|
|
—
|
|
|
36,055
|
|
Net income attributable to Medley Management Inc.
|
$
|
1,695
|
|
|
$
|
—
|
|
|
$
|
1,695
|
|
Year Ended
December 31, 2016
Compared to Year Ended
December 31, 2015
Revenues
Management Fees.
Total management fees
decrease
d by
$10.2 million
, or
13%
, to
$65.5 million
for the year ended
December 31, 2016
compared to the year ended
December 31, 2015
.
|
|
•
|
Our management fees from permanent capital vehicles decreased by $8.1 million for the year ended
December 31, 2016
compared to the same period in 2015. Management fees from SIC increased by $7.6 million due to an increase in Part I incentive fees and an
16%
increase in average fee earning AUM for the year ended
December 31, 2016
compared to the same period in 2015. Management fees from MCC decreased by $15.7 million due to a decrease in Part I incentive fees and a
14%
decrease in average fee earning AUM for the year ended
December 31, 2016
compared to the same period in 2015.
|
|
|
•
|
Our management fees from long-dated private funds and SMAs decreased by $2.1 million for the year ended
December 31, 2016
, compared to the same period in 2015. The decrease was primarily due to a decrease in origination fees, partly offset by an increase in base management fees.
|
Performance Fees.
Performance fees
increase
d to
$2.4 million
for the year ended
December 31, 2016
compared to a reversal of performance fees of
$15.7 million
for the same period in 2015. The
increase
was due to an
increase
in SMA performance fees accrual for the year ended
December 31, 2016
compared to a reversal of performance fees of MOF II and SMAs for the year ended
December 31, 2015
, which was the result of a decline in the underlying fund values.
Other Revenues and Fees.
Other revenues and fees
increase
d by
$0.7 million
, or
9%
, to
$8.1 million
for the year ended
December 31, 2016
compared to the same period in 2015. The increase was due primarily to an increase in administrative fees from our permanent capital vehicles.
Expenses
Compensation and Benefits.
Compensation and benefits
increase
d by
$1.0 million
, or
4%
to
$27.8 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
increase
was due primarily to an increase in salaries, that resulted from an increase in headcount, and an increase in stock-based compensation expense, partly offset by a decrease in discretionary compensation during the year ended
December 31, 2016
Performance Fee Compensation.
There was a reversal in performance fee compensation of
$0.3 million
during the year ended
December 31, 2016
as compared to a reversal of performance fee compensation of
$8.0 million
for the same period in 2015. The variance in performance fee compensation was due primarily to changes in projected future payments.
General, Administrative and Other Expenses
. General, administrative and other expenses
increase
d by
$11.7 million
to
$28.5 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
increase
was due primarily to an increase in expense support agreement expenses related to SIC. The expense support agreement with SIC expired on December 31, 2016, as such, we will no longer be responsible for expenses under the expense support agreement relating to SIC.
Other Income (Expense)
Dividend Income.
Dividend income
increase
d by
$0.4 million
to
$1.3 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
increase
was due to dividend income from our investment in available-for-sale securities which were acquired during the year ended
December 31, 2016
.
Interest Expense.
Interest expense
increase
d by
$0.8 million
, or
9%
, to
$9.2 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
increase
was primarily due to an acceleration of amortization of debt issuance costs and discount relating to prepayments made on our Term Loan Facility as a result of the refinancing of our indebtedness from the issuance of senior unsecured debt. Average debt outstanding during the year ended
December 31, 2016
and 2015 was $106.0 million and $105.9 million, respectively.
Other Income (Expenses), net.
Other expenses, net
decrease
d by
$0.6 million
to
$1.1 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
decrease
was due primarily to changes in fair value of our investment in SIC.
Provision for Income Taxes
Our effective income tax rate was
9.7%
and
8.9%
for the year ended
December 31, 2016
and 2015, respectively. Our tax rate is affected by recurring items, such as permanent differences and income allocated to non-controlling interests which is not subject to U.S. federal, state and local corporate income taxes. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The
increase
in the effective tax rate during the year ended
December 31, 2016
as compared to the same period in 2015 was primarily attributed to the variance in the reversal of performance compensation which is not included in taxable income.
Redeemable Non-Controlling Interests and Non-Controlling Interests in Consolidated Subsidiaries
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
increase
d by
$3.4 million
to
$2.5 million
for the year ended
December 31, 2016
compared to the same period in 2015. The
increase
was due primarily to a reversal of MOF II performance fees for the year ended
December 31, 2015
, a portion of which was allocated to non-controlling interests in consolidated subsidiaries.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Management Fees.
Total management fees increased by $14.4 million, or 24%, to $75.7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014.
|
|
•
|
Our permanent capital vehicles generated an additional $12.4 million in management fees for the year ended December 31, 2015 compared to the same period in 2014. Management fees from SIC increased $12.7 million due to a 43% increase in fee earning AUM over that period and due to an increase in Part I incentive fees. Management fees from MCC decreased $0.2 million due to a decrease in Part I incentive fees, partially offset by a $2.2 million increase in base management fees over that period.
|
|
|
•
|
Our management fees from long-dated private funds and SMAs increased by $2.0 million for the year ended December 31, 2015 compared to the same period in 2014. As previously discussed, the adoption of new consolidation guidance led to the deconsolidation of our Consolidated Funds effective January 1, 2015. As a result of the deconsolidation, management fees increased by $4.5 million compared to the same period in 2014. This increase was partially offset by a decrease in origination fees.
|
Performance Fees.
Performance fees decreased by $17.7 million to $(15.7) million for the year ended December 31, 2015 compared to the same period in 2014. The decrease was due primarily to the reversal of MOF II performance fees as a result of a decrease in the asset values within the underlying MOF II portfolio. The decrease was partially offset by an increase of $5.8 million in performance fees as a result of the deconsolidation of our Consolidated Funds for the year ended December 31, 2015 compared to the same period in 2014.
Other Revenues and Fees.
Other revenues and fees decreased by $1.4 million, or 16%, to $7.4 million for the year ended December 31, 2015 compared to the same period in 2014. The decrease was due primarily to a $3.8 million decrease in reimbursements from SIC for organizational and offering expense. As of October 31, 2014, we were fully reimbursed by SIC, as such there was no revenue associated with these reimbursements during the year ended December 31, 2015. The decrease was partially offset by an increase in administrative fees from our permanent capital vehicles.
Expenses
Compensation and Benefits.
Compensation and benefits increased by $6.4 million, or 32% to $26.8 million for the year ended December 31, 2015 compared to the same period in 2014. The increase was due primarily to increases in base salaries, stock compensation incurred with the grant of restricted stock units in connection with our IPO and compensation associated with guaranteed payments to Medley LLC members that, prior to the Company’s Reorganization and IPO, were recorded as distributions from members’ capital. The increase in base salaries were primarily the result of a 20% increase in average headcount for the year ended December 31, 2015 compared to the same period in 2014.
Performance Fee Compensation.
Performance fee compensation decreased by $6.5 million to $(8.0) million for the year ended December 31, 2015 compared to the same period in 2014. The variance in performance fee compensation was due primarily to a decrease in our performance fee compensation payable that resulted from a decrease in projected future payments.
Consolidated Funds Expenses.
Consolidated Funds expenses decreased by $1.7 million for the year ended December 31, 2015 compared to the same period in 2014 due to the deconsolidation of MOF I and MOF II as of January 1, 2015. There were no Consolidated Funds expenses for the year ended December 31, 2015.
General, Administrative and Other Expenses
. General, administrative and other expenses increased by $0.5 million, or 3%, to $16.8 million for the year ended December 31, 2015 compared to the same period in 2014. The increase was due primarily to an increase in expense support agreement expenses related to SIC and an overall increase in general, administrative and other expenses due to an overall growth of our business. The increase was partially offset by a decrease in organization and offering expenses of SIC as a result of Medley not being liable for these expenses as of June 2, 2014.
Other Income (Expense)
When evaluating the changes in other income (expense), we separately analyze the returns generated by our investment portfolio from the investment returns generated by our Consolidated Funds.
Dividend Income.
Dividend income of $0.9 million remained consistent during the year ended December 31, 2015 compared to the same period in 2014.
Interest Expense.
Interest expense increased by $2.9 million to $8.5 million for the year ended December 31, 2015 compared to the same period in 2014. The increase was a direct result of our $110.0 million debt refinancing with Credit Suisse AG Cayman Islands Branch. Average debt outstanding during the years ended December 31, 2015 and 2014 was $105.9 million and $70.5 million, respectively.
Other Income (Expenses), net.
Other income (expenses), net decreased by $0.1 million to $1.6 million for the year ended December 31, 2015 compared to the same period in 2014. The decrease was due primarily to the deconsolidation of MOF I and MOF II for the year ended December 31, 2015, a decrease in expense associated with our revenue share payable and a decrease in loss from our investments in MOF I. The decrease was partially offset by an increase in unrealized loss from our investment in SIC.
Investments of Consolidated Funds
Interest and other income of Consolidated Funds, excluding the amount attributable to loan participations, decreased by $61.5 million for the year ended December 31, 2015 compared to the same period in 2014 due to the deconsolidation of MOF I and MOF II as of January 1, 2015. There were no Consolidated Funds expenses for the year ended December 31, 2015.
Net unrealized and realized gain (loss) on investments of Consolidated Funds, excluding the amount attributable to loan participations, decreased by $18.6 million for the year ended December 31, 2015 compared to the same period in 2014 due to the deconsolidation of MOF I and MOF II as of January 1, 2015. There was no unrealized or realized gain (loss) on investments of Consolidated Funds for the year ended December 31, 2015.
Provision for Income Taxes
Our effective income tax rate was 8.9% and 3.5% for the years ended December 31, 2015 and 2014, respectively. The increase in the effective tax rate was due primarily to the impact of the consolidation of MOF II for the year ended December 31, 2014, as MOF II earnings flow through to its owners and is not subject to federal or state income taxes at the entity level. In addition, the Company was subject to federal, state and local income taxes on net income attributed to Medley Management Inc. from September 29, 2014 through December 31, 2014. Prior to September 29, 2014, the Company was only subject to New York City’s unincorporated business tax.
Non-Controlling Interests
Net Income Attributable to Non-Controlling Interests in Consolidated Funds.
Net income attributable to non-controlling interests in Consolidated Funds decreased by $29.7 million to zero for the year ended December 31, 2015 compared to the same
period in 2014. As a result of the deconsolidation of our Consolidated Funds effective January 1, 2015, we no longer record net income attributable to non-controlling interests in Consolidated Funds.
Net Income Attributable to Non-Controlling Interests in Consolidated Subsidiaries.
Net income attributable to non-controlling interests in consolidated subsidiaries decreased by $2.8 million to $(0.9) million for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily due to the reversal of performance fees of MOF II.
Reconciliation of Certain Non-GAAP Performance Measures to Consolidated U.S. GAAP Financial Measures
In addition to analyzing our results on a GAAP basis, management also makes operating decisions and assesses business performance based on the financial and operating metrics and data that are presented without the impact of the consolidation of any funds. Management believes that these measures provide analysts, investors and management with helpful information regarding our underlying operating performance and our business, as they remove the impact of items management believes are not reflective of underlying operating performance. These non-GAAP measures are also used by management for planning purposes, including the preparation of internal budgets; and for evaluating the effectiveness of operational strategies. Additionally, we believe these non-GAAP measures provide another tool for investors to use in comparing our results with other companies in our industry, many of whom use similar non-GAAP measures. There are limitations associated with the use of non-GAAP financial measures as compared to the use of the most directly comparable U.S. GAAP financial measure and these measures supplement and should be considered in addition to and not in lieu of the results of operations discussed below. Furthermore, such measures may be inconsistent with measures presented by other companies.
Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC is the U.S. GAAP financial measure most comparable to Core Net Income and Core EBITDA. The following table is a reconciliation of net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC on a consolidated basis to Core Net Income and Core EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Amounts in thousands, except share and per share amounts)
|
Net income attributable to Medley Management Inc.
|
|
$
|
997
|
|
|
$
|
3,111
|
|
|
$
|
1,695
|
|
Net income attributable to non-controlling interests in
Medley LLC
|
|
6,406
|
|
|
18,406
|
|
|
36,055
|
|
Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC
|
|
7,403
|
|
|
21,517
|
|
|
37,750
|
|
Reimbursable fund startup expenses
|
|
16,329
|
|
|
6,378
|
|
|
5,811
|
|
IPO date award stock-based compensation
|
|
2,811
|
|
|
2,585
|
|
|
845
|
|
Adjustment for pre-IPO guaranteed payments to members
(1)
|
—
|
|
|
—
|
|
|
(3,380
|
)
|
Other non-core items
(2)
|
|
1,348
|
|
|
303
|
|
|
(5
|
)
|
Income tax benefit (expense) on adjustments
|
|
(2,360
|
)
|
|
(1,036
|
)
|
|
(139
|
)
|
Core Net Income
|
|
$
|
25,531
|
|
|
$
|
29,747
|
|
|
$
|
40,882
|
|
Interest expense
|
|
8,614
|
|
|
8,469
|
|
|
5,520
|
|
Income taxes
|
|
3,423
|
|
|
3,051
|
|
|
1,154
|
|
Depreciation and amortization
|
|
913
|
|
|
454
|
|
|
401
|
|
Core EBITDA
|
|
$
|
38,481
|
|
|
$
|
41,721
|
|
|
$
|
47,957
|
|
|
|
|
|
|
|
|
Core Net Income Per Share
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
Pro-Forma Weighted Average Shares Outstanding
(3)
|
|
30,689,412
|
|
|
30,459,958
|
|
|
30,491,417
|
|
____________
|
|
(1)
|
Represents a pro-forma adjustment to reflect guaranteed payments to Medley LLC members as compensation expense. Prior to the Company's Reorganization and IPO, these payments were recorded as distributions from members' capital.
|
|
|
(2)
|
For year ended December 31, 2016, other non-core items consist of a $0.6 million acceleration of amortization of debt issuance costs and discount relating to prepayments made on our Term Loan Facility as a result of the refinancing of our indebtedness from the issuance of senior unsecured debt, a $0.5 million impairment loss on our investment in CK Pearl Fund and a $0.2 million severance cost to former employees. For the years ended December 31, 2015 and 2014, other non-core items consist of severance costs to former employees.
|
|
|
(3)
|
Assumes
the conversion by the pre-IPO holders of 23,333,333 LLC Units for 23,333,333 shares of Class A common stock at the beginning of each period presented, the vesting of the weighted average number of restricted stock units during each of the periods presented and, at the beginning of the year ended December 31, 2014, the issuance of 6,000,000 shares of Class A common stock in connection with our IPO.
|
The calculation of Core Net Income Per Share is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Amounts in thousands, except share and per share amounts)
|
Numerator
|
|
|
|
|
|
|
|
|
Core Net Income
|
|
$
|
25,531
|
|
|
$
|
29,747
|
|
|
$
|
40,882
|
|
Add: Income taxes
|
|
3,423
|
|
|
3,051
|
|
|
1,154
|
|
Pre-Tax Core Net Income
|
|
$
|
28,954
|
|
|
$
|
32,798
|
|
|
$
|
42,036
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
5,804,042
|
|
|
6,002,422
|
|
|
6,000,000
|
|
Conversion of LLC Units to Class A common stock
|
|
23,333,333
|
|
|
23,333,333
|
|
|
23,333,333
|
|
Restricted stock units
|
|
1,552,037
|
|
|
1,124,203
|
|
|
1,158,084
|
|
Pro-Forma Weighted Average Shares Outstanding
|
|
30,689,412
|
|
|
30,459,958
|
|
|
30,491,417
|
|
Pre-Tax Core Net Income Per Share
|
|
$
|
0.94
|
|
|
$
|
1.08
|
|
|
$
|
1.38
|
|
Less: corporate income taxes per share
(1)
|
|
(0.40
|
)
|
|
(0.47
|
)
|
|
(0.59
|
)
|
Core Net Income Per Share
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
0.79
|
|
____________
|
|
(1)
|
Assumes that all of our pre-tax earnings are subject to federal, state and local corporate income taxes. In determining corporate income taxes, we used a combined effective corporate tax rate of 43.0%.
|
Net Income Margin is the U.S. GAAP financial measure most comparable to Core Net Income Margin. Net Income margin is equal to Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC divided by total revenue and for the year ended December 31, 2014, total standalone revenue. The following table is a reconciliation of Net Income Margin to Core Net Income Margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Net Income Margin
|
|
9.7
|
%
|
|
31.9
|
%
|
|
45.7
|
%
|
Reimbursable fund startup expenses
(1)
|
|
21.5
|
%
|
|
9.5
|
%
|
|
7.0
|
%
|
IPO date award stock-based compensation
(1)
|
|
3.7
|
%
|
|
3.8
|
%
|
|
1.0
|
%
|
Adjustment for pre-IPO guaranteed payments to members
(1)(2)
|
—
|
%
|
|
—
|
%
|
|
(4.0
|
)%
|
Other non-core items
(1)(3)
|
|
1.8
|
%
|
|
0.4
|
%
|
|
0.0
|
%
|
Provision for income taxes
(1)
|
|
1.4
|
%
|
|
3.0
|
%
|
|
1.3
|
%
|
Corporate income taxes
(4)
|
|
(16.4
|
)%
|
|
(20.9
|
)%
|
|
(21.8
|
)%
|
Core Net Income Margin
|
|
21.7
|
%
|
|
27.7
|
%
|
|
29.2
|
%
|
____________
|
|
(1)
|
Adjustments to Net income attributable to Medley Management Inc. and non-controlling interests in Medley LLC to calculate Core Net Income are presented as a percentage of total revenue, and, for the year ended December 31, 2014, total standalone revenue.
|
|
|
(2)
|
Represents a pro-forma adjustment to reflect guaranteed payments to Medley LLC members as compensation expense. Prior to the Company's Reorganization and IPO, these payments were recorded as distributions from members' capital.
|
|
|
(3)
|
For year ended December 31, 2016, other non-core items consist of a $0.6 million acceleration of amortization of debt issuance costs and discount relating to prepayments made on our Term Loan Facility as a result of the refinancing of our indebtedness from the issuance of senior unsecured debt, a $0.5 million impairment loss on our investment in CK Pearl Fund and a $0.2 million severance cost to former employees. For the years ended December 31, 2015 and 2014, other non-core items consist of severance costs to former employees.
|
|
|
(4)
|
Assumes that all our pre-tax earnings, including adjustments above, are subject to federal, state and local corporate income taxes. In determining corporate income taxes, we used a combined effective corporate tax rate of 43.0% and presented the calculation as a percentage of total revenue.
|
Liquidity and Capital Resources
Our primary cash flow activities involve: (i) generating cash flow from operations, which largely includes management fees; (ii) making distributions to our owners; and (iii) borrowings, interest payments and repayments under our debt facilities. As of
December 31, 2016
, our cash and cash equivalents were
$49.7 million
and our restricted cash equivalents balance was
$4.9 million
.
Our material source of cash from our operations is management fees, which are collected quarterly. We primarily use cash flows from operations to pay compensation and benefits, general, administrative and other expenses, federal, state and local corporate income taxes, debt service costs and distributions to our owners. Our cash flows, together with the proceeds from equity and debt issuances, are also used to fund investments in limited partnerships, purchase of available-for-sale securities, acquisition of fixed assets and other capital items. If cash flow from operations were insufficient to fund distributions, we expect that we would suspend paying such distributions.
For the year ended December 31, 2014, our consolidated financial statements reflect the cash flows of our operating business, and the results of our Consolidated Funds. The assets of our Consolidated Funds, on a gross basis, are significantly larger than the assets of our operating business and therefore have a substantial effect on our reported cash flows. The primary cash flow activities of our Consolidated Funds include: (i) raising capital from third-party investors, which is reflected as non-controlling interests of our Consolidated Funds; (ii) purchasing and selling investment securities; (iii) collecting interest and dividend income; (iv) generating cash through the realization of certain investments; and (v) distributing cash to investors. Our Consolidated Funds are treated as investment companies for financial accounting purposes under U.S. GAAP; therefore, the character and classification of all Consolidated Fund transactions are presented as cash flows from operations.
Debt Instruments
Senior Unsecured Debt
2026 Notes
On August 9, 2016, Medley LLC completed a registered public offering of
$25.0 million
of an aggregate principal amount of
6.875%
senior notes due 2026 (the “2026 Notes”) at a public offering price of
100%
of the principal amount. On October 18, 2016, Medley LLC completed a registered public offering of an additional
$28.6 million
in aggregate principal amount of the 2026 Notes at a public offering price of
$24.45
for each
$25.00
principal amount of notes. We used the net proceeds from these offerings to repay a portion of the outstanding indebtedness under the Term Loan Facility. Collectively, these offerings compose the senior unsecured debt balance as of December 31, 2016.
The 2026 Notes mature on August 15, 2026 and interest is payable quarterly commencing on November 15, 2016. The 2026 Notes are subject to redemption in whole or in part at any time or from time to time, at our option, on or after August 15, 2019 at a redemption price per security equal to
100%
of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2026 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MDLX.”
As of
December 31, 2016
, the outstanding senior unsecured debt balance was
$49.8 million
, which is reflected net of unamortized discount and debt issuance costs of
$3.8 million
.
2024 Notes
On January 18, 2017, Medley LLC completed a public offering of
$34.5 million
in aggregate principal amount of
7.25%
senior notes due 2024 (the “2024 Notes”) at a public offering price of 100% of the principal amount of notes. On February 22, 2017, Medley LLC completed a public offering of an additional
$34.5 million
in aggregate principal amount of 2024 Notes at a public offering price of
$25.25
for each
$25.00
principal amount of notes. We used the net proceeds from the offering to repay the remaining outstanding indebtedness under the Term Loan Facility and for general corporate purposes.
The 2024 Notes mature on January 30, 2024 and interest is payable quarterly commencing on April 30, 2017. The senior unsecured debt is subject to redemption in whole or in part at any time or from time to time, at our option, on or after January 30, 2020 at a redemption price per security equal to
100%
of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2024 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MDLQ.”
Revolving Credit Facility
On August 19, 2014, we entered into a $15.0 million senior secured revolving credit facility with City National Bank (as amended, the “Revolving Credit Facility”), as administrative agent and collateral agent thereunder, and the lenders from time to time party thereto, which will mature on August 19, 2017, with a one-year extension at the option of the borrower, provided certain conditions are met. On May 3, 2016, the Revolving Credit Facility was amended to permit us to issue additional indebtedness. The amendment also provided for the creation and funding of certain future funds, as well as for certain other technical changes to the Revolving Credit Facility. We intend to use any proceeds of borrowings under the Revolving Credit Facility for general corporate purposes, including funding our working capital needs. We have not incurred any borrowings under the Revolving Credit Facility through the date of this filing.
Term Loan Facility
On August 14, 2014, we entered into a $110.0 million senior secured term loan credit facility (as amended, the “Term Loan Facility”) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent thereunder, Credit Suisse Securities (USA) LLC, as bookrunner and lead arranger, and the lenders from time to time party thereto, which was scheduled to mature on June 15, 2019. On May 3, 2016, the Term Loan Facility was amended to permit us to issue additional indebtedness with proceeds of such indebtedness to be used to prepay loans outstanding under the Term Loan Facility. The amendment also provided for the creation and funding of certain future funds, as well as for certain other technical changes to the Term Loan Facility. Medley LLC was the borrower under the Term Loan Facility.
In February 2017, borrowings under this facility were paid off using the proceeds from the issuance of the 2024 Notes, without penalty, which resulted in the termination of the Term Loan Facility.
Interest Rate and Fees
Borrowings under the Revolving Credit Facility bear interest, at our option, at a rate equal to either (1) a Eurodollar margin over an adjusted LIBOR rate or (2) a base rate margin over an adjusted base rate determined by reference to the highest of (a) the term loan administrative agent’s prime rate; (b) the federal funds effective rate in effect on such day plus 0.5%; and (c) an adjusted LIBOR rate plus 1.0%. The applicable margins for the Revolving Credit Facility are (i) if the ratio of net debt to Core EBITDA is less than 1.0 to 1.0, 1.5% in the case of adjusted base rate loans, and, in the case of Eurodollar loans, (x) 3.0% until maturity; and (ii) if the ratio of net debt to Core EBITDA is greater than or equal to 1.0 to 1.0, 2.50% in the case of adjusted base rate loans, and, in the case of Eurodollar loans, (x) 3.25% until maturity. In addition to paying interest on any outstanding principal under the Revolving Credit Facility, we are required to pay an unused line fee of 0.25% per annum of the unused portion of the commitments.
Borrowings under the Term Loan Facility bore interest, at our option, at a rate equal to either (i) a Eurodollar margin over an adjusted LIBOR rate (with a “floor” of 1.0%) or (ii) a base rate margin over an adjusted base rate determined by reference to the highest of (a) the term loan administrative agent’s prime rate; (b) the federal funds effective rate in effect on such day plus 0.5%; and (c) an adjusted LIBOR rate plus 1.0%. The applicable margins for the Term Loan Facility was 5.5%, in the case of Eurodollar loans and 4.5%, in the case of adjusted base rate loans.
Guarantees and Collateral
Any obligations under the Revolving Credit Facility are unconditionally and irrevocably guaranteed by certain of Medley LLC’s subsidiaries, including Medley Capital LLC, MOF II Management LLC, MOF III Management LLC, Medley SMA Advisors LLC, Medley GP Holdings LLC, and Medley GP LLC (the “credit agreement guarantors”). In addition, any outstanding borrowings are collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, the borrower and each of the borrower’s and credit agreement guarantors’ direct or indirect domestic subsidiaries and 65% of the capital stock of, or other equity interests in, each of the borrower’s or any subsidiary guarantors’ direct wholly owned first-tier restricted foreign subsidiaries, and (ii) certain tangible and intangible assets of the borrower and the credit agreement guarantors (subject to certain exceptions and qualifications).
None of our non-wholly owned domestic subsidiaries are obligated to guarantee the Revolving Credit Facility. Such subsidiaries include MCC Advisors LLC, SIC Advisors LLC, MOF II GP LLC and MOF III GP LLC.
Certain Covenants and Events of Default
The Revolving Credit Facility contains a number of significant affirmative and negative covenants and customary events of default. Such covenants, among other things, will limit or restrict, subject to certain exceptions, the ability of the borrower and its restricted subsidiaries to:
|
|
•
|
incur additional indebtedness, make guarantees and enter into hedging arrangements;
|
|
|
•
|
create liens on assets;
|
|
|
•
|
enter into sale and leaseback transactions;
|
|
|
•
|
engage in mergers or consolidations;
|
|
|
•
|
make fundamental changes;
|
|
|
•
|
pay dividends and distributions or repurchase our capital stock;
|
|
|
•
|
make investments, loans and advances, including acquisitions;
|
|
|
•
|
engage in certain transactions with affiliates;
|
|
|
•
|
make changes in the nature of their business; and
|
|
|
•
|
make prepayments of junior debt.
|
In addition, the credit agreement governing our Revolving Credit Facility contains a financial covenant that requires us to maintain, with respect to each four quarter period, a ratio of net debt to Core EBITDA not greater than 3.5 to 1.0. The ratio of net debt to Core EBITDA in respect of the Revolving Credit Facility is calculated using our financial results and includes the adjustments made to calculate Core EBITDA.
Our Revolving Credit Facility contains certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lender under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of any amounts due under the Revolving Credit Facility and all actions permitted to be taken by a secured creditor.
Non-Recourse Promissory Notes
In April 2012, we borrowed $5.0 million under a non-recourse promissory note with a foundation, and $5.0 million under a non-recourse promissory note with a trust. Proceeds from the borrowings were used to purchase 1,108,033 shares of common stock of SIC, which were pledged as collateral for the obligations. Interest on the notes is paid monthly and is equal to the dividends received by us related to the pledged shares. We may prepay the notes in whole or in part at any time without penalty. The notes are scheduled to mature in March 2019. The proceeds from the notes were recorded net of issuance costs of $3.8 million and are being accrued, using the effective interest method, over the term of the non-recourse promissory notes.
Notes Payable
In March 2014, we issued a promissory note in the amount of $2.5 million to a former Medley member in connection with the purchase of his membership interests. The promissory note carried no interest, had quarterly amortization payments of $0.3 million and matured in March 2016.
Cash Flows
The significant captions and amounts from our consolidated financial statements, which for the year ended December 31, 2014, include the effects of our Consolidated Funds in accordance with U.S. GAAP, are summarized below. Negative amounts represent a net outflow, or use of cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Statements of cash flows data
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
$
|
14,420
|
|
|
$
|
24,063
|
|
|
$
|
(196,426
|
)
|
Net cash provided by (used in) investing activities
|
(17,072
|
)
|
|
(299
|
)
|
|
(521
|
)
|
Net cash provided by (used in) financing activities
|
(14,473
|
)
|
|
(39,282
|
)
|
|
278,758
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
(17,125
|
)
|
|
$
|
(15,518
|
)
|
|
$
|
81,811
|
|
Operating Activities
Our net cash flow provided by (used in) operating activities was
$14.4 million
,
$24.1 million
and
$(196.4) million
for the years ended December 31, 2016, 2015 and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014, net cash flow provided by operating activities was due to net income of
$10.0 million
,
$20.6 million
and
$69.4 million
, respectively, non-cash adjustments of $6.7 million, $17.4 million and $2.4 million, respectively, and changes in operating assets and liabilities of $(2.3) million, $(14.0) million and $5.9 million, respectively.
For the year ended December 31, 2014, net cash flow used in operating activities also includes net purchases of investments by our Consolidated Funds, of $293.7 million and change in cash and cash equivalents of the Consolidated Funds of $22.2 million. These amounts represent the significant variances between net income and cash flows from operations and are reflected as operating activities pursuant to investment company accounting guidance. The growth of our business is reflected by the increase in net cash provided by operating activities of our core segment, while the fund-related activities requirements vary based upon the specific investment activities being conducted during such period. The movements within our Consolidated Funds do not adversely impact our liquidity or earnings trends. We believe that our ability to generate cash from operations provides us the necessary liquidity to manage short-term fluctuations in working capital as well as to meet our short-term commitments.
Investing Activities
Our investing activities generally reflect cash used for acquisitions of fixed assets, distributions received from our equity method investments and, in 2016, purchases of available-for-sale securities. Purchases of fixed assets were
$1.9 million
, $0.8 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Distributions received from equity method investments were
$1.7 million
and
$0.5 million
for the years ended December 31, 2016 and 2015, respectively. Purchases of available-for-sale securities were
$16.8 million
for the year ended December 31, 2016. There were no purchases of available-for-sale securities for the years ended December 31, 2015 and 2014.
Financing Activities
Dividends paid are presented as a use of cash of
$5.5 million
and
$4.1 million
, respectively for the years ended December 31, 2016 and 2015. Distributions to members and redeemable non-controlling interests are presented as a use of cash from financing activities and were
$23.7 million
,
$32.7 million
and
$119.4 million
, for the years ended December 31, 2016, 2015 and 2014, respectively.. Capital contributions from non-controlling interests and redeemable non-controlling interests resulted in an inflow of cash of
$17.0 million
for the year ended December 31, 2016. Repurchases of Class A common stock represented a use of cash from financing activities of
$1.2 million
and
$0.1 million
for the years ended December 31, 2016 and 2015, respectively.
On August 9, 2016, we completed our first registered public offering of senior unsecured debt and on October 18, 2016 we completed our second registered public offering of senior unsecured debt. The proceeds from these offerings, net of offering expenses payable by us, amounted to $49.7 million. The net proceeds from the offering were used to repay a portion of the outstanding indebtedness under the Term Loan Facility. Repayments of debt obligations resulted in an outflow of cash of
$50.5 million
,
$1.3 million
and
$51.9 million
for the years ended December 31, 2016, 2015 and 2014, respectively. Proceeds from the
issuance of debt obligations provided an inflow of cash of
$52.6 million
and
$123.9 million
, for the years ended December 31, 2016 and 2014, respectively. There were no proceeds from issuance of debt obligations for the year ended December 31, 2015.
For the year ended December 31, 2014, net contributions from non-controlling interests in our Consolidated Funds were $131.4 million and net proceeds from secured borrowings were $100.6 million. There was no impact on our cash flows relating to our Consolidated Funds for the years ended December 31, 2016 and 2015.
On September 29, 2014, we completed our IPO pursuant to which we sold 6,000,000 shares of common stock at a price of $18.00 per share. Total proceeds from the offering, net of offering expenses payable by us were $96.7 million.
Sources and Uses of Liquidity
Our sources of liquidity are (i) cash on hand, (ii) net working capital, (iii) cash flows from operations, (iv) realizations on our investments, (v) net proceeds from borrowings under the Revolving Credit Facility and issuances of publicly-registered debt and (vi) other potential financings. We believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future. We expect that our primary liquidity needs will be comprised of cash to (i) provide capital to facilitate the growth of our existing investment management business, (ii) fund our commitments to funds that we advise, (iii) provide capital to facilitate our expansion into business that are complementary to our existing investment management business, (iv) pay operating expenses, including cash compensation to our employees and payments under the TRA, (v) fund capital expenditures, (vi) pay income taxes, and (vii) make distributions to our shareholders in accordance with our dividend policy.
We intend to use a portion of our available liquidity to fund cash dividends to our common shareholders on a quarterly basis. Our ability to fund cash dividends to our common shareholders is dependent on a myriad of factors, including among others: general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; timing of capital calls by our funds in support of our commitments; our financial condition and operating results; working capital requirements and other anticipated cash needs; contractual restrictions and obligations; legal, tax and regulatory restrictions; restrictions on the payment of distributions by our subsidiaries to us; and other relevant factors.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in this Form 10-K for a summary of our significant accounting policies.
Principles of Consolidation
In accordance with ASC 810,
Consolidation
, we consolidate those entities where we have a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. As such, we consolidate entities that we conclude are VIEs, for which we are deemed to be the primary beneficiary and entities in which we hold a majority voting interest or have majority ownership and control over the operational, financial and investing decisions of that entity.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02,
Consolidation (Topic 810) – Amendments to the Consolidation Analysis,
which changes the consolidation analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We elected to early adopt this new guidance using the modified retrospective method effective January 1, 2015. As a result of the adoption of ASU 2015-02, we determined that we are no longer the primary beneficiary of the funds. Therefore, we deconsolidated certain funds that had been previously consolidated under previous guidance effective January 1, 2015. Restatement of periods prior to January 1, 2015 was not required.
For legal entities evaluated for consolidation, we must determine whether the interests that it holds and fees paid to it qualify as a variable interest in an entity. This includes an evaluation of the management fees and performance fees paid to us
when acting as a decision maker or service provider to the entity being evaluated. Under the new guidance, fees received by us that are customary and commensurate with the level of services provided, and we don’t hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, would not be considered a variable interest. We factor in all economic interests including proportionate interests through related parties, to determine if fees are considered a variable interest. Prior to the adoption of the new consolidation guidance, these fees were considered variable interests by us.
An entity in which we hold a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of equity investment at risk have the right to direct the activities of the entity that most significantly impact the legal entity’s economic performance, (c) the voting rights of some investors are disproportionate to their obligation to absorb losses or rights to receive returns from a legal entity. Under the new guidance, for limited partnerships and other similar entities, non-controlling investors must have substantive rights to either dissolve the fund or remove the general partner (“kick-out rights”) in order to qualify as a VIE.
For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. We are generally deemed to have a controlling financial interest if we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. We determine whether we are the primary beneficiary of a VIE at the time we become initially involved with the VIE and we reconsider that conclusion continuously. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These assessments require judgments. Each entity is assessed for consolidation on a case-by-case basis.
For those entities evaluated under the voting interest model, we consolidate the entity if we have a controlling financial interest. We have a controlling financial interest in a voting interest entity (“VOE”) if we own a majority voting interest in the entity. Prior to the new guidance, we consolidated VOE’s where we were the general partner and as such, were presumed to have control, regardless of our ownership.
Consolidated Funds
With respect to the Consolidated Funds, which represent limited partnerships, Medley LLC earns a fixed management fee based on either (i) limited partners’ capital commitments to the funds, (ii) invested capital, (iii) NAV, or (iv) lower of cost or market value of a fund’s portfolio investments. In addition, Medley earns a performance fee based upon the investment returns in excess of a stated hurdle rate. We considered the accounting treatment under ASU 2010-10,
Amendments for Certain Investment Funds
, and determined that the funds were not VIEs for the year ended December 31, 2014. However, as the general partner, and due to the lack of substantive kick out or participating rights of the limited partners, these funds were consolidated under the voting interest model in accordance with ASC 810-20,
Control of Partnerships and Similar Entities
, for the year ended December 31, 2014.
Deconsolidated Funds
Certain funds that have historically been consolidated in the financial statements are no longer consolidated. We had consolidated MOF I in our consolidated financial statements under the voting interest model in accordance with ASC 810-20, as we were the general partner and the limited partners lacked substantive kick out or participating rights. Effective January 1, 2015, we completed our role as investment manager of this fund and transitioned the management of the residual assets of this fund to another asset manager. As a result of this transition, we deconsolidated the financial statements of this fund, on January 1, 2015. There was no gain or loss recognized upon deconsolidation. In addition, on January 1, 2015, we deconsolidated the one remaining consolidated fund as a result of the adoption of ASU 2015-02.
Performance Fees
Performance fees are based on certain specific hurdle rates as defined in the funds’ applicable investment management or partnership agreements. Performance fees are recorded on an accrual basis to the extent such amounts are contractually due.
We have elected to adopt Method 2 of ASC 605, Revenue Recognition, for revenue based on a formula. Under this method, we are entitled to performance-based fees that can amount to as much as 20.0% of a fund's profits, subject to certain hurdles.
Performance-based fees are assessed as a percentage of the investment performance of the funds. The performance fee for any period is based upon an assumed liquidation of the fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund 's income allocation provisions. The performance fees may be subject to reversal to the extent that the performance fees recorded exceeds the amount due to the general partner or investment manager based on a fund's cumulative investment returns.
Performance fees receivable is presented separately in our audited consolidated statements of financial condition included in this Form 10-K and represents performance fees recognized but not yet collected. The timing of the payment of performance fees due to the general partner or investment manager varies depending on the terms of the applicable fund agreements.
If applicable, we record an accrual for the potential repayment of previously received performance fees which represents amounts that would need to be repaid to the underlying funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. Our actual obligation, however, would not become payable or realized until the end of a fund’s life.
Performance Fee Compensation Payable
We have an obligation to pay our professionals a portion of the performance fees earned from certain funds. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance fee revenue and, until paid, are recognized as performance fee compensation payable. Performance fee compensation is recognized in the same period that the related performance fees are recognized. Performance fee compensation can be reversed during periods when there is a decline in performance fees that were previously recognized.
Income Taxes
We account for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize interest and penalties on uncertain tax positions and other tax matters as a component of income tax expense. For interim periods, we account for income taxes based on its estimate of the effective tax rate for the year. Discrete items and changes in its estimate of the annual effective tax rate are recorded in the period they occur.
Medley Management Inc., is subject to U.S. federal, state and local corporate income taxes on its allocable portion of income of Medley LLC at prevailing corporate tax rates, which are reflected in our consolidated financial statements. Medley LLC and its subsidiaries are not subject to federal, state and local corporate income taxes since all income, gains and losses are passed through to its members. However, Medley LLC and its subsidiaries are subject to New York City’s unincorporated business tax, which is also included in our provision for income taxes.
We analyze our tax filing positions in all of the U.S. federal, state and local tax jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a liability is established.
Prior to our Reorganization and IPO, our business was organized as a partnership for tax purposes and was not subject to United States federal, state and local income taxes. A provision for income taxes was made for certain entities that were subject to New York City’s unincorporated business tax.
Stock-based Compensation
We account for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Under the fair value recognition provision of this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.
Stock-based compensation expense is based on awards ultimately expected to vest and have been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The effect of such change in estimated forfeitures is recognized through a cumulative catch-up adjustment that is included in the period of the change in estimate.
The value of the portion of the award that is ultimately expected to vest is recognized as a component of compensation and benefits over the requisite service periods in our consolidated statements of operations. We elected to use the straight-line method for all awards with graded vesting features.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements and their impact on us can be found in Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in this Form 10-K.
Off-Balance Sheet Arrangements
In the normal course of business, we may engage in off-balance sheet arrangements, including transactions in guarantees, commitments, indemnifications and potential contingent repayment obligations.
See Note 9, “Commitments and Contingencies,” to our audited consolidated financial statements included in this Form 10-K for a discussion of our commitments and contingencies.
Contractual Obligations
The following table sets forth information relating to our contractual obligations as of December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1 - 3
years
|
|
4 - 5
years
|
|
More than
5 years
|
|
Total
|
|
(Amounts in thousands)
|
Medley Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
(1)
|
$
|
2,683
|
|
|
$
|
5,414
|
|
|
$
|
5,263
|
|
|
$
|
4,254
|
|
|
$
|
17,614
|
|
Loans payable
(2)
|
—
|
|
|
54,800
|
|
|
—
|
|
|
—
|
|
|
54,800
|
|
Senior unsecured debt
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
53,595
|
|
|
53,595
|
|
Interest obligations on debt
(4)
|
6,637
|
|
|
11,664
|
|
|
7,369
|
|
|
17,042
|
|
|
42,712
|
|
Revenue share payable
|
1,168
|
|
|
2,478
|
|
|
2,044
|
|
|
439
|
|
|
6,129
|
|
Capital commitments to funds
(5)
|
525
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
525
|
|
Total
|
$
|
11,013
|
|
|
$
|
74,356
|
|
|
$
|
14,676
|
|
|
$
|
75,330
|
|
|
$
|
175,375
|
|
____________
|
|
(1)
|
We lease office space in New York and San Francisco under non-cancelable lease agreements. In August 2015, the Company signed a new lease for its office space in New York City. The Company’s obligations under the current terms of these leases extend through September 2023. The amounts in this table represent the minimum lease payments required over the term of the lease, and include operating leases for office equipment.
|
|
|
(2)
|
We have included all loans described in Note 6, “Loans Payable,” to our consolidated financial statements included in this Form 10-K. The amounts in this table include $44.8 million relating to our Term Loan Facility which was repaid in full in February 2017 using the proceeds from the issuance of additional senior unsecured debt.
|
|
|
(3)
|
We have included all loans described in Note 7, “Senior Unsecured Debt,” to our consolidated financial statements included in this Form 10-K.
|
|
|
(3)
|
Our future interest obligations on debt outstanding assume an interest rate of 6.5% on our Term Loan balance and an interest of 6.875% on our senior unsecured debt balance.
|
|
|
(4)
|
Represents equity commitments by us to certain long-dated private funds managed by us. These amounts are generally due on demand and are therefore presented in the less than one year category.
|
Tax Receivable Agreement.
Holders of Medley LLC Units (other than Medley Management Inc.) may, subject to certain conditions and transfer restrictions applicable to such members as set forth in the operating agreement of Medley LLC, from and after the first anniversary of the date of the completion of the IPO (subject to the terms of the exchange agreement), exchange their LLC Units for shares of Class A common stock of Medley Management Inc. on a one-for-one basis. Medley LLC intends to make
an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
“
Code”) effective for each taxable year in which an exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of Medley LLC at the time of an exchange of LLC Units. The exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Medley LLC. These increases in tax basis may reduce the amount of tax that Medley Management Inc. would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the holders of LLC Units that provides for the payment by Medley Management Inc. to exchanging holders of LLC Units of 85% of the benefits, if any, that Medley Management Inc. is deemed to realize as a result of these increases in tax basis and of certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This payment obligation is an obligation of Medley Management Inc. and not of Medley LLC. For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Medley Management Inc. (calculated with certain assumptions) to the amount of such taxes that Medley Management Inc. would have been required to pay had there been no increase to the tax basis of the assets of Medley LLC as a result of the exchanges and had Medley Management Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income. See “Certain Relationships and Related Person Transactions - Tax Receivable Agreement” described in our Prospectus. We anticipate that we will account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from future exchanges as follows:
|
|
•
|
we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange;
|
|
|
•
|
to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
|
|
|
•
|
we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.
|
All of the effects of changes in any of our estimates after the date of the exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.
Indemnifications
In the normal course of business, we enter into contracts that contain indemnities for our affiliates, persons acting on our behalf or such affiliates and third parties. The terms of the indemnities vary from contract to contract and the maximum exposure under these arrangements, if any, cannot be determined and has neither been recorded in our consolidated financial statements. As of December 31, 2016, we have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Contingent Obligations
The partnership documents governing our funds generally include a clawback provision that, if triggered, may give rise to a contingent obligation that may require the general partner to return amounts to the fund for distribution to investors. Therefore, performance fee revenue, generally, is subject to reversal in the event that the funds incur future losses. These losses are limited to the extent of the cumulative performance fee revenue recognized in income to date, net of a portion of taxes paid. Due in part to our investment performance and the fact that our performance fee revenue is generally determined on a liquidation basis, as of December 31, 2016, we accrued
$7.1 million
for clawback obligations that would need to be paid had the funds been liquidated as of that date. There can be no assurance that we will not incur additional clawback obligations in the future. If all of the existing investments were valued at $0, the amount of cumulative performance fee revenue that have been recognized would be reversed. We believe that the possibility of all of the existing investments becoming worthless is remote. At December 31, 2016, had we assumed all existing investments were valued at $0, the net amount of performance fee revenue subject to additional reversal would have been approximately
$7.1 million
.
Performance fee revenue is also affected by changes in the fair values of the underlying investments in the funds that we advise. Valuations, on an unrealized basis, can be significantly affected by a variety of external factors including, but not limited to, bond yields and industry trading multiples. Under the governing agreements of certain of our funds, we may have to fund additional amounts on account of clawback obligations beyond what we received in performance fee compensation on account of distributions of performance fee payments made to current or former professionals from such funds if they do not fund their respective shares of such clawback obligations. We will generally retain the right to pursue any remedies that we have under such governing agreements against those carried interest recipients who fail to fund their obligations.
Additionally, at the end of the life of the funds, there could be a payment due to a fund by us if we have recognized more performance fee revenue than was ultimately earned. The general partner obligation amount, if any, will depend on final realized values of investments at the end of the life of the fund.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is related to our role as general partner or investment adviser to our investment funds and the sensitivity to movements in the fair value of their investments, including the effect on management fees, performance fees and investment income.
The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions which are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.
Effect on Management Fees
Management fees are generally based on a defined percentage of gross asset values, total committed capital, net invested capital and NAV of the investment funds managed by us as well as a percentage of net interest income over a performance hurdle. Management fees calculated based on fair value of assets or net investment income are affected by short-term changes in market values.
The overall impact of a short-term change in market value may be mitigated by fee definitions that are not based on market value including invested capital and committed capital, market value definitions that exclude the impact of realized and/or unrealized gains and losses, market value definitions based on beginning of the period values or a form of average market value including daily, monthly or quarterly averages, as well as monthly or quarterly payment terms.
As such, based on an incremental 10% short-term increase in fair value of the investments in our permanent capital vehicles, long-dated private funds and SMAs’ as of December 31, 2016, we calculated a $0.8 million increase in management fees for the year ended December 31, 2016. In the case of a 10% short-term decline in fair value of the investments in our permanent capital, long-dated funds and SMAs’ as of December 31, 2016, we calculated a $1.0 million decrease in management fees for the year ended December 31, 2016.
Effect on Performance Fees
Performance fees are based on certain specific hurdle rates as defined in the funds' applicable investment management or partnership agreements. The performance fees for any period are based upon an assumed liquidation of the fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund's income allocation provisions, which can result in a performance-based fee to us, subject to certain hurdles and benchmarks. The performance fees may be subject to reversal to the extent that the performance fees recorded exceed the amount due to the general partner or investment manager based on a fund's cumulative investment returns.
Short-term changes in the fair values of funds' investments may materially impact accrued performance fees depending on the respective funds' performance relative to applicable hurdles. The overall impact of a short-term change in market value may be mitigated by a number of factors including, but not limited to, the way in which carried interest performance fees are calculated, which is not ultimately dependent on short-term moves in fair market value, but rather realize cumulative performance of the
investments through the end of the long-dated private funds and SMAs’ lives. However, short-term moves can meaningfully impact our ability to accrue performance fees and receive cash payments in any given period.
As such, based on an incremental 10% short-term increase in fair value of the investments in our long-dated private funds and SMAs’ as of December 31, 2016, we calculated a $36.5 million increase in performance fees for the year ended December 31, 2016. In the case of a 10% short-term decline in fair value of investments in our long-dated private funds and SMAs’ as of December 31, 2016, we calculated a $4.8 million decrease in performance fees for the year ended December 31, 2016.
Effect on Part I and Part II Incentive Fees
Incentive fees are based on certain specific hurdle rates as defined in our permanent capital vehicles' applicable investment management agreements. The Part II incentive fees are based upon realized gains netted against cumulative realized and unrealized losses. The Part I incentive fees are not subject to clawbacks as our carried interest performance fees are.
Short-term changes in the fair values of the investments of our permanent capital vehicles may materially impact Part II incentive fees depending on the respective vehicle's performance relative to applicable hurdles to the extent there were realized gains that we would otherwise earn Part II incentive fees on.
As such, based on an incremental 10% short-term increase in fair value of the investments in our permanent capital vehicles as of December 31, 2016, we calculated a $5.3 million increase in Part I and II incentive fees for year ended December 31, 2016. In the case of a 10% short-term decline in fair value of the investments in our permanent capital vehicles as of December 31, 2016, we calculated a $0.4 million increase in Part I incentive fees for the year ended December 31, 2016, respectively.
Interest Rate Risk
As of December 31, 2016, we had $101.6 million of debt outstanding, presented as debt obligations on our audited consolidated financial statements included elsewhere in this Form 10-K. The annual interest rate on our Term Loan Facility was 6.50% compared to fixed rate of 6.875% on our Senior Unsecured Debt as of December 31, 2016.
Based on the floating rate component of our loans payable as of December 31, 2016, we estimate that in the event of a change of 100 basis point in interest rates and the outstanding balance as of December 31, 2016, interest expense related to variable rates would increase or decrease by 15% or $0.7 million for the year ended December 31, 2016.
As credit-oriented investors, we are also subject to interest rate risk through the securities we hold in our funds. A 100 basis point increase in interest rates would be expected to negatively affect prices of securities that accrue interest income at fixed rates and therefore negatively impact net change in unrealized appreciation on the funds' investments. The actual impact is dependent on the average duration of such holdings. Conversely, securities that accrue interest at variable rates would be expected to benefit from a 100 basis points increase in interest rates because these securities would generate higher levels of current income and therefore positively impact interest and dividend income, subject to LIBOR. In the cases where our funds pay management fees based on NAV, we would expect management fees to experience a change in direction and magnitude corresponding to that experienced by the underlying portfolios.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Medley Management Inc.
We have audited the accompanying consolidated balance sheets of Medley Management Inc. (prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC) and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in equity and redeemable non-controlling interests, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medley Management Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ RSM US LLP
New York, New York
March 16, 2017
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
49,666
|
|
|
$
|
71,688
|
|
Restricted cash equivalents
|
4,897
|
|
|
—
|
|
Investments, at fair value
|
31,904
|
|
|
16,360
|
|
Management fees receivable
|
12,630
|
|
|
16,172
|
|
Performance fees receivable
|
4,961
|
|
|
2,518
|
|
Other assets
|
18,311
|
|
|
13,015
|
|
Total assets
|
$
|
122,369
|
|
|
$
|
119,753
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Loans payable
|
$
|
52,178
|
|
|
$
|
100,871
|
|
Senior unsecured debt
|
49,793
|
|
|
—
|
|
Accounts payable, accrued expenses and other liabilities
|
36,270
|
|
|
34,746
|
|
Performance fee compensation payable
|
985
|
|
|
1,823
|
|
Total liabilities
|
139,226
|
|
|
137,440
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Non-controlling Interests
|
30,805
|
|
|
—
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Class A common stock, $0.01 par value, 3,000,000,000 shares authorized; 6,042,050 and 6,010,646 issued as of December 31, 2016 and 2015, respectively; 5,809,130 and 5,993,941 outstanding as of December 31, 2016 and 2015, respectively
|
58
|
|
|
60
|
|
Class B common stock, $0.01 par value, 1,000,000 shares authorized; 100 shares issued and outstanding
|
—
|
|
|
—
|
|
Additional paid in capital (capital deficit)
|
3,310
|
|
|
631
|
|
Accumulated other comprehensive income (loss)
|
33
|
|
|
—
|
|
Retained earnings (accumulated deficit)
|
(5,254
|
)
|
|
(730
|
)
|
Total stockholders' equity (deficit), Medley Management Inc.
|
(1,853
|
)
|
|
(39
|
)
|
Non-controlling interests in consolidated subsidiaries
|
(1,717
|
)
|
|
(459
|
)
|
Non-controlling interests in Medley LLC
|
(44,092
|
)
|
|
(17,189
|
)
|
Total equity (deficit)
|
(47,662
|
)
|
|
(17,687
|
)
|
Total liabilities, redeemable non-controlling interests and equity
|
$
|
122,369
|
|
|
$
|
119,753
|
|
See accompanying notes to consolidated financial statements
F-2
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Consolidated Statements of Operations
(Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Management fees (includes Part I incentive fees of $14,209, $21,487 and $19,507, respectively)
|
|
$
|
65,496
|
|
|
$
|
75,675
|
|
|
61,252
|
|
|
Performance fees
|
|
2,421
|
|
|
(15,685
|
)
|
|
2,050
|
|
|
Other revenues and fees
|
|
8,111
|
|
|
7,436
|
|
|
8,871
|
|
|
Total revenues
|
|
76,028
|
|
|
67,426
|
|
|
72,173
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
27,800
|
|
|
26,768
|
|
|
20,322
|
|
|
Performance fee compensation
|
|
(319
|
)
|
|
(8,049
|
)
|
|
(1,543
|
)
|
|
Consolidated Funds expenses
|
|
—
|
|
|
—
|
|
|
1,670
|
|
|
General, administrative and other expenses
|
|
28,540
|
|
|
16,836
|
|
|
16,312
|
|
|
Total expenses
|
|
56,021
|
|
|
35,555
|
|
|
36,761
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
1,304
|
|
|
886
|
|
|
886
|
|
|
Interest expense
|
|
(9,226
|
)
|
|
(8,469
|
)
|
|
(5,520
|
)
|
|
Other income (expenses), net
|
|
(1,070
|
)
|
|
(1,641
|
)
|
|
(1,773
|
)
|
|
Interest and other income of Consolidated Funds
|
|
—
|
|
|
—
|
|
|
71,468
|
|
|
Interest expense of Consolidated Funds
|
|
—
|
|
|
—
|
|
|
(9,951
|
)
|
|
Net realized gain (loss) on investments of Consolidated Funds
|
—
|
|
|
—
|
|
|
789
|
|
|
Net change in unrealized appreciation (depreciation) on investments of Consolidated Funds
|
—
|
|
|
—
|
|
|
(20,557
|
)
|
|
Net change in unrealized depreciation (appreciation) on secured borrowings of Consolidated Funds
|
—
|
|
|
—
|
|
|
1,174
|
|
|
Total other income (expense), net
|
|
(8,992
|
)
|
|
(9,224
|
)
|
|
36,516
|
|
|
Income (loss) before income taxes
|
|
11,015
|
|
|
22,647
|
|
|
71,928
|
|
|
Provision for (benefit from) income taxes
|
|
1,063
|
|
|
2,015
|
|
|
2,528
|
|
|
Net income (loss)
|
|
9,952
|
|
|
20,632
|
|
|
69,400
|
|
|
Net income attributable to non-controlling interests in Consolidated Funds
|
—
|
|
|
—
|
|
|
29,717
|
|
|
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
2,549
|
|
|
(885
|
)
|
|
1,933
|
|
|
Net income attributable to non-controlling interests in Medley LLC
|
6,406
|
|
|
18,406
|
|
|
36,055
|
|
|
Net income attributable to Medley Management Inc.
|
$
|
997
|
|
|
$
|
3,111
|
|
|
$
|
1,695
|
|
|
Dividends declared per Class A common stock
|
|
$
|
0.80
|
|
|
$
|
0.60
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Net income per Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 11)
|
|
$
|
0.02
|
|
|
$
|
0.46
|
|
|
$
|
0.24
|
|
(1)
|
Diluted (Note 11)
|
|
$
|
0.02
|
|
|
$
|
0.46
|
|
|
$
|
0.24
|
|
(1)
|
Weighted average shares outstanding - Basic and Diluted
|
|
5,804,042
|
|
|
6,002,422
|
|
|
6,000,000
|
|
|
____________
See accompanying notes to consolidated financial statements
F-3
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
(1) Based on net income attributable to Medley Management Inc. for the period September 29, 2014 through December 31, 2014.
See accompanying notes to consolidated financial statements
F-4
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income (loss)
|
|
$
|
9,952
|
|
|
$
|
20,632
|
|
|
$
|
69,400
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Change in fair value of available-for-sale securities
|
|
194
|
|
|
—
|
|
|
—
|
|
Total comprehensive income (loss)
|
|
10,146
|
|
|
20,632
|
|
|
69,400
|
|
Comprehensive income (loss) attributable to non-controlling interests in Consolidated Funds
|
—
|
|
|
—
|
|
|
29,717
|
|
Comprehensive income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
2,577
|
|
|
(885
|
)
|
|
1,933
|
|
Comprehensive income attributable to Medley LLC
|
|
6,539
|
|
|
18,406
|
|
|
36,055
|
|
Comprehensive income attributable to Medley Management Inc.
|
$
|
1,030
|
|
|
$
|
3,111
|
|
|
$
|
1,695
|
|
See accompanying notes to consolidated financial statements
F-5
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
C
onsolidated Statement of Changes in Equity and Redeemable Non-controlling Interests
(Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medley LLC and Medley GP Holdings LLC
|
|
Medley Management Inc.
|
|
|
|
|
Non-controlling Interests in Consolidated Funds
|
|
Non-controlling Interests in Consolidated Subsidiaries
|
|
Members' Equity (Deficit)
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
Additional
Paid in
Capital
(Capital
Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
Non-
controlling
Interests in
Medley
LLC
|
|
Total
Equity
|
|
|
Redeemable
Non-
controlling
Interests
|
|
|
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
|
|
|
|
|
|
Balance at January 1, 2014
|
$
|
464,475
|
|
|
$
|
40
|
|
|
$
|
(18,554
|
)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
445,961
|
|
|
|
$
|
—
|
|
Contributions
|
120,318
|
|
|
928
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
121,246
|
|
|
|
—
|
|
Distributions
|
(22,688
|
)
|
|
—
|
|
|
(120,621
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(143,309
|
)
|
|
|
—
|
|
Net income
|
22,902
|
|
|
2,055
|
|
|
26,753
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,710
|
|
|
|
—
|
|
Balance prior to September 29, 2014
|
585,007
|
|
|
3,023
|
|
|
(112,422
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
475,608
|
|
|
|
—
|
|
Effects of Reorganization and Offering
|
—
|
|
|
—
|
|
|
112,422
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(112,422
|
)
|
|
—
|
|
|
|
—
|
|
Balance at September 29, 2014
|
585,007
|
|
|
3,023
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(112,422
|
)
|
|
475,608
|
|
|
|
—
|
|
Net income subsequent to September 29, 2014
|
6,815
|
|
|
(122
|
)
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,695
|
|
|
9,302
|
|
|
17,690
|
|
|
|
—
|
|
Issuance of Class A shares in Initial Public Offering, net of underwriters discount
|
—
|
|
|
—
|
|
|
—
|
|
|
6,000,000
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
100,380
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,440
|
|
|
|
—
|
|
Issuance of Class B shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Initial Public Offering costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,715
|
)
|
|
(3,715
|
)
|
|
|
—
|
|
Dilution assumed with Initial Public Offering
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(103,658
|
)
|
|
—
|
|
|
—
|
|
|
103,658
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
894
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
894
|
|
|
|
—
|
|
Dividends declared on Class A common stock ($0.20 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,423
|
)
|
|
—
|
|
|
(1,423
|
)
|
|
|
—
|
|
Contributions
|
33,726
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,726
|
|
|
|
—
|
|
Distributions
|
—
|
|
|
(1,375
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(795
|
)
|
|
(2,170
|
)
|
|
|
—
|
|
Balance at December 31, 2014
|
625,548
|
|
|
1,526
|
|
|
—
|
|
|
6,000,000
|
|
|
60
|
|
|
100
|
|
|
—
|
|
|
(2,384
|
)
|
|
—
|
|
|
272
|
|
|
(3,972
|
)
|
|
621,050
|
|
|
|
—
|
|
Deconsolidation of MOF I LP
|
(15,321
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,321
|
)
|
|
|
—
|
|
Deconsolidation of MOF II LP
|
(610,227
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(610,227
|
)
|
|
|
—
|
|
Net income
|
—
|
|
|
(885
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,111
|
|
|
18,406
|
|
|
20,632
|
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,052
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,052
|
|
|
|
—
|
|
Dividends on Class A common stock ($0.60 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,113
|
)
|
|
—
|
|
|
(4,113
|
)
|
|
|
—
|
|
Excess tax benefit from dividends paid to RSU holders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
85
|
|
|
|
—
|
|
Issuance of Class A common stock related to vesting of restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
10,646
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Repurchases of Class A common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,705
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(101
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(101
|
)
|
|
|
—
|
|
Contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Distributions
|
—
|
|
|
(1,100
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,644
|
)
|
|
(32,744
|
)
|
|
|
—
|
|
Balance at December 31, 2015
|
—
|
|
|
(459
|
)
|
|
—
|
|
|
5,993,941
|
|
|
60
|
|
|
100
|
|
|
—
|
|
|
631
|
|
|
—
|
|
|
(730
|
)
|
|
(17,189
|
)
|
|
(17,687
|
)
|
|
|
—
|
|
Net income (loss)
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
997
|
|
|
6,406
|
|
|
7,387
|
|
|
|
2,565
|
|
Change in fair value of available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
133
|
|
|
166
|
|
|
|
28
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,811
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,811
|
|
|
|
—
|
|
Dividends on Class A common stock ($0.80 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,521
|
)
|
|
—
|
|
|
(5,521
|
)
|
|
|
—
|
|
Excess tax benefit from dividends paid to RSU holders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
84
|
|
|
|
—
|
|
Issuance of Class A common stock related to vesting of restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
31,404
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Repurchases of Class A common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(216,215
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(1,196
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,198
|
)
|
|
|
—
|
|
Contributions
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
|
17,010
|
|
Distributions
|
—
|
|
|
(1,547
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,115
|
)
|
|
(22,662
|
)
|
|
|
(994
|
)
|
Reclassification of redeemable non-controlling interest
|
—
|
|
|
(41
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,155
|
)
|
|
(12,196
|
)
|
|
|
12,196
|
|
Issuance of non-controlling interests, at fair value
|
—
|
|
|
334
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(192
|
)
|
|
142
|
|
|
|
—
|
|
Balance at December 31, 2016
|
$
|
—
|
|
|
$
|
(1,717
|
)
|
|
$
|
—
|
|
|
5,809,130
|
|
|
$
|
58
|
|
|
100
|
|
|
$
|
—
|
|
|
$
|
3,310
|
|
|
$
|
33
|
|
|
$
|
(5,254
|
)
|
|
$
|
(44,092
|
)
|
|
$
|
(47,662
|
)
|
|
|
$
|
30,805
|
|
See accompanying notes to consolidated financial statements
F-6
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
9,952
|
|
|
$
|
20,632
|
|
|
69,400
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
3,811
|
|
|
3,052
|
|
|
894
|
|
Amortization of debt issuance costs
|
1,018
|
|
|
545
|
|
|
752
|
|
Accretion of debt discount
|
958
|
|
|
776
|
|
|
604
|
|
Provision for (benefit from) deferred taxes
|
(267
|
)
|
|
(904
|
)
|
|
(483
|
)
|
Depreciation and amortization
|
913
|
|
|
454
|
|
|
401
|
|
Net change in unrealized depreciation (appreciation) on investments
|
(27
|
)
|
|
885
|
|
|
272
|
|
Loss (income) from equity method investments
|
93
|
|
|
12,578
|
|
|
—
|
|
Other non-cash amounts
|
169
|
|
|
—
|
|
|
—
|
|
Operating adjustments related to Consolidated Funds:
|
|
|
|
|
|
Provision for (benefit from) deferred taxes
|
—
|
|
|
—
|
|
|
(243
|
)
|
Interest income paid-in-kind
|
—
|
|
|
—
|
|
|
(5,264
|
)
|
Accretion of original issue discount
|
—
|
|
|
—
|
|
|
(1,760
|
)
|
Net realized (gain) loss on investments
|
—
|
|
|
—
|
|
|
(789
|
)
|
Net change in unrealized depreciation (appreciation) on investments
|
—
|
|
|
—
|
|
|
20,556
|
|
Net change in unrealized appreciation (depreciation) on secured borrowings of Consolidated Funds
|
—
|
|
|
—
|
|
|
(1,174
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Management fees receivable
|
3,542
|
|
|
(999
|
)
|
|
(6,252
|
)
|
Performance fees receivable
|
(2,443
|
)
|
|
3,055
|
|
|
(2,234
|
)
|
Other assets
|
(1,617
|
)
|
|
(4,915
|
)
|
|
(1,671
|
)
|
Accounts payable, accrued expenses and other liabilities
|
(844
|
)
|
|
(1,112
|
)
|
|
8,693
|
|
Performance fee compensation payable
|
(838
|
)
|
|
(9,984
|
)
|
|
(4,418
|
)
|
Changes in operating assets and liabilities of Consolidated Funds:
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
|
|
—
|
|
|
22,244
|
|
Cost of investments purchased
|
—
|
|
|
—
|
|
|
(448,258
|
)
|
Proceeds from sales and repayments of investments
|
—
|
|
|
—
|
|
|
154,549
|
|
Other assets
|
—
|
|
|
—
|
|
|
(6,784
|
)
|
Accounts payable, accrued expenses and other liabilities
|
—
|
|
|
—
|
|
|
4,539
|
|
Net cash provided by (used in) operating activities
|
14,420
|
|
|
24,063
|
|
|
(196,426
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
(1,935
|
)
|
|
(795
|
)
|
|
(521
|
)
|
Distributions received from equity method investments
|
1,678
|
|
|
496
|
|
|
—
|
|
Purchases of available-for-sale securities
|
(16,815
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
(17,072
|
)
|
|
(299
|
)
|
|
(521
|
)
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-7
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Repayment of debt obligations
|
(50,513
|
)
|
|
(1,250
|
)
|
|
(51,937
|
)
|
Proceeds from issuance of debt obligations
|
52,588
|
|
|
—
|
|
|
123,900
|
|
Proceeds from Initial Public Offering
|
—
|
|
|
—
|
|
|
100,440
|
|
Initial Public Offering costs
|
—
|
|
|
—
|
|
|
(3,715
|
)
|
Capital contributions from non-controlling interests in consolidated subsidiaries and redeemable non-controlling interests
|
17,022
|
|
|
—
|
|
|
—
|
|
Distributions to members and redeemable non-controlling interests
|
(23,656
|
)
|
|
(32,744
|
)
|
|
(119,363
|
)
|
Debt issuance costs
|
(2,916
|
)
|
|
—
|
|
|
(2,546
|
)
|
Dividends paid
|
(5,521
|
)
|
|
(4,113
|
)
|
|
—
|
|
Repurchases of Class A common stock
|
(1,198
|
)
|
|
(101
|
)
|
|
—
|
|
Capital contributions to equity method investments
|
(279
|
)
|
|
(1,074
|
)
|
|
—
|
|
Financing activities of Consolidated Funds
|
|
|
|
|
|
Contributions from non-controlling interest holders
|
—
|
|
|
—
|
|
|
154,044
|
|
Distributions to non-controlling interest holders
|
—
|
|
|
—
|
|
|
(22,688
|
)
|
Proceeds from secured borrowings
|
—
|
|
|
—
|
|
|
115,439
|
|
Repayments on secured borrowings
|
—
|
|
|
—
|
|
|
(14,816
|
)
|
Net cash provided by (used in) financing activities
|
(14,473
|
)
|
|
(39,282
|
)
|
|
278,758
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash equivalents
|
(17,125
|
)
|
|
(15,518
|
)
|
|
81,811
|
|
Cash, cash equivalents and restricted cash equivalents, beginning of period
|
71,688
|
|
|
87,206
|
|
|
5,395
|
|
Cash, cash equivalents and restricted cash equivalents, end of period
|
$
|
54,563
|
|
|
$
|
71,688
|
|
|
$
|
87,206
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents, and restricted cash equivalents reported on the consolidated balance sheets to the total of such amounts reported on the consolidated statements of cash flows
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
49,666
|
|
|
$
|
71,688
|
|
|
$
|
87,206
|
|
Restricted cash equivalents
|
4,897
|
|
|
—
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash equivalents
|
$
|
54,563
|
|
|
$
|
71,688
|
|
|
$
|
87,206
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
Interest paid
|
$
|
7,992
|
|
|
$
|
6,576
|
|
|
$
|
3,900
|
|
Income taxes paid
|
2,085
|
|
|
4,982
|
|
|
2,411
|
|
Supplemental disclosure of non-cash investing activities
|
|
|
|
|
|
Investment in MOF I LP attributed to deconsolidation
|
$
|
—
|
|
|
$
|
1,768
|
|
|
$
|
—
|
|
Investment in MOF II LP attributed to deconsolidation
|
—
|
|
|
10,474
|
|
|
—
|
|
Fixed assets
|
2,293
|
|
|
—
|
|
|
—
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
Issuance of non-controlling interest, at fair value
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reclassification of redeemable non-controlling interest
|
12,155
|
|
|
—
|
|
|
—
|
|
Non-cash distribution to members
|
—
|
|
|
—
|
|
|
3,428
|
|
Non-cash debt
|
—
|
|
|
—
|
|
|
2,500
|
|
Dividends declared but not paid
|
—
|
|
|
—
|
|
|
1,423
|
|
Transfer of membership interests to non-controlling interests in consolidated subsidiaries
|
—
|
|
|
—
|
|
|
928
|
|
See accompanying notes to consolidated financial statements
F-8
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
Medley Management Inc. is an asset management firm offering yield solutions to retail and institutional investors. The corporation’s national direct origination franchise provides capital to the middle market in the U.S. Medley Management Inc., through its consolidated subsidiary, Medley LLC, provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts and serves as the general partner to the private funds, which are generally organized as pass-through entities. Medley LLC is headquartered in New York City and has an office in San Francisco.
The Company’s business is currently comprised of only
one
reportable segment, the investment management segment, and substantially all of the Company operations are conducted through this segment. The investment management segment provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts. The Company conducts its investment management business in the U.S., where substantially all its revenues are generated.
Initial Public Offering of Medley Management Inc.
Medley Management Inc. was incorporated on
June 13, 2014
and commenced operations on
September 29, 2014
upon the completion of its initial public offering (“IPO”) of its Class A common stock. Medley Management Inc. raised
$100.4 million
, net of underwriting discount, through the issuance of
6,000,000
shares of Class A common stock at an offering price to the public of
$18.00
per share. Medley Management Inc. used the offering proceeds to purchase
6,000,000
newly issued LLC Units (defined below) from Medley LLC. Prior to the IPO, Medley Management Inc. had not engaged in any business or other activities except in connection with its formation and IPO.
In connection with the IPO, Medley Management Inc. issued
100
shares of Class B common stock to Medley Group LLC (“Medley Group”), an entity wholly owned by the pre-IPO members of Medley LLC. For as long as the pre-IPO members and then-current Medley personnel hold at least
10%
of the aggregate number of shares of Class A common stock and LLC Units (defined below) (excluding those LLC Units held by Medley Management Inc.) then outstanding, the Class B common stock entitles Medley Group to a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of membership units held by such holder. The Class B common stock does not participate in dividends and does not have any liquidation rights.
Medley LLC Reorganization
In connection with the IPO, Medley LLC amended and restated its limited liability agreement to modify its capital structure by reclassifying the
23,333,333
interests held by the pre-IPO members into a single new class of units (“LLC Units”). The pre-IPO members also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, subject to the terms of an exchange agreement, to
exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis
, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. In addition, pursuant to the amended and restated limited liability agreement, Medley Management Inc. became the sole managing member of Medley LLC.
The pre-IPO owners are, subject to limited exceptions, prohibited from transferring any LLC Units held by them or any shares of Class A common stock received upon exchange of such LLC Units, until the third anniversary of the date of the closing of the IPO without the Company’s consent. Thereafter and prior to the fourth and fifth anniversaries of the closing of the IPO, such holders may not transfer more than 33 1/3% and 66 2/3%, respectively, of the number of LLC Units held by them, together with the number of any shares of Class A common stock received by them upon exchange therefor, without the Company’s consent.
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 Medley Management Inc., Medley LLC and its consolidated subsidiaries (collectively, “Medley” or the “Company”) and, for the year ended December 31, 2014, certain funds (individually “Consolidated Funds,” collectively, the “Company”).
The Consolidated Funds have been consolidated in the accompanying financial statements for the year ended December 31, 2014 in accordance with U.S. GAAP. Including the results of the Consolidated Funds significantly increases the reported
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
amounts of the revenues, expenses and cash flows of the Company; however, the Consolidated Funds' results included herein have no direct effect on the net income attributable to members or on total equity. The economic ownership interests of the investors in the Consolidated Funds are reflected as “Non-controlling interests in Consolidated Funds” and as “Net income attributable to non-controlling interests in Consolidated Funds” in the accompanying consolidated financial statements.
Prior to the Reorganization and IPO on September 29, 2014, all compensation for services rendered by senior Medley LLC professionals were reflected as distributions from members' capital rather than as compensation expense. Subsequent to the Reorganization and IPO, all guaranteed payments made to these senior professionals are recognized as compensation expense.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In accordance with Accounting Standards Codification (“ASC”) 810,
Consolidation
, the Company consolidates those entities where it has a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. As such, the Company consolidates entities that the Company concludes are variable interest entities (“VIEs”), for which the Company is deemed to be the primary beneficiary and entities in which it holds a majority voting interest or has majority ownership and control over the operational, financial and investing decisions of that entity.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02,
Consolidation (Topic 810) – Amendments to the Consolidation Analysis
, which changes the consolidation analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The Company elected to early adopt this new guidance using the modified retrospective method effective January 1, 2015. As a result of the adoption of ASU 2015-02, the Company determined that it is no longer the primary beneficiary of certain funds it manages. Therefore, the Company deconsolidated certain funds that had been consolidated under previous guidance effective January 1, 2015.
For legal entities evaluated for consolidation, the Company must determine whether the interests that it holds and fees paid to it qualify as a variable interest in an entity. This includes an evaluation of the management fees and performance fees paid to the Company when acting as a decision maker or service provider to the entity being evaluated. Under the new guidance, if fees received by the Company are customary and commensurate with the level of services provided, and the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, the interest that the Company holds would not be considered a variable interest. The Company factors in all economic interests including proportionate interests through related parties, to determine if fees are considered a variable interest. Prior to the adoption of the new consolidation guidance, these fees were considered variable interests by the Company.
An entity in which the Company holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of equity investment at risk have the right to direct the activities of the entity that most significantly impact the legal entity’s economic performance, (c) the voting rights of some investors are disproportionate to their obligation to absorb losses or rights to receive returns from a legal entity. Under the new guidance, for limited partnerships and other similar entities, non-controlling investors must have substantive rights to either dissolve the fund or remove the general partner (“kick-out rights”) in order to not qualify as a VIE.
For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company is generally deemed to have a controlling financial interest if it has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion continuously. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These assessments require judgments. Each entity is assessed for consolidation on a case-by-case basis.
For those entities evaluated under the voting interest model, the Company consolidates the entity if it has a controlling financial interest. The Company has a controlling financial interest in a voting interest entity (“VOE”) if it owns a majority voting interest in the entity. Prior to the new guidance, the Company consolidated VOE’s where it was the general partner and as such, was presumed to have control, regardless of its ownership interest.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Consolidated Variable Interest Entities
Medley Management Inc. is the sole managing member of Medley LLC and, as such, it operates and controls all of the business and affairs of Medley LLC and, through Medley LLC, conducts its business. Under ASC 810, Medley LLC meets the definition of a VIE because the equity of Medley LLC is not sufficient to permit activities without additional subordinated financial support. Medley Management Inc. has the obligation to absorb expected losses that could be significant to Medley LLC and holds
100%
of the voting power, therefore Medley Management Inc. is considered to be the primary beneficiary of Medley LLC.
As a result, Medley Management Inc. consolidates the financial results of Medley LLC and its subsidiaries and records a non-controlling interest for the economic interest in Medley LLC held by the non-managing members. Medley Management Inc.’s and the non-managing members’ economic interests in Medley LLC are
19.9%
and
80.1%
, respectively, as of
December 31, 2016
and
20.4%
and
79.6%
, respectively, as of
December 31, 2015
. Net income attributable to the non-controlling interests in Medley LLC on the consolidated statements of operations represents the portion of earnings attributable to the economic interest in Medley LLC held by its non-managing members. Non-controlling interests in Medley LLC on the consolidated balance sheets represents the portion of net assets of Medley LLC attributable to the non-managing members based on total LLC Units of Medley LLC owned by such non-managing members.
As of
December 31, 2016
, Medley LLC has
three
majority owned subsidiaries, SIC Advisors LLC, Medley Seed Funding I LLC and STRF Advisors LLC, all of which are consolidated VIEs. Each of these entities was organized as a limited liability company and was legally formed to either manage a designated fund or strategically invest capital as well as isolate business risk. As of
December 31, 2016
, total assets and total liabilities, after eliminating entries, of these VIEs reflected in the consolidated balance sheets were
$51.7 million
and
$22.8 million
, respectively. As of
December 31, 2015
, Medley had only
one
majority owned subsidiary, SIC Advisors LLC, which was a consolidated VIE. As of
December 31, 2015
, total assets and total liabilities, after eliminating entries, of this VIE reflected in the consolidated balance sheets were
$31.1 million
and
$21.2 million
, respectively. Except to the extent of the assets of these VIEs that are consolidated, the holders of the consolidated VIEs’ liabilities generally do not have recourse to the Company.
Seed Investments
The Company accounts for seed investments through the application of the voting interest model under ASC 810-10-25-1 through 25-14 and consolidates a seed investment when the investment advisor holds a controlling interest, which is, in general, 50% or more of the equity in such investment. For seed investments for which the Company does not hold a controlling interest, the Company accounts for such seed investment under the equity method of accounting, at its ownership percentage of such seed investment’s net asset value.
Consolidated Funds
With respect to the Consolidated Funds, which represent limited partnerships, Medley LLC earns a fixed management fee based on either (i) limited partners' capital commitments to the funds, (ii) invested capital, (III) net asset value (“NAV”), or (iv) lower of cost or market value of a fund's portfolio investments. In addition, Medley earns a performance fee based upon the investment returns in excess of a stated hurdle rate. The Company considered the accounting treatment under ASU 2010-10, Amendments for Certain Investment Funds, and determined that the funds were not VIEs for the year ended December 31, 2014. However, as the general partner, and due to the lack of substantive kick out or participating rights of the limited partners, these funds were consolidated under the voting interest model in accordance with ASC 810-20,
Control of Partnerships and Similar Entities
, for the year ended December 31, 2014.
Deconsolidated Funds
Certain funds that have historically been consolidated in the financial statements are no longer consolidated. The Company had consolidated MOF I in its consolidated financial statements in accordance with ASC 810-20, as the Company was the general partner and the limited partners lacked substantive kick out or participating rights. Effective January 1, 2015, the Company completed its role as investment manager of this fund and transitioned the management of the residual assets of this fund to another asset manager. As a result of the transition, the Company deconsolidated the financial statements of this fund, on January 1, 2015. There was no gain or loss recognized upon deconsolidation.
Prior to January 1, 2015, the Company had consolidated Medley Opportunity Fund II LP (“MOF II”) in its consolidated financial statements in accordance with ASC 810-20 as the Company was the general partner and the limited partners lacked kick
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
out rights or participating rights. Under the guidance of ASU 2015-02, which the Company adopted effective as of January 1, 2015, the Company reconsidered the consolidation conclusion for MOF II and, as a result of the new guidance, determined that, although MOF II continues to be a VIE, the Company is no longer considered to be the primary beneficiary. Therefore, the Company deconsolidated MOF II at January 1, 2015 and records its investment in the entity under the equity method of accounting. See Note 3, “Investments.”
Non-Consolidated Variable Interest Entities
Beginning in November 2006, Medley held a variable interest in an investment fund which was formed under the laws of the Cayman Islands and organized to make investments in a diversified portfolio of corporate and asset-based investments. The equity holders (as a group) lack the direct and indirect ability through voting rights or similar rights to make decisions about this legal entity's activities that have a significant effect on the success of the legal entity. As such, this entity is considered to be a VIE under the guidance of ASU 2010-10. Medley had a variable interest in the fund through an investment management agreement pursuant to which Medley managed the investment activities of the fund, received and annual base management fee and was entitled to receive an incentive fee, subject to the underlying financial performance of the invesment fund. The Company did not consolidate this entity's expected losses or receive a majority of the entity's returns. Effective October 31, 2014, the investment management agreement was terminated and Medley transferred its responsibilities to a new investment manager and, therefore, no longer holds a variable interest in this entity.
The Company received no management fees from this non-consolidated VIE for the years ended December 31, 2016 and 2015. For the year ended December 31, 2014, the Company received management fees from this entity of
$1.1 million
. As of December 31, 2016 and 2015, there were no assets recognized in the Company's consolidated balance sheets related to this non-consolidated VIE and Medley had no exposure to losses from the entity.
The Company holds interests in certain VIEs that are not consolidated because the Company is not deemed the primary beneficiary. The Company's interest in these entities is in the form of insignificant equity interests and fee arrangements. The maximum exposure to loss represents the potential loss of assets by the Company relating to these non-consolidated entities.
As of
December 31, 2016
, the Company recorded investments, at fair value, attributed to these non-consolidated VIEs of
$5.1 million
, receivables of
$1.9 million
included as a component of other assets and a clawback obligation of
$7.1 million
included as a component of accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. The clawback obligation assumes a hypothetical liquidation of a fund’s investments, at their then current fair values and a portion of tax distributions relating to performance fees which would need to be returned. As of
December 31, 2015
, the Company recorded investments, at fair value of
$5.9 million
, receivables of
$0.9 million
included as a component of other assets and a clawback obligation of
$7.1 million
included as a component of accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. As of
December 31, 2016
, the Company’s maximum exposure to losses from these entities is
$7.0 million
.
Concentration of Credit and Market Risk
In the normal course of business, the Company's underlying funds encounter significant credit and market risk. Credit risk is the risk of default on investments in debt securities, loans and derivatives that result from a borrower's or derivative counterparty's inability or unwillingness to make required or expected payments. Credit risk is increased in situations where the Company's underlying funds are investing in distressed assets or unsecured or subordinate loans or in securities that are a material part of its respective business. Market risk reflects changes in the value of investments due to changes in interest rates, credit spreads or other market factors.
The Company's underlying funds may make investments outside of the United States. These non-U.S. investments are subject to the same risks associated with U.S. investments, as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risk of political and economic instability, difficulties in managing the investments, potentially adverse tax consequences, and the burden of complying with a wide variety of foreign laws.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
of the financial statements and the reported amounts of income and expenses during the reporting period. Management’s estimates are based on historical experience and other factors, including expectations of future events that management believes to be reasonable under the circumstances. These assumptions and estimates also require management to exercise judgment in the process of applying the Company’s accounting policies. Significant estimates and assumptions by management affect the carrying value of investments, performance compensation payable and certain accrued liabilities. Actual results could differ from these estimates, and such differences could be material.
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 not experienced any 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.
Non-Controlling Interests in Consolidated Entities
Non-controlling interests in Consolidated Funds represent the component of equity in such consolidated entities held by third-parties. These interests are adjusted for general partner allocations and for subscriptions and redemptions that occur during the reporting period.
Non-controlling interests in consolidated subsidiaries represent the component of equity in such consolidated entities held by third-parties. These interests are adjusted for contributions to and distributions from Medley entities and are allocated income from Medley entities based on their ownership percentages.
Redeemable Non-Controlling Interests
Redeemable non-controlling interests represents interests of certain third parties that are not mandatorily redeemable but redeemable for cash or other assets at a fixed or determinable price or a fixed or determinable date, at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer. These interests are classified in temporary equity.
Cash and Cash Equivalents
Cash and cash equivalents include liquid investments in money market funds and demand deposits. The Company had cash balances with financial institutions in excess of Federal Deposit Insurance Corporation insured limits during the years ended December 31, 2016 and 2015. The Company monitors the credit standing of these financial institutions and has not experienced, and has no expectations of experiencing any losses with respect to such balances.
Restricted Cash Equivalents
Restricted cash equivalents consist of cash held at one of the Company's subsidiaries which was contributed by the Company and third-party investors. The restricted cash equivalents balance can only be used to purchase investments in new and existing Medley managed funds.
Adoption of ASU 2016-15
Effective October 1, 2016, the Company early adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance was issued to reduce the diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investments. As a result of this guidance, the Company elected to treat distributions received from certain equity method investments using the cumulative earnings approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities. The early adoption of this new guidance did not have an impact to the presentation of the statement of cash flows for the prior years presented.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Adoption of ASU 2016-18
Effective October 1, 2016, the Company early adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows show the change in the total of cash, cash equivalents and restricted cash for the applicable period presented. This new guidance also requires entities to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The Company early adopted this guidance using the retrospective transition method. The early adoption of this new guidance did not have an impact to the presentation of the statement of cash flows for the prior years presented as the Company did not have any restricted cash for those periods presented.
Class A Earnings per Share
The Company computes and presents earnings per share using the two-class method. Under the two-class method, the Company allocates earnings between common stock and participating securities. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. For purposes of calculating earnings per share, the Company reduces its reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to Class A common stockholders. Earnings are then divided by the weighted average number of Class A common stock outstanding to arrive at basic earnings per share. Diluted earnings per share reflects the potential dilution beyond shares for basic earnings per share that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in our earnings. Participating securities consist of the Company's unvested restricted stock units that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in its basic and diluted calculations.
Investments
Investments include equity method investments that are not consolidated but over which the Company exerts significant influence. The Company measures the carrying value of its public non-traded equity method investment at NAV per share. The Company measures the carrying value of its privately-held equity method investments by recording its share of the underlying income or loss of these entities.
Unrealized appreciation (depreciation) resulting from changes in fair value of the equity method investments is reflected as a component of other income (expense) in the consolidated statements of operations. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
The carrying amounts of equity method investments are reflected in investments in the consolidated statements of financial condition. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities approximates fair value. The Company evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
Investments also include available-for-sale securities which consist of an investment in publicly traded common stock. The Company measures the carrying value of its publicly traded investment in available-for-sale securities at the quoted market price on the primary market or exchange on which they trade. Unrealized appreciation (depreciation) resulting from changes in fair value of available-for-sale securities is recorded in accumulated other comprehensive income, redeemable non-controlling interests and non-controlling interests in Medley LLC. Realized gains (losses) and declines in value determined to be other than temporary, if any, are reported in other income (expenses), net. The Company evaluates its investment in available-for-sale securities for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investment may not be recoverable.
Prior to January 1, 2015, the Consolidated Funds reflected their investments at fair value with unrealized appreciation (depreciation) resulting from changes in fair value reflected as a component of net change in unrealized depreciation on investments of Consolidated Funds in the consolidated statements of operations.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Fixed Assets
Fixed assets consist primarily of furniture, fixtures, computer equipment, and leasehold improvements and are recorded at cost, less accumulated depreciation and amortization.
The Company calculates depreciation expense for furniture, fixtures, and computer equipment using the straight-line method over the estimated useful life used for the respective assets, which generally ranges from
three
to
seven
years. Amortization of leasehold improvements is provided on a straight-line basis over the shorter of the remaining term of the underlying lease or estimated useful life of the improvement. Useful lives of leasehold improvements range from
three
to
eight
years. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from accounts and any resulting gain or loss is reflected in Other Expenses, net in the consolidated statements of operations.
Debt Issuance Costs
Debt issuance costs represent direct costs incurred with obtaining financing and are amortized over the term of the underlying debt using the effective interest method. Debt issuance costs, and the related amortization expense, are adjusted when any prepayments of principal are made to the related outstanding debt. Amortization of debt issuance costs is included as a component of interest expense in the Company's consolidated statement of operations.
Adoption of ASU 2015-03
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15,
Interest – Imputation of Interest
, which updated ASU 2015-03 guidance to state that the SEC staff would not object to an entity deferring and presenting debt issuance costs relating to a line of credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit agreement.
The Company adopted the new guidance and retrospectively presented debt issuance costs related to its long-term debt as a deduction from the carrying amount of the associated debt on its Consolidated Balance Sheets as of
December 31, 2016
and 2015. As a result of the adoption,
$1.7 million
of debt issuance costs were reclassified from other assets to debt obligations as of December 31, 2015. The Company continues to present debt issuance costs related to its revolving credit facility as an asset on its Consolidated Balance Sheets as of
December 31, 2016
and 2015. This change did not affect the Company’s consolidated statements of operations, cash flows or changes in equity.
Revenues
Management Fees
Medley provides investment management services to both public and private investment vehicles. Management fees include base management fees, other management fees, and Part I incentive fees, as described below.
Base management fees are calculated based on either (i) the average or ending gross assets balance for the relevant period, (ii) limited partners’ capital commitments to the funds, (iii) invested capital, (iv) NAV or (v) lower of cost or market value of a fund’s portfolio investments. For the private funds, Medley receives base management fees during a specified period of time, which is generally
ten
years from the initial closing date. However, such termination date may be earlier in certain limited circumstances or later if extended for successive
one
-year periods, typically up to a maximum of
two
years. Depending upon the contracted terms of the investment management agreement, management fees are paid either quarterly in advance or quarterly in arrears, and are recognized as earned over the period the services are provided.
Certain management agreements provide for Medley to receive other management fee revenue derived from up front origination fees paid by the portfolio companies of the funds, as well as separately managed accounts. These fees are recognized when Medley becomes entitled to such fees.
Certain management agreements also provide for Medley to receive Part I incentive fee revenue derived from net interest income (excluding gains and losses) above a hurdle rate. Effective January 1, 2016, as it relates to Medley Capital Corporation
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
(“MCC”), these fees are subject to netting against realized and unrealized losses. Part I incentive fees are paid quarterly and are recognized as earned over the period the services are provided.
Performance Fees
Performance fees consist principally of the allocation of profits from certain funds and separately managed accounts, to which Medley provides management services. Medley is generally entitled to an allocation of income as a performance fee after returning the invested capital plus a specified preferred return as set forth in each respective agreement. Medley recognizes revenues attributable to performance fees based upon the amount that would be due pursuant to the respective agreement at each period end as if the funds were terminated at that date. Accordingly, the amount recognized in the Company's consolidated financial statements reflects Medley’s share of the gains and losses of the associated funds’ underlying investments measured at their current fair values. Performance fee revenue may include reversals of previously recognized performance fees due to a decrease in the net income of a particular fund that results in a decrease of cumulative performance fees earned to date. Since fund return hurdles are cumulative, previously recognized performance fees also may be reversed in a period of appreciation that is lower than the particular fund’s hurdle rate. During the year ended December 31, 2016, the Company did
no
t reverse previously recognized performance fees. During the year ended December 31, 2015, the Company reversed
$24.0 million
of previously recognized performance fees. For the year ended December 31, 2014, the Company reversed
$4.4 million
and
$2.3 million
of previously recognized performance fees on a standalone and consolidated basis, respectively. As of
December 31, 2016
, the Company recognized cumulative performance fees of
$7.1 million
.
Performance fees received in prior periods may be required to be returned by Medley in future periods if the funds’ investment performance declines below certain levels. Each fund is considered separately in this regard and, for a given fund, performance fees can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments, at their then current fair values, previously recognized and distributed performance fees would be required to be returned, a liability is established for the potential clawback obligation. As of
December 31, 2016
, the Company had not received any performance fee distributions, except for tax distributions related to the Company’s allocation of net income, which included an allocation of performance fees. Pursuant to the organizational documents of each respective fund, a portion of these tax distributions is subject to clawback. As of
December 31, 2016
, the Company had accrued
$7.1 million
for clawback obligations that would need to be paid if the funds were liquidated at fair value as of the end of the reporting period. The Company’s actual obligation, however, would not become payable or realized until the end of a fund’s life.
Other Revenues and Fees
Medley provides administrative services to certain affiliated funds and is reimbursed for direct and allocated expenses incurred in providing such administrative services, as set forth in the respective fund agreements. These fees are recognized as revenue in the period administrative services are rendered.
During the year ended December 31, 2014, included in other revenues and fees are reimbursements received by Medley from SIC under its investment advisory agreement. Expenses incurred by Medley under this agreement are recorded within general, administrative, and other expenses in the consolidated statements of operations. For additional information on these reimbursements, refer to Note 10.
Performance Fee Compensation
Medley has issued profit interests in certain subsidiaries to select employees. These profit-sharing arrangements are accounted for under ASC 710,
Compensation — General,
which requires compensation expense to be measured at fair value at the grant date and expensed over the vesting period, which is usually the period over which the service is provided. The fair value of the profit interests are re-measured at each balance sheet date and adjusted for changes in estimates of cash flows and vesting percentages. The impact of such changes is recorded in the consolidated statements of operations as an increase or decrease to performance fee compensation.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718,
Compensation – Stock Compensation
. Under the fair value recognition provision of this guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Stock-based compensation expense recognized for the periods presented is based on awards ultimately expected to vest and have been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The effect of such change in estimated forfeitures is recognized through a cumulative catch-up adjustment that is included in the period of the change in estimate.
The value of the portion of the award that is ultimately expected to vest on a straight-line basis over the requisite service period is included within compensation and benefits on the Company’s consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company’s policy is to recognize interest and penalties on uncertain tax positions and other tax matters as a component of income tax expense. For interim periods, the Company accounts for income taxes based on its estimate of the effective tax rate for the year. Discrete items and changes in its estimate of the annual effective tax rate are recorded in the period they occur.
Medley Management Inc. is subject to U.S. federal, state and local corporate income taxes on its allocable portion of the income of Medley LLC at prevailing corporate tax rates, which are reflected in the Company’s consolidated financial statements. Medley LLC and its subsidiaries are not subject to federal, state and local corporate income taxes since all income, gains and losses are passed through to its members. However, Medley LLC and its subsidiaries are subject to New York City’s unincorporated business tax, which is included in the Company’s provision for income taxes.
Prior to the Company's Reorganization and IPO, no provision was made for U.S. federal, state and local corporate income taxes in the accompanying consolidated financial statements since the Company was a group of pass-through entities for U.S. and state income tax purposes and its profits and losses were allocated to the partners who are individually responsible for reporting such amounts. A provision for income taxes was made for certain entities that were subject to New York City's unincorporated business tax.
The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established.
Leases
Certain lease agreements contain escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the length of the lease term. The difference between rent expense and rent paid is recorded as deferred rent. Leasehold improvements made by the lessee and funded by landlord allowances or other incentives are also recorded as deferred rent and are amortized as a reduction in rent expense over the term of the lease. Deferred rent is included as a component of accounts payable, accrued expenses and other liabilities on the consolidated balance sheets.
Secured Borrowings of Consolidated Funds
The Consolidated Funds follow the guidance in ASC 860,
Transfers and Servicing,
when accounting for loan participations and other partial loan sales. Such guidance provides accounting and reporting standards for transfers and servicing of financial assets and requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance. Under ASC 860, the Company applies a control-oriented approach to participating interests whereby control is considered to have been surrendered only if (i) the transferred financial assets have been isolated from the transferor, (ii) the transferee has the right to pledge or exchange the transferred financial assets it received, and (iii) the transferor, its consolidated affiliates in the financial statements being presented, or its agents do not maintain effective control over the transferred financial assets. Participations or other partial loan sales which do not meet all of these conditions remain on the Company’s consolidated balance sheets and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
For these participations or partial loan sales accounted for as secured borrowings, the interest income earned on the entire loan balance is recorded within interest and other income of Consolidated Funds and the interest income earned by the buyer in the partial loan sale is recorded as interest expense of Consolidated Funds in the accompanying consolidated statements of operations. Changes in the fair value of secured borrowings of Consolidated Funds are included in net change in unrealized depreciation (appreciation) on secured borrowings in the consolidated statements of operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
, which provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contracts, (3) determine the transaction prices, (4) allocate the transaction prices to the performance obligations in the contracts, and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The guidance also requires advanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which clarified the implementation guidance regarding performance obligations and licensing arrangements. The new standard will become effective for the Company on January 1, 2018, with early application permitted to the effective date of January 1, 2017. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. However, the adoption of this guidance is expected to impact the timing of performance fee revenue recognition. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In August 2014, the FASB released ASU 2014-15,
Presentation of Financial Statements – Going Concern
, which requires a company to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within the one year period subsequent to the date that the financial statements are issued or within the one year period subsequent the date that the financial statements are available to be issued. This guidance is effective for fiscal years ending after December 15, 2016, and for annual and interim periods thereafter. The Company adopted this guidance effective January 1, 2017 and the adoption did not have an impact on the consolidated financial statements of the Company.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which requires that all equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. This guidance eliminates the available-for-sale classification for equity securities with readily determinable fair values. However, companies may elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. This guidance is effective for fiscal years beginning after December 31, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. However, the adoption of this guidance is expected to result in a significant increase in total assets and total liabilities, but will not have a significant impact on the consolidated statement of operations.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This guidance simplifies and improves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 31, 2016, with early adoption permitted. Upon initial evaluation, the adoption of ASU 2016-09 will have the following changes to the Company's consolidated financial statements. First, excess tax benefits and deficiencies will be recognized in the consolidated statements of operations instead of being recorded to equity, and forfeitures may be accounted for as they occur instead of being estimated. In addition, excess tax benefits will be classified as cash flows from operating activities, and cash withheld by the Company for employees'
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
withholding taxes will be classified as cash flows from financing activities on the Company's consolidated statements of cash flows.
The Company does not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on its consolidated balance sheets, results of operations or cash flows.
3. INVESTMENTS
The components of investments are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Equity method investments, at fair value
|
$
|
14,895
|
|
|
$
|
16,360
|
|
Available-for-sale securities
|
17,009
|
|
|
—
|
|
Total investments, at fair value
|
$
|
31,904
|
|
|
$
|
16,360
|
|
Equity Method Investments
Medley measures the carrying value of its public non-traded equity method investments at NAV per share. Unrealized appreciation (depreciation) resulting from changes in NAV per share is reflected as a component of other income (expense) in the consolidated statements of operations. The carrying value of the Company’s privately-held equity method investments is determined based on the amounts invested by the Company, adjusted for the equity in earnings or losses of the investee allocated based on the respective underlying agreements, less distributions received.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. During the year ended December 31, 2016, the Company assessed that the liquidation value of its investment in CK Pearl Fund was below its carrying value and that such decline led to an other than temporary impairment. As a result, the Company recorded a
$0.5 million
loss on its investment in CK Pearl Fund which is included as a component of other income (expenses), net on the consolidated statements of operations. There were no impairment losses recorded during the years ended
December 31, 2015
and 2014.
As of
December 31, 2016
and 2015, the Company’s carrying value of its equity method investments was
$14.9 million
and
$16.4 million
, respectively. Included in this balance was
$9.0 million
as of
December 31, 2016
and 2015 from the Company’s investment in publicly-held Sierra Income Corporation (“SIC”). The remaining balance as of
December 31, 2016
and 2015 relates primarily to the Company’s investments in MOF II, Medley Opportunity Fund III LP (“MOF III”) and CK Pearl Fund.
Available-For-Sale Securities
As of
December 31, 2016
, the Company’s carrying value of its available-for-sale securities was
$17.0 million
and consisted of
2,264,892
shares of MCC. The Company measures the carrying value of its investment in MCC at fair value based on the quoted market price on the exchange on which its shares trade. As of
December 31, 2016
, the cumulative unrealized gains in redeemable non-controlling interests and non-controlling interests in Medley LLC on the Company's consolidated balance sheets was
$0.2 million
. There were
no
impairment charges recorded related to the Company’s investments in available-for-sale securities during the year ended
December 31, 2016
.
4. FAIR VALUE MEASUREMENTS
The Company follows the guidance set forth in ASC 820 for measuring the fair value of investments in available-for-sale securities. Fair value is the price that would be received from 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. Financial instruments recorded at fair value in the
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:
|
|
•
|
Level I – Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.
|
|
|
•
|
Level II – Valuations based on inputs other than quoted prices in active markets included in Level I, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in non-active markets including 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 III – 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 and 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 that 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 III information, assuming no additional corroborating evidence.
|
When determining the fair value of publicly traded equity securities, the Company uses the quoted market price as of the valuation date on the primary market or exchange on which they trade. The Company’s investments in available-for-sale securities are categorized as Level I. As of
December 31, 2016
and 2015, there were
no
financial instruments classified as Level II or Level III.
Our equity method investments for which fair value is measured at NAV per share, or its equivalent, using the practical expedient, are not categorized in the fair value hierarchy.
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 financials assets or liabilities. Reclassifications impacting all levels of the fair value hierarchy are reported as transfers in or out of Level I, II or III category as of the beginning of the quarter during which the reclassifications occur. There were
no
transfers between levels in the fair value hierarchy during the years ended
December 31, 2016
and 2015.
5. OTHER ASSETS
The components of other assets are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Fixed assets, net of accumulated depreciation of $1,816 and $1,667, respectively
|
$
|
4,998
|
|
|
$
|
1,708
|
|
Security deposits
|
1,975
|
|
|
3,034
|
|
Administrative fees receivable (Note 10)
|
2,068
|
|
|
1,654
|
|
Deferred tax assets (Note 12)
|
2,001
|
|
|
1,658
|
|
Due from affiliates (Note 10)
|
2,133
|
|
|
1,486
|
|
Prepaid expenses and taxes
|
3,078
|
|
|
2,293
|
|
Other
|
2,058
|
|
|
1,182
|
|
Total other assets
|
$
|
18,311
|
|
|
$
|
13,015
|
|
6. LOANS PAYABLE
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
The Company’s loans payable consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Term loans under the Credit Suisse Term Loan Facility, net of unamortized discount and debt issuance costs of $1,207 and $2,489, respectively
|
$
|
43,593
|
|
|
$
|
92,511
|
|
Non-recourse promissory notes, net of unamortized discount and debt issuance costs of $1,415 and $1,953, respectively
|
8,585
|
|
|
8,360
|
|
Total loans payable
|
$
|
52,178
|
|
|
$
|
100,871
|
|
Credit Suisse Term Loan Facility
On
August 14, 2014
, the Company entered into a
$110.0 million
senior secured term loan credit facility (as amended, “Term Loan Facility”) with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent thereunder, Credit Suisse Securities (USA) LLC, as bookrunner and lead arranger, and the lenders from time-to-time party thereto, which will mature on
June 15, 2019
.
Borrowings under the Term Loan Facility, bore interest, at the borrower’s option, at a rate equal to either a Eurodollar margin over an adjusted LIBOR (with a “floor” of
1.0%
) or a base rate margin over an adjusted base rate determined by reference to the highest of (i) the term loan administrative agent’s prime rate; (ii) the federal funds effective rate in effect on such day plus
0.5%
; and (iii) an adjusted LIBOR plus
1.0%
. The applicable margins for the Term Loan Facility was
5.5%
, in the case of Eurodollar loans and
4.5%
, in the case of adjusted base rate loans. Outstanding borrowings under the Term Loan Facility bore interest at a rate of
6.5%
as of
December 31, 2016
and 2015. Borrowings were collateralized by substantially all of the equity interests in Medley LLC’s wholly owned subsidiaries.
The Term Loan Facility required principal repayments in
quarterly installments
equal to
$1.4 million
(which amount may be adjusted as a result of prepayment or incremental term loans drawn), with the remaining amount payable at maturity. The Company can also make voluntary repayments, without penalty, at any time prior to August 14, 2016, not to exceed
$33.0 million
in the aggregate. As of
December 31, 2016
and 2015, outstanding borrowings under this facility were
$43.6 million
and
$92.5 million
, respectively, which is reflected net of unamortized discount and debt issuance costs of
$1.2 million
and
$2.5 million
, respectively. Debt issuance costs and the discount under the term loans were being accreted, using the effective interest method, over the term of the notes. Total interest expense under this Term Loan Facility, including accretion of the note discount and amortization of debt issuance costs, was
$6.7 million
,
$7.0 million
and
$2.8 million
for of the years ended
December 31, 2016
,
2015
and 2014, respectively. The fair value of the outstanding balance of Term Loan Facility approximated its par value as of
December 31, 2016
.
In August and October 2016, the Company voluntarily prepaid
$23.5 million
and
$26.7 million
, respectively, of outstanding term loans under this facility using the net proceeds from the offerings of senior unsecured debt (described in Note 7). The prepayments were applied against the remaining quarterly installments and a portion of the Term Loan Facility payable at maturity.
The Term Loan Facility also contained a financial covenant that required the Company to maintain a Maximum Net Leverage Ratio of not greater than
3.5
to
1.0
, with which the Company is compliant. This ratio was calculated on a trailing twelve months basis and was the ratio of Total Net Debt, as defined, to Core EBITDA, as defined, and was calculated using the Company’s financial results and included the adjustments made to calculate Core EBITDA. Non-compliance with any of the financial or non-financial covenants without cure or waiver would constitute an event of default under the Term Loan Facility. The Term Loan Facility also contains other customary events of default, including defaults based on events of bankruptcy and insolvency, dissolution, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties. In February 2017, borrowings under this facility were paid off using the proceeds from the issuance of additional senior unsecured debt which resulted in the termination of the Term Loan Facility. Refer to Note 17, “Subsequent Events”.
CNB Credit Agreement
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
On
August 19, 2014
, the Company entered into a
$15.0 million
senior secured revolving credit facility with City National Bank (as amended, the “Revolving Credit Facility”). On May 3, 2016, the Revolving Credit Facility was amended to permit issuance of additional indebtedness by the Company. The amendment also provided for the creation and funding of certain future funds, as well as for certain other technical changes to the Revolving Credit Facility. The Company intends to use any proceeds from borrowings under the Revolving Credit Facility for general corporate purposes, including funding of its working capital needs. Borrowings under the Revolving Credit Facility bear interest at the option of the Company, either (i) at an Alternate Base Rate, as defined, plus an applicable margin not to exceed
3.25%
or (ii) at an Adjusted LIBOR plus an applicable margin not to exceed
4.0%
. As of and during the years ended
December 31, 2016
and 2015, there were no amounts drawn under the Revolving Credit Facility.
The Revolving Credit Facility also contains a financial covenant that requires the Company to maintain a Maximum Net Leverage Ratio of not greater than
3.5
to
1.0
, with which the Company is compliant. This ratio is calculated on a trailing twelve months basis and is the ratio of Total Net Debt, as defined, to Core EBITDA, as defined, and is calculated using the Company’s financial results and includes the adjustments made to calculate Core EBITDA. Non-compliance with any of the financial or non-financial covenants without cure or waiver would constitute an event of default under the Revolving Credit Facility. The Revolving Credit Facility also contains other customary events of default, including defaults based on events of bankruptcy and insolvency, dissolution, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties. There were no events of default under the Revolving Credit Facility as of
December 31, 2016
.
Non-Recourse Promissory Notes
In April 2012, the Company borrowed
$10.0 million
under two non-recourse promissory notes. Proceeds from the borrowings were used to purchase
1,108,033
shares of common stock of SIC, which were pledged as collateral for the obligations. Interest on the notes is paid monthly and is equal to the dividends received by the Company related to the pledged shares. The Company may prepay the notes in whole or in part at any time without penalty and the lenders may call the notes if certain conditions are met. The notes are scheduled to mature in
March 2019
. The proceeds from the notes were recorded net of issuance costs of
$3.8 million
and are being accreted, using the effective interest method, over the term of the non-recourse promissory notes. Total interest expense under these non-recourse promissory notes, including accretion of the note discount, was
$1.4 million
for each of the years ended
December 31, 2016
, 2015 and 2014. The fair value of the outstanding balance of the notes was
$10.2 million
and
$10.1 million
as of
December 31, 2016
and 2015, respectively.
In March 2014, the Company issued a promissory note in the amount of
$2.5 million
to a former Medley member in connection with the purchase of his membership interests. The promissory note carries no interest, has quarterly amortization payments of
$0.3 million
, and matured in March 2016. As of
December 31, 2015
, the balance under this note was
$0.3 million
.
Contractual Maturities of Loans Payable
As of
December 31, 2016
,
$54.8 million
of future principal payments will be due, relating to the loans payable, during the year ended December 31, 2019. There are no other future principal payments due under the loans payable.
7. SENIOR UNSECURED DEBT
On August 9, 2016, Medley LLC completed a registered public offering of
$25.0 million
of an aggregate principal amount of
6.875%
senior notes due 2026 at a public offering price of
100%
of the principal amount. On October 18, 2016, Medley LLC completed a public offering of an additional
$28.6 million
in aggregate principal amount of
6.875%
senior notes due 2026 at a public offering price of
$24.45
for each
$25.00
principal amount of notes. Together, the August 9, 2016 and the October 18, 2016 offerings compose the senior unsecured debt balance.
The senior unsecured debt matures on August 15, 2026 and interest is payable quarterly commencing on November 15, 2016. The senior unsecured debt is subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after August 15, 2019 at a redemption price per security equal to
100%
of the outstanding principal amount thereof plus accrued and unpaid interest payments. The senior unsecured debt is listed on the New York Stock Exchange and trades thereon under the trading symbol “MDLX.”
As of
December 31, 2016
, the outstanding senior unsecured debt balance was
$49.8 million
, which is reflected net of unamortized discount and debt issuance costs of
$3.8 million
. Debt issuance costs and the discount under the senior unsecured
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
debt are being accreted, using the effective interest method, over the term of the senior unsecured debt. Total interest expense under the senior unsecured debt, including accretion of the discount and amortization of debt issuance costs, was
$1.2 million
for the year ended
December 31, 2016
. Net proceeds from the issuance of the senior unsecured debt were used to repay a portion of the outstanding indebtedness under the Term Loan Facility. The fair value of the outstanding balance of senior unsecured debt was
$51.6 million
as of
December 31, 2016
. In January and February 2017, Medley LLC completed additional registered offerings of senior unsecured debt. Refer to Note 17, “Subsequent Events.”
8. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accounts payable, accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Accrued compensation and benefits
|
$
|
7,978
|
|
|
$
|
9,107
|
|
Due to affiliates (Note 10)
|
15,043
|
|
|
13,634
|
|
Revenue share payable (Note 9)
|
6,472
|
|
|
6,774
|
|
Accrued interest
|
558
|
|
|
1,304
|
|
Professional fees
|
858
|
|
|
614
|
|
Deferred rent
|
2,833
|
|
|
285
|
|
Deferred tax liabilities (Note 12)
|
202
|
|
|
127
|
|
Accounts payable and other accrued expenses
|
2,326
|
|
|
2,901
|
|
Total accounts payable, accrued expenses and other liabilities
|
$
|
36,270
|
|
|
$
|
34,746
|
|
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Medley leases office space in New York City and San Francisco under non-cancelable lease agreements that expire at
various times through September 2023
. Rent expense was
$2.5 million
for the year ended
December 31, 2016
and
$2.6 million
for the years ended December 31,
2015
and 2014.
Future minimum rental payments under non-cancelable leases are as follows as of
December 31, 2016
(in thousands):
|
|
|
|
|
2017
|
$
|
2,683
|
|
2018
|
2,704
|
|
2019
|
2,710
|
|
2020
|
2,833
|
|
2021
|
2,430
|
|
Thereafter
|
4,254
|
|
Total future minimum lease payments
|
$
|
17,614
|
|
Capital Commitments to Funds
As of
December 31, 2016
and 2015, the Company had aggregate unfunded commitments of
$0.5 million
and
$0.3 million
, respectively, to certain long-dated private funds.
Other Commitments
In April 2012, the Company entered into an obligation to pay a fixed percentage of management and incentive fees received by the Company from SIC. The agreement was entered into contemporaneously with the
$10 million
non-recourse promissory notes that were issued to the same parties (Note 6). The two transactions were deemed to be related freestanding contracts and the
$10 million
of loan proceeds were allocated to the contracts using their relative fair values. At inception, the Company recognized an obligation of
$4.4 million
representing the present value of the future cash flows expected to be paid
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
under this agreement. As of
December 31, 2016
and 2015, this obligation amounted to
$6.5 million
and
$6.8 million
, respectively, and is recorded as revenue share payable, a component of accounts payable, accrued expenses and other liabilities on the consolidated balance sheets. The change in the estimated cash flows for this obligation is recorded in other income (expense) on the consolidated statements of operations.
Legal Proceedings
From time to time, the Company is involved in various legal proceedings, lawsuits and claims incidental to the conduct of its business. Its business is also subject to extensive regulation, which may result in regulatory proceedings against it. Except as described below, the Company is not currently party to any material legal proceedings.
MCC Advisors LLC was named as a defendant in a lawsuit on May 29, 2015, by Moshe Barkat and Modern VideoFilm Holdings, LLC (“MVF Holdings”) against MCC, MOF II, MCC Advisors LLC, Deloitte Transactions and Business Analytics LLP A/K/A Deloitte ERG (“Deloitte”), Scott Avila (“Avila”), Charles Sweet, and Modern VideoFilm, Inc. (“MVF”). The lawsuit is pending in the California Superior Court, Los Angeles County, Central District, as Case No. BC 583437. The lawsuit was filed after MCC, as agent for the lender group, exercised remedies following a series of defaults by MVF and MVF Holdings on a secured loan with an outstanding balance at the time in excess of
$65 million
. The lawsuit sought damages in excess of
$100 million
. Deloitte and Avila have settled the claims against them in exchange for payment of
$1.5 million
. Following a separate lawsuit by Mr. Barkat against MVF’s D&O insurance carrier, the carrier, Charles Sweet and MVF have settled the claims against them. On June 6, 2016, the court granted the defendants’ demurrers on several counts and dismissed Mr. Barkat’s claims with prejudice except with respect to his claim for intentional interference with contract. MCC and the other defendants continue to dispute the remaining allegations and are vigorously defending the lawsuit while pursuing affirmative counterclaims against Mr. Barkat and MVF Holdings. On August 29, 2016, MVF Holdings filed another lawsuit in the California Superior Court, Los Angeles County, Central District, as Case No. BC 631888 (the “Derivative Action”), naming MCC Advisors LLC and certain of Medley’s employees as defendants, among others. In the Derivative Action, MVF Holdings reasserts substantially the same claims that were previously asserted in each of their three prior complaints. MCC Advisors LLC and the other defendants believe the outstanding claims for alleged interference with Mr. Barkat’s employment contract, and the other causes of action asserted in the Derivative Action are without merit and all defendants intend to continue to assert a vigorous defense.
CK Pearl Fund, Ltd. and CK Pearl Fund, LP v. Rothstein Kass & Company, P.C., Rothstein-Kass P.A., Rothstein Kass & Co. LLC and Rothstein, Kass & Company (Cayman); Rothstein Kass & Company, P.C., Rothstein-Kass P.A., Rothstein Kass & Co. LLC and Rothstein, Kass & Company (Cayman) v. Medley Capital LLC, filed on September 19, 2016, in the Superior Court of New Jersey Law Division: Essex County, as Docket No. L-5196-15. On September 28, 2016, Rothstein Kass & Company, P.C., Rothstein-Kass P.A., Rothstein Kass & Co. LLC and Rothstein, Kass & Company (Cayman); Rothstein Kass & Company, P.C., Rothstein-Kass P.A. (the “Rothstein Companies”) notified Medley Capital LLC that they had filed a Third-Party Complaint naming Medley Capital LLC as an additional defendant in the pending lawsuit between CK Pearl Fund, Ltd. and CK Pearl Fund, LP (the “CK Pearl Funds”) and the Rothstein Companies. The CK Pearl Funds’ lawsuit against Rothstein Kass was commenced on July 23, 2015. Medley Capital LLC was not named as a defendant in the CK Pearl Funds’ lawsuit. In their First Amended Complaint, the CK Pearl Funds alleged that the Rothstein Companies failed to exercise reasonable care and diligence in conducting audits of the CK Pearl Funds’ financial statements from 2008 to 2013. More specifically, the CK Pearl Funds allege that asset valuations prepared by independent third-party valuation firms and Medley Capital LLC were overstated and the Rothstein Kass Companies should not have issued audit opinions stating that the CK Pearl Funds’ financial statements were fairly presented. The CK Pearl Funds alleged that, as a result, they paid Medley Capital LLC greater management fees than were otherwise due and that the CK Pearl Funds lost money on follow-on investments that they otherwise would not have made. The CK Pearl Funds’ complaint seeks damages in excess of
$125 million
. From 2007 through 2014, the CK Pearl Funds were named Medley Opportunity Fund Ltd and Medley Opportunity Fund LP and Medley Capital LLC acted as investment manager to the CK Pearl Funds. On September 19, 2016, the Rothstein Companies filed an answer denying the CK Pearl Funds’ allegations and a cross-complaint against the CK Pearl Funds and a third-party complaint against Medley Capital LLC. The complaints filed by the Rothstein Companies allege that the CK Pearl Funds and/or Medley Capital LLC were responsible for valuations and, if any financial statements or any valuations were overstated, the CK Pearl Funds and/or Medley Capital LLC, not the Rothstein Companies, were responsible. Medley Capital LLC is demanding indemnification pursuant to its contractual agreements with the CK Pearl Funds and contribution from both the CK Pearl Funds and their independent directors with respect to the claims asserted by the Rothstein Companies. Medley Capital LLC disputes the allegations and intends to defend the case vigorously.
Medley Capital LLC v. CK Pearl Fund, Ltd., filed on November 28, 2016, in the Grand Court of the Cayman Islands in the Financial Services Division, as Cause No. FSD 196 of 2016. On November 28, 2016, Medley Capital LLC commenced a lawsuit against CK Pearl Fund Ltd. seeking declaratory relief with respect its right to indemnification in connection with the
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Rothstein litigation and advancement of its expenses in connection with defending the same. CK Pearl Fund Ltd. has indicated that it is prepared to acknowledge Medley Capital LLC's right to advancement of costs and expenses defending the Rothstein litigation.
10. RELATED PARTY TRANSACTIONS
Substantially all of Medley’s revenue is earned through agreements with its consolidated and non-consolidated funds for which it collects management and performance fees for providing investment and management services.
In April 2012, Medley entered into an investment advisory agreement (“IAA”) with SIC. Pursuant to the terms of the IAA, Medley agreed to bear all organization and offering expenses (“O&O Expenses”) related to SIC until the earlier of the end of the SIC offering period or such time that SIC has raised
$300 million
in gross proceeds in connection with the sale of shares of its common stock. The SIC IAA also required SIC to reimburse Medley for O&O Expenses incurred by Medley in an amount equal to
1.25%
of the aggregate gross proceeds in connection with the sale of shares of its common stock until the earlier of the end of the SIC offering period, or Medley has been repaid in full. Effective June 2, 2014, Medley was no longer liable for these expenses as SIC had reached the
$300 million
in gross proceeds threshold.
During the year ended December 31, 2014, Medley incurred O&O Expenses of
$1.5 million
, which were recorded within general, administrative, and other expenses in the consolidated statements of operations. Reimbursements of O&O were
$3.8 million
during the year ended December 31, 2014 and were recorded in other revenues and fees on the consolidated statements of operations. There were
no
O&O expenses or reimbursements of O&O during the years ended December 31, 2016 and 2015.
In June 2012, Medley entered into an Expense Support and Reimbursement Agreement (“ESA”) with SIC. Under the ESA, until December 31, 2016, Medley will pay up to
100%
of SIC’s operating expenses in order for SIC to achieve a reasonable level of expenses relative to its investment income. Pursuant to the ESA, SIC has a conditional obligation to reimburse Medley for any amounts they funded under the ESA if, within three years of the date on which Medley funded such amounts, SIC meets certain financial levels. For the years ended
December 31, 2016
, 2015 and 2014 Medley recorded
$16.1 million
,
$6.4 million
and
$5.0 million
, respectively, for ESA expenses under this agreement. The ESA expenses are recorded within general, administrative, and other expense in the consolidated statements of operations. Amounts due to SIC under the ESA agreement were
$7.9 million
and
$7.2 million
as of
December 31, 2016
and 2015, respectively. These amounts are included in accounts payable, accrued expenses and other liabilities as due to affiliates on the consolidated balance sheets.
In January 2011, Medley entered into an administration agreement with MCC (the “MCC Admin Agreement”), whereby Medley agreed to provide administrative services necessary for the operations of MCC. MCC agreed to pay Medley for the costs and expenses incurred in providing such administrative services, including an allocable portion of Medley’s overhead expenses and an allocable portion of the cost of MCC’s officers and their respective staffs. Medley records these administrative fees as revenue in the period when the services are provided and are included in other revenues and fees on the consolidated statements of operations. For the years ended
December 31, 2016
,
2015
and 2014, the Company recorded
$3.9 million
,
$4.0 million
and
$3.7 million
, respectively, of revenue related to the MCC Admin Agreement. Amounts due from MCC under the MCC Admin Agreement was
$0.9 million
as of
December 31, 2016
and 2015, respectively, and is included as a component of other assets on the consolidated balance sheets.
In April 2012, Medley entered into an administration agreement with SIC (the “SIC Admin Agreement”), whereby Medley agreed to provide administrative services necessary for the operations of SIC. SIC agreed to pay Medley for the costs and expenses incurred in providing such administrative services including an allocable portion of Medley’s overhead expenses and an allocable portion of the cost of SIC’s officers and their respective staffs. Medley records these administrative fees as revenue in the period when the services are provided and are included in other revenues and fees on the consolidated statement of operations. For the years ended
December 31, 2016
,
2015
and 2014, the Company recorded
$2.8 million
,
$2.1 million
and
$1.3 million
, respectively, of revenue related to the SIC Admin Agreement. Amounts due from SIC under the SIC Admin Agreement was
$0.9 million
and
$0.5 million
as of
December 31, 2016
and 2015, respectively, and is included as a component of other assets on the consolidated balance sheets.
Additionally, Medley entered into administration agreements with other entities that it manages (the “Funds Admin Agreements”), whereby Medley agreed to provide administrative services necessary for the operations of these other vehicles. These other entities agreed to pay Medley for the costs and expenses incurred in providing such administrative services, including an allocable portion of Medley’s overhead expenses and an allocable portion of the cost of these other vehicles' officers and their respective staffs. Medley records these administrative fees as revenue in the period when the services are provided and are included
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
in other revenues and fees on the consolidated statement of operations. For the years ended
December 31, 2016
and 2015 the Company recorded
$0.9 million
and
$0.2 million
, respectively, of revenue related to the Funds Admin Agreements. There was no revenue related to the Funds Admin Agreement for the year ended December 31, 2014. Amounts due from these entities under the Funds Admin Agreements were
$0.3 million
and
$0.2 million
, respectively, as of
December 31, 2016
and 2015, and are included as a component of other assets on the consolidated balance sheets.
Equity Method Investments
The Company holds equity method investments in SIC, MOF II, MOF III, CK Pearl Fund and other vehicles. As of
December 31, 2016
and 2015, the Company’s carrying value of its equity method investments was
$14.9 million
and
$16.4 million
, respectively. Included in this balance was
$9.0 million
as of
December 31, 2016
and 2015, from the Company’s investment in SIC.
Available-For-Sale Securities
As of
December 31, 2016
, the Company’s carrying value of its available-for-sale securities was
$17.0 million
and consisted of
2,264,892
shares of MCC which were purchased on the open market for
$16.8 million
. As of
December 31, 2016
, the Company recorded
$0.2 million
of cumulative unrealized gains in redeemable non-controlling interests and non-controlling interests in Medley LLC on the Company's consolidated balance sheets.
Promissory Note
In March 2014, the Company issued a promissory note in the amount of
$2.5 million
to a former Medley member in connection with the purchase of his membership interests. The promissory note carried no interest, had quarterly amortization payments of
$0.3 million
, and was paid down in full as of March 2016. As of
December 31, 2015
, the balance under this note was
$0.3 million
.
Exchange Agreement
Prior to the completion of the Company's IPO, Medley LLC's limited liability agreement was restated among other things, to modify its capital structure by reclassifying the interests held by its existing owners (i.e. the members of Medley prior to the IPO) into the LLC Units. Medley’s existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right (subject to the terms of the exchange agreement as described therein), to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.
Tax Receivable Agreement
Medley Management Inc. entered into a tax receivable agreement with the holders of LLC Units that provides for the payment by Medley Management Inc. to exchanging holders of LLC Units of
85%
of the benefits, if any, that Medley Management Inc. is deemed to realize as a result of increases in tax basis of tangible and intangible assets of Medley LLC from the future exchange of LLC Units for shares of Class A common stock, as well as certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
The term of the tax receivable agreement will continue until all such tax benefits under the agreement have been utilized or have expired, unless Medley Management Inc. exercises its right to terminate the tax receivable agreement for an amount based on an agreed value of payments remaining to be made under the agreement. As of
December 31, 2016
, there were no transactions under this agreement.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
11. EARNINGS (LOSS) PER CLASS A SHARE
The table below presents basic and diluted net income (loss) per share of Class A common stock using the two-class method for the years ended
December 31, 2016
,
2015
and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Amounts in thousands, except share and per share amounts)
|
Basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Net income attributable to Medley Management Inc.
|
|
$
|
997
|
|
|
$
|
3,111
|
|
|
$
|
1,695
|
|
Less: Allocation to participating securities
|
|
(892
|
)
|
|
(353
|
)
|
|
(267
|
)
|
Net income (loss) available to Class A common stockholders
|
|
$
|
105
|
|
|
$
|
2,758
|
|
|
$
|
1,428
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Class A common stock outstanding
|
|
5,804,042
|
|
|
6,002,422
|
|
|
6,000,000
|
|
Net income (loss) per Class A share
|
|
$
|
0.02
|
|
|
$
|
0.46
|
|
|
$
|
0.24
|
|
The Company declared a
$0.20
dividend per share of Class A common stock on November 10, 2014, March 29, 2015, August 10, 2015, November 11, 2015, February 11, 2016, May 10, 2016, August 9, 2016 and November 10, 2016. The allocation to participating securities above generally represents dividends paid to holders of unvested restricted stock units which reduces net income available to common stockholders.
The weighted average shares of Class A common stock is the same for both basic and diluted earnings per share as the diluted amount excludes the assumed conversion of
23,333,333
LLC Units to shares of Class A common stock, the impact of which would be antidilutive.
12. INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31, 2016, 2015 and 2014 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(Amounts in thousands, except share and per share amounts)
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
272
|
|
|
$
|
1,546
|
|
|
$
|
486
|
|
State
|
|
1,058
|
|
|
1,373
|
|
|
2,768
|
|
Total current provision
|
|
1,330
|
|
|
2,919
|
|
|
3,254
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
158
|
|
|
(454
|
)
|
|
2
|
|
State and local
|
|
(425
|
)
|
|
(450
|
)
|
|
(728
|
)
|
Total deferred provision
|
|
(267
|
)
|
|
(904
|
)
|
|
(726
|
)
|
Provision for Income Taxes
|
|
$
|
1,063
|
|
|
$
|
2,015
|
|
|
$
|
2,528
|
|
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net effect of temporary differences between the tax basis of an asset or liability and its reported amount in the Company’s consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years. The significant components of the Company's deferred tax assets and liabilities included on its consolidated balance sheets are as follow:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Deferred tax assets
|
|
|
|
Tax goodwill
|
$
|
605
|
|
|
$
|
597
|
|
Basis difference in partnership interest
|
417
|
|
|
630
|
|
Unrealized losses
|
44
|
|
|
55
|
|
Stock-based compensation
|
216
|
|
|
101
|
|
Accrued expenses not currently deductible for tax purposes
|
7
|
|
|
86
|
|
New York City unincorporated business tax credit carryforward
|
512
|
|
|
—
|
|
Other liabilities
|
200
|
|
|
189
|
|
Total deferred tax assets
|
$
|
2,001
|
|
|
$
|
1,658
|
|
Deferred tax liabilities
|
|
|
|
Accrued fee income
|
$
|
147
|
|
|
$
|
68
|
|
Other
|
55
|
|
|
59
|
|
Total deferred tax liabilities
|
202
|
|
|
127
|
|
Net deferred tax assets
|
$
|
1,799
|
|
|
$
|
1,531
|
|
The Company's effective tax rate includes a rate benefit attributable to the fact that the Company's subsidiaries operate as a limited liability companies, which are not subject to federal or state income tax. Accordingly, a portion of the Company's earnings attributable to the non-controlling interests are not subject to corporate level taxes. However, a portion of the limited liabilities income is subject to New York City’s unincorporated business tax. For the years ended
December 31, 2016
and
2015
, the company was subject to federal, state and city corporate income taxes on its pre-tax income attributable to Medley Management Inc.
A reconciliation of the federal statutory tax rate to the effective tax rates for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Income allocated to non-controlling interests
|
|
(28.9
|
)%
|
|
(26.8
|
)%
|
|
(32.9
|
)%
|
State and local corporate income taxes
|
|
1.2
|
%
|
|
1.0
|
%
|
|
0.2
|
%
|
Partnership unincorporated business tax
|
|
4.2
|
%
|
|
1.7
|
%
|
|
2.6
|
%
|
Permanent differences
|
|
—
|
%
|
|
(2.9
|
)%
|
|
(0.4
|
)%
|
Other
|
|
(0.8
|
)%
|
|
1.9
|
%
|
|
—
|
%
|
Effective tax rate
|
|
9.7
|
%
|
|
8.9
|
%
|
|
3.5
|
%
|
Interest expense and penalties related to income tax matters are recognized as a component of the provision for income taxes and were less than
$0.1 million
in 2016. There were
no
such amounts incurred during the years ended December 31, 2015 and 2014. As of and during the years ended December 31, 2016, 2015 and 2014, there were
no
uncertain tax positions taken that were not more likely than not to be sustained. Certain subsidiaries of the Company are no longer subject to tax examinations by taxing authorities for tax years prior to 2012.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
13. COMPENSATION EXPENSE
Compensation generally includes salaries, bonuses, and profit sharing awards. Bonuses and profit sharing awards are accrued over the service period to which they relate. Guaranteed payments made to our senior professionals who are members of Medley LLC are recognized as compensation expense. The guaranteed payments to the Company’s Co-Chief Executive Officers are performance based and are periodically set subject to maximums based on the Company’s total assets under management. Such maximums aggregated to
$5.0 million
for the year ended
December 31, 2016
and
$3.0 million
for each of the years ended
December 31, 2015
and
2014
. Commencing with the fourth quarter of 2014 and for the years ended
December 31, 2016
and
2015
, neither of the Company’s Co-Chief Executive Officers received any guaranteed payments.
Performance Fee Compensation
In October 2010 and January 2014, the Company granted shares of vested profit interests in certain subsidiaries to select employees. These awards are viewed as a profit-sharing arrangement and are accounted for under ASC 710, which requires compensation expense to be recognized over the vesting period, which is usually the period over which service is provided. The shares were vested at grant date, subject to a divestiture percentage based on percentage of service completed from the award grant date to the employee’s termination date. The Company adjusts the related liability quarterly based on changes in estimated cash flows for the profit interests.
In February 2015 and March 2016, the Company granted incentive cash bonus awards to select employees. These awards entitle employees to receive cash compensation based on distributed performance fees received by the Company from certain institutional funds. Eligibility to receive payments pursuant to these incentive awards is based on continued employment and ceases automatically upon termination of employment. Performance compensation expense is recorded based on the fair value of the incentive awards at the date of grant and is recognized on a straight-line basis over the expected requisite service period. The performance compensation liability is subject to re-measurement at the end of each reporting period and any changes in the liability are recognized in such reporting period.
For the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded a reversal of performance fee compensation expense of
$0.3 million
,
$8.0 million
and
$1.5 million
, respectively. As of
December 31, 2016
and
2015
, the total performance fee compensation payable for these awards was
$1.0 million
and
$1.8 million
, respectively.
Retirement Plan
The Company sponsors a defined-contribution 401(k) retirement plan that covers all employees. Employees are eligible to participate in the plan immediately, and participants are
100%
vested from the date of eligibility. The Company makes contributions to the Plan of
3%
of an employee’s eligible wages, up to a maximum limit as determined by the Internal Revenue Service. The Company also pays all administrative fees related to the plan. The Company's accrued contributions to the plan were
$0.6 million
for the year ended
December 31, 2016
and
$0.4 million
for each of the years ended
December 31, 2015
and
2014
.
Stock-Based Compensation
In connection with the IPO, the Company adopted the Medley Management Inc. 2014 Omnibus Incentive Plan (the “Plan”). The purpose of the Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors (and prospective directors, officers, employees, consultants and advisors) of the Company can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation measured by reference to the value of Medley Management Inc.’s Class A common stock or Medley LLC’s unit interests, thereby strengthening their commitment to the welfare of the Company and aligning their interests with those of the Company’s stockholders. The Plan provides for the issuance of incentive stock options (“ISOs”), nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), stock bonuses, other stock-based awards and cash awards. The maximum aggregate number of awards available to be granted under the plan, as amended, is
4,500,000
, of which all or any portion may be issued as shares of Medley Management Inc.’s Class A common stock or Medley LLC’s unit interests. Shares of Class A common stock issued by the Company in settlement of awards may be authorized and unissued shares, shares held in the treasury of the Company, shares purchased on the market or by private purchase or a combination of the foregoing. As of
December 31, 2016
, there were
2.8 million
awards available to be granted under the Plan.
The fair value of RSUs granted under the plan is determined to be the fair value of the underlying shares on the date of grant. The aggregate fair value, which is then adjusted for anticipated forfeitures, is charged to compensation expense on a straight-
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
line basis over the vesting period, which is generally up to
five
years. For the years ended
December 31, 2016
,
2015
and 2014 stock-based compensation was
$3.8 million
,
$3.1 million
and
$0.9 million
respectively.
The following summarizes RSU activity for the years ended
December 31, 2016
, 2015 and 2014:
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted
Average Grant
Date Fair Value
|
Balance at December 31, 2013
|
—
|
|
|
$
|
—
|
|
Granted
|
1,203,515
|
|
|
17.91
|
|
Forfeited
|
(5,600
|
)
|
|
18.00
|
|
Vested
|
—
|
|
|
—
|
|
Balance at December 31, 2014
|
1,197,915
|
|
|
$
|
17.91
|
|
Granted
|
188,404
|
|
|
9.96
|
|
Forfeited
|
(244,868
|
)
|
|
17.99
|
|
Vested
|
(10,647
|
)
|
|
18.00
|
|
Balance at December 31, 2015
|
1,130,804
|
|
|
$
|
16.56
|
|
Granted
|
597,283
|
|
|
5.89
|
|
Forfeited
|
(44,200
|
)
|
|
17.24
|
|
Vested
|
(31,404
|
)
|
|
6.05
|
|
Balance at December 31, 2016
|
1,652,483
|
|
|
$
|
12.88
|
|
As of
December 31, 2016
there were approximately
1.4 million
RSUs outstanding, net of estimated forfeitures, which are expected to vest. Unamortized compensation cost related to unvested RSUs as of
December 31, 2016
was
$11.1 million
and is expected to be recognized over a weighted average period of
3.1 years
.
14. REDEEMABLE NON-CONTROLLING INTERESTS
In January 2016, the Company executed an amendment to SIC Advisors' operating agreement which provided the Company with the right to redeem membership units owned by the minority interest holder. The Company’s redemption right is triggered by the termination of the dealer manager agreement between SIC and SC Distributors LLC, an affiliate of the minority interest holder. As a result of this redemption feature, the Company reclassified the non-controlling interest in SIC Advisors from the equity section to redeemable non-controlling interests in the mezzanine section of the balance sheet based on its fair value as of the amendment date. The fair value of the non-controlling interest was determined to be
$12.2 million
on the date of the amendment and was adjusted through a charge to non-controlling interests in Medley LLC. As of
December 31, 2016
, the balance of the redeemable non-controlling interest in SIC Advisors LLC was
$13.3 million
.
On June 3, 2016, the Company entered into a Master Investment Agreement with DB MED Investor I LLC and DB MED Investor II LLC (the ‘‘Investors’’) to invest up to
$50 million
in new and existing Medley managed funds (the ‘‘Joint Venture’’). The Company will contribute up to
$10 million
and an interest in STRF Advisors LLC, the investment advisor to Sierra Total Return Fund, in exchange for common equity interests in the Joint Venture. The Investors will invest up to
$40 million
in exchange for preferred equity interests in the Joint Venture. On account of the preferred equity interests, the Investors will receive an
8%
preferred distribution,
15%
of the Joint Venture’s profits, and all of the profits from the contributed interest in STRF Advisors LLC. Medley has the option, subject to certain conditions, to cause the Joint Venture to redeem the Investors’ interest in exchange for repayment of the outstanding investment amount at the time of redemption, plus certain other considerations. The Investors have the right, after
seven years
, to redeem their interests in the Joint Venture. As such, the Investors’ interest in the Joint Venture is included as a component of redeemable non-controlling interests on the Company’s consolidated balance sheets and amounted to
$17.5 million
as of
December 31, 2016
. Total contributions to the Joint Venture amounted to
$21.3 million
through
December 31, 2016
and were used to purchase
$16.8 million
of MCC shares on the open market. The Company intends to use the remaining contributions of
$4.4 million
, which is included in restricted cash equivalents on our consolidated balance sheets, to fund future investments.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
15. MARKET AND OTHER RISK FACTORS
Due to the nature of the Medley funds’ investment strategy, their portfolio of investments has significant market and credit risk. As a result, the Company is subject to market and other risk factors, including, but not limited to the following:
Market Risk
The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions that are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.
Credit Risk
There are no restrictions on the credit quality of the investments the Company intends to make. Investments may be deemed by nationally recognized rating agencies to have substantial vulnerability to default in payment of interest and/or principal. Some investments may have low-quality ratings or be unrated. Lower rated and unrated investments have major risk exposure to adverse conditions and are considered to be predominantly speculative. Generally, such investments offer a higher return potential than higher rated investments, but involve greater volatility of price and greater risk of loss of income and principal.
In general, the ratings of nationally recognized rating organizations represent the opinions of agencies as to the quality of the securities they rate. Such ratings, however, are relative and subjective; they are not absolute standards of quality and do not evaluate the market value risk of the relevant securities. It is also possible that a rating agency might not change its rating of a particular issue on a timely basis to reflect subsequent events. The Company may use these ratings as initial criteria for the selection of portfolio assets for the Company but is not required to utilize them.
Limited Liquidity of Investments
The funds managed by the Company invest and intend to continue to invest in investments that may not be readily marketable. Illiquid investments may trade at a discount from comparable, more liquid investments and, at times there may be no market at all for such investments. Subordinate investments may be less marketable, or in some instances illiquid, because of the absence of registration under federal securities laws, contractual restrictions on transfer, the small size of the market or the small size of the issue (relative to issues of comparable interests). As a result, the funds managed by the Company may encounter difficulty in selling its investments or may, if required to liquidate investments to satisfy redemption requests of its investors or debt service obligations, be compelled to sell such investments at less than fair value.
Counterparty Risk
Some of the markets in which the Company, on behalf of its underlying funds, may affect its transactions are “over-the-counter” or “interdealer” markets. The participants in such markets are typically not subject to credit evaluation and regulatory oversight, unlike members of exchange-based markets. This exposes the Company to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the applicable contract (whether or not such dispute is bona fide) or because of a credit or liquidity problem, causing the Company to suffer loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Company has concentrated its transactions with a single or small group of counterparties.
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
16. QUARTERLY FINANCIAL DATA (unaudited)
The following tables present the Company's consolidated unaudited quarterly results of operations for 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
(unaudited)
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
June 30, 2016
|
|
March 31, 2016
|
|
|
(Amounts in thousands)
|
Revenues
|
|
$
|
18,251
|
|
|
$
|
18,880
|
|
|
$
|
21,326
|
|
|
$
|
17,571
|
|
Expenses
|
|
9,184
|
|
|
15,553
|
|
|
17,508
|
|
|
13,776
|
|
Total other income (expense), net
|
|
(1,595
|
)
|
|
(2,036
|
)
|
|
(2,714
|
)
|
|
(2,647
|
)
|
Income (loss) before income taxes
|
|
7,472
|
|
|
1,291
|
|
|
1,104
|
|
|
1,148
|
|
Net income (loss)
|
|
6,700
|
|
|
1,214
|
|
|
1,002
|
|
|
1,036
|
|
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
1,443
|
|
|
438
|
|
|
405
|
|
|
263
|
|
Net income attributable to non-controlling interests in Medley LLC
|
4,632
|
|
|
556
|
|
|
539
|
|
|
679
|
|
Net income attributable to Medley Management Inc.
|
$
|
625
|
|
|
$
|
220
|
|
|
$
|
58
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per Class A common stock:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares - Basic and Diluted
|
5,809,130
|
|
|
5,778,409
|
|
|
5,777,726
|
|
|
5,851,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
(unaudited)
|
|
|
December 31, 2015
|
|
September 30, 2015
|
|
June 30, 2015
|
|
March 31, 2015
|
|
|
(Amounts in thousands)
|
Revenues
|
|
$
|
15,979
|
|
|
$
|
5,431
|
|
|
$
|
20,536
|
|
|
$
|
25,480
|
|
Expenses
|
|
9,845
|
|
|
3,880
|
|
|
9,990
|
|
|
11,840
|
|
Total other income (expense), net
|
|
(2,467
|
)
|
|
(2,757
|
)
|
|
(1,875
|
)
|
|
(2,125
|
)
|
Income (loss) before income taxes
|
|
3,667
|
|
|
(1,206
|
)
|
|
8,671
|
|
|
11,515
|
|
Net income (loss)
|
|
3,605
|
|
|
(1,093
|
)
|
|
7,753
|
|
|
10,367
|
|
Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
|
249
|
|
|
(2,150
|
)
|
|
(274
|
)
|
|
1,290
|
|
Net income attributable to non-controlling interests in Medley LLC
|
2,830
|
|
|
785
|
|
|
6,988
|
|
|
7,803
|
|
Net income attributable to Medley Management Inc.
|
$
|
526
|
|
|
$
|
272
|
|
|
$
|
1,039
|
|
|
$
|
1,274
|
|
|
|
|
|
|
|
|
|
|
Net income per Class A common stock:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Weighted average shares - Basic and Diluted
|
6,009,400
|
|
|
6,000,211
|
|
|
6,000,000
|
|
|
6,000,000
|
|
Medley Management Inc.
(Prior to September 29, 2014, Medley LLC and Medley GP Holdings LLC)
Notes to Consolidated Financial Statements
17. SUBSEQUENT EVENTS
On February 9, 2017, the Company’s Board of Directors declared a dividend of
$0.20
per share of Class A common stock for the fourth quarter of 2016. The dividend was paid on March 6, 2017 to stockholders of record as of February 23, 2017.
On January 18, 2017, Medley LLC completed a public offering of
$34.5 million
in aggregate principal amount of
7.25%
senior notes due 2024 at a public offering price of 100% of the principal amount of notes. The notes mature on January 30, 2024 with interest payable quarterly. Medley LLC used the net proceeds from the offering to repay
$33.0 million
of the outstanding indebtedness under the Term Loan Facility.
On February 22, 2017, Medley LLC completed a public offering of an additional
$34.5 million
in aggregate principal amount of
7.25%
senior notes due 2024 at a public offering price of
$25.25
for each
$25.00
principal amount of notes. The notes mature on January 30, 2024 with interest payable quarterly. Medley LLC used the net proceeds from the offering to repay the remaining outstanding indebtedness under the Term Loan Facility and for general corporate purposes. The notes under both offerings are traded on the New York Stock Exchange under the trading symbol
“
MDLQ.
”