Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission File Number: 001-33723
Main Street Capital Corporation
(Exact name of registrant as specified in its charter)
Maryland
41-2230745
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1300 Post Oak Boulevard, Suite 800
Houston, TX
77056
(Address of principal executive offices)
(Zip Code)
(713) 350-6000
(Registrant’s telephone number including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the issuer’s common stock as of August 8, 2013 was 35,040,016.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets — June 30, 2013 (unaudited) and December 31, 2012
1
Consolidated Statements of Operations (unaudited) — Three and six months ended June 30, 2013 and 2012
2
Consolidated Statements of Changes in Net Assets (unaudited) — Six months ended June 30, 2013 and 2012
3
Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2013 and 2012
4
Consolidated Schedule of Investments (unaudited) — June 30, 2013
5
Consolidated Schedule of Investments — December 31, 2012
19
Notes to Consolidated Financial Statements (unaudited)
32
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
59
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
79
Item 4.
Controls and Procedures
PART II OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
Signatures
81
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET CAPITAL CORPORATION
Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
June 30, 2013
December 31, 2012
(Unaudited)
ASSETS
Portfolio investments at fair value:
Control investments (cost: $235,029 and $217,483 as of June 30, 2013 and December 31, 2012, respectively)
$
302,558
278,475
Affiliate investments (cost: $187,622 and $142,607 as of June 30, 2013 and December 31, 2012, respectively)
230,293
178,413
Non-Control/Non-Affiliate investments (cost: $567,997 and $456,975 as of June 30, 2013 and December 31, 2012, respectively)
581,244
467,543
Investment in affiliated Investment Manager (cost: $2,668 as of December 31, 2012)
—
Total portfolio investments (cost: $990,648 and $819,733 as of June 30, 2013 and December 31, 2012, respectively)
1,114,095
924,431
Marketable securities and idle funds investments (cost: $22,502 and $28,469 as of June 30, 2013 and December 31, 2012, respectively)
21,759
28,535
Total investments (cost: $1,013,150 and $848,202 as of June 30, 2013 and December 31, 2012, respectively)
1,135,854
952,966
Cash and cash equivalents
41,220
63,517
Interest receivable and other assets
12,168
14,580
Receivable for securities sold
31,213
Deferred financing costs (net of accumulated amortization of $3,430 and $3,203 as of June 30, 2013 and December 31, 2012, respectively)
7,994
5,162
Total assets
1,228,449
1,036,225
LIABILITIES
SBIC debentures (par: $225,000 as of June 30, 2013 and December 31, 2012, par of $100,000 is recorded at a fair value of $87,123 and $86,467 as of June 30, 2013 and December 31, 2012, respectively)
212,123
211,467
Credit facility
215,000
132,000
Notes payable
92,000
Payable for securities purchased
26,605
20,661
Deferred tax liability, net
11,006
11,778
Accounts payable and other liabilities
5,782
4,527
Interest payable
5,626
3,562
Dividend payable
4,924
5,188
Payable to affiliated Investment Manager
4,066
Total liabilities
573,066
393,249
Commitments and contingencies (Note M)
NET ASSETS
Common stock, $0.01 par value per share (150,000,000 shares authorized; 35,014,302 and 34,589,484 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively)
350
346
Additional paid-in capital
553,011
544,136
Accumulated net investment income, net of cumulative dividends of $159,506 and $115,401 as of June 30, 2013 and December 31, 2012, respectively
26,879
35,869
Accumulated net realized gain from investments (accumulated net realized gain from investments of of $10,241 before cumulative dividends of $28,993 as of June 30, 2013 and accumulated net realized gain from investments of $9,838 before cumulative dividends of $28,993 as of December 31, 2012)
(18,752
)
(19,155
Net unrealized appreciation, net of income taxes
93,895
81,780
Total net assets
655,383
642,976
Total liabilities and net assets
NET ASSET VALUE PER SHARE
18.72
18.59
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
INVESTMENT INCOME:
Interest, fee and dividend income:
Control investments
8,169
6,083
14,703
11,850
Affiliate investments
5,399
4,141
11,060
9,814
Non-Control/Non-Affiliate investments
13,862
10,101
27,000
18,248
Interest, fee and dividend income
27,430
20,325
52,763
39,912
Interest and dividends from marketable securities, idle funds and other
370
517
681
1,489
Total investment income
27,800
20,842
53,444
41,401
EXPENSES:
Interest
(5,542
(4,180
(9,424
(8,044
Compensation
(2,574
General and administrative
(1,249
(554
(1,937
(1,162
Expenses reimbursed to affiliated Investment Manager
(2,702
(3,189
(5,359
Share-based compensation
(602
(580
(1,205
(1,161
Total expenses
(9,967
(8,016
(18,329
(15,726
NET INVESTMENT INCOME
17,833
12,826
35,115
25,675
NET REALIZED GAIN (LOSS) FROM INVESTMENTS:
(96
(2,061
(3,732
5,500
483
174
140
337
Marketable securities and idle funds investments
322
325
263
1,033
Total net realized gain (loss) from investments
805
(3,329
403
4,809
NET REALIZED INCOME
18,638
9,497
35,518
30,484
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Portfolio investments
6,337
17,515
16,415
22,023
(743
(55
(810
(84
SBIC debentures
555
(1,808
(657
(1,508
Investment in affiliated Investment Manager
(51
Total net change in unrealized appreciation
6,149
15,652
14,948
20,380
INCOME TAXES:
Federal and state income, excise, and other taxes
(752
(601
(1,422
(1,270
Deferred taxes
(31
(395
(1,411
(1,602
Income tax provision
(783
(996
(2,833
(2,872
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
24,004
24,153
47,633
47,992
Noncontrolling interest
(54
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCK
47,938
NET INVESTMENT INCOME PER SHARE - BASIC AND DILUTED
0.51
0.47
1.01
0.94
NET REALIZED INCOME PER SHARE - BASIC AND DILUTED
0.54
0.35
1.02
1.12
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCK PER SHARE - BASIC AND DILUTED
0.69
0.88
1.37
1.77
DIVIDENDS PAID PER SHARE:
Regular monthly dividends
0.42
0.92
0.83
Supplemental dividends
Total
1.27
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED
34,803,729
27,365,758
34,751,905
27,118,421
The accompanying notes are an integral part of these financial statements
Consolidated Statements of Changes in Net Assets
(in thousands, except shares)
Accumulated
Net Unrealized
Total Net
Net Realized
Appreciation from
Assets
Common Stock
Additional
Net Investment
Gain From
Investments,
Including
Number
Par
Paid-In
Income, Net
Net of Income
Noncontrolling
of Shares
Value
Capital
of Dividends
Net of Dividends
Taxes
Asset Value
Balances at December 31, 2011
26,714,384
267
360,164
12,531
(20,445
53,194
405,711
5,477
411,188
Public offering of common stock, net of offering costs
4,312,500
43
92,913
92,956
MSC II noncontrolling interest acquisition
229,634
5,328
5,330
(5,417
(87
Adjustment to investment in Investment Manager related to MSC II noncontrolling interest acquisition
(1,616
1,161
Purchase of vested stock for employee payroll tax withholding
(7,858
(199
Dividend reinvestment
200,961
4,712
4,714
Issuance of restricted stock
139,033
(1
Distributions to noncontrolling interest
(114
Dividends to stockholders
(9,068
(13,523
(22,591
Net increase resulting from operations
17,508
54
Balances at June 30, 2012
31,588,654
315
462,462
29,138
(29,159
70,648
533,404
Balances at December 31, 2012
34,589,484
1,205
(19,460
(523
173,926
5,580
5,582
252,227
(2
Consolidation of Investment Manager
2,037
Issuances of common stock
18,125
578
(44,105
12,115
Balances at June 30, 2013
35,014,302
Consolidated Statements of Cash Flows
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Investments in portfolio companies
(353,620
(261,019
Proceeds from sales and repayments of debt investments
178,750
131,852
Proceeds from sale of equity investments in portfolio companies
26,547
Investments in marketable securities and idle funds investments
(52,503
(7,596
Proceeds from marketable securities and idle funds investments
42,469
27,212
Net change in unrealized appreciation
(14,948
(20,380
Net realized (gain) loss from investments
(403
(4,809
Accretion of unearned income
(5,079
(6,405
Payment-in-kind interest
(2,368
(1,529
Cumulative dividends
(467
(133
Share-based compensation expense
Amortization of deferred financing costs
538
467
1,411
1,622
Changes in other assets and liabilities:
2,913
(346
2,064
(100
(3,960
(2,071
(330
553
Deferred fees and other
1,500
623
Net cash provided by (used in) operating activities
(155,195
(66,359
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of common stock, net of offering costs
Proceeds from public offering of 6.125% Notes
Dividends paid to stockholders
(38,787
(17,528
Proceeds from credit facility
250,000
114,000
Repayments on credit facility
(167,000
(133,000
Payment of deferred loan costs and SBIC debenture fees
(3,370
(292
Other
55
(451
Net cash provided by (used in) financing activities
132,898
55,685
Net increase (decrease) in cash and cash equivalents
(22,297
(10,674
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
42,650
CASH AND CASH EQUIVALENTS AT END OF PERIOD
31,976
Supplemental cash flow disclosures:
Interest Paid
6,827
7,677
Taxes paid
4,466
473
Non-cash financing activities:
Shares issued pursuant to the DRIP
CONSOLIDATED SCHEDULE OF INVESTMENTS
Portfolio Company (1)
Business Description
Type of Investment (2) (3)
Principal (4)
Cost (4)
Fair Value
Control Investments (5)
Bond-Coat, Inc.
Casing and Tubing Coating Services
12% Secured Debt (Maturity - December 28, 2017)
14,750
14,565
Common Stock (Fully diluted 43.4%)
6,350
7,150
20,915
21,715
Café Brazil, LLC
Casual Restaurant Group
Member Units (Fully diluted 69.0%) (8)
1,742
6,770
California Healthcare Medical Billing, Inc.
Outsourced Billing and Revenue Cycle Management
12% Secured Debt (Maturity - October 17, 2015)
8,103
7,942
8,094
Warrants (Fully diluted 21.3%)
1,193
3,380
Common Stock (Fully diluted 9.8%)
1,177
1,560
10,312
13,034
CBT Nuggets, LLC
Produces and Sells IT Training Certification Videos
Member Units (Fully diluted 41.6%) (8)
1,300
9,650
Ceres Management, LLC (Lambs Tire & Automotive)
Aftermarket Automotive Services Chain
14% Secured Debt (Maturity - May 31, 2018)
4,000
Class B Member Units (12% cumulative) (8)
3,100
Member Units (Fully diluted 100.0%)
5,273
510
9.5% Secured Debt (Lamb’s Real Estate Investment I, LLC) (Maturity - October 1, 2025)
1,041
Member Units (Lamb’s Real Estate Investment I, LLC) (Fully diluted 100%)
625
730
14,039
9,381
Condit Exhibits, LLC
Tradeshow Exhibits / Custom Displays
13% Current / 5% PIK Secured Debt (Maturity - July 1, 2013)
4,661
Warrants (Fully diluted 47.9%)
320
1,400
4,981
6,061
Gulf Manufacturing, LLC
Manufacturer of Specialty Fabricated Industrial Piping Products
9% PIK Secured Debt (Ashland Capital IX, LLC) (Maturity - June 30, 2017)
919
Member Units (Fully diluted 34.2%) (8)
2,980
12,660
3,899
13,579
Harrison Hydra-Gen, Ltd.
Manufacturer of Hydraulic Generators
9% Secured Debt (Maturity - June 4, 2015)
4,896
4,591
Preferred Stock (8% cumulative) (8)
1,124
Common Stock (Fully diluted 34.5%) (8)
718
1,340
6,433
7,360
Hawthorne Customs and Dispatch Services, LLC
Facilitator of Import Logistics, Brokerage, and Warehousing
Member Units (Fully diluted 47.6%) (8)
589
440
Member Units (Wallisville Real Estate, LLC) (Fully diluted 59.1%) (8)
1,215
1,890
1,804
2,330
Hydratec, Inc.
Designer and Installer of Micro-Irrigation Systems
Prime Plus 1%, Current Coupon 9%, Secured Debt (Maturity - October 31, 2013) (9)
375
Common Stock (Fully diluted 94.2%) (8)
7,095
13,350
7,470
13,725
Impact Telecom, Inc.
Telecommunications Services
LIBOR Plus 4.50%, Current Coupon 6.50%, Secured Debt (Maturity - May 31, 2018)
2,500
2,493
13% Secured Debt (Maturity - May 31, 2018)
22,500
14,233
Warrants (Fully diluted 40.0%)
8,000
24,726
Indianapolis Aviation Partners, LLC
Fixed Base Operator
15% Secured Debt (Maturity - September 15, 2014)
3,850
3,734
Warrants (Fully diluted 30.1%)
1,129
1,940
4,863
5,790
Jensen Jewelers of Idaho, LLC
Retail Jewelry Store
Prime Plus 2%, Current Coupon 5.25%, Secured Debt (Maturity - November 14, 2013) (9)
1,597
13% Current / 6% PIK Secured Debt (Maturity - November 14, 2013)
1,657
Member Units (Fully diluted 60.8%) (8)
811
2,770
4,065
6,024
Lighting Unlimited, LLC
Commercial and Residential Lighting Products and Design Services
8% Secured Debt (Maturity - August 22, 2014)
1,784
Preferred Stock (non-voting)
476
162
Warrants (Fully diluted 7.1%)
Common Stock (Fully diluted 70.0%) (8)
100
2,414
1,946
Marine Shelters Holdings, LLC (LoneStar Marine Shelters)
Fabricator of Marine and Industrial Shelters
10,250
10,060
Preferred Stock (Fully diluted 26.7%)
3,750
13,810
Mid-Columbia Lumber Products, LLC
Manufacturer of Finger- Jointed Lumber Products
10% Secured Debt (Maturity - December 18, 2017)
1,750
12% Secured Debt (Maturity - December 18, 2017)
3,900
9.5% Secured Debt (Mid - Columbia Real Estate, LLC) (Maturity - May 13, 2025)
994
Warrants (Fully diluted 9.2%)
90
800
Member Units (Fully diluted 42.9%)
1,042
Member Units (Mid - Columbia Real Estate, LLC) (Fully diluted 50.0%) (8)
250
270
8,026
11,564
NAPCO Precast, LLC
Precast Concrete Manufacturing
Prime Plus 2%, Current Coupon 9%, Secured Debt (Maturity - February 1, 2016) (9)
2,923
2,886
18% Secured Debt (Maturity - February 1, 2016)
4,468
4,408
Member Units (Fully diluted 44.0%)
2,975
4,790
10,269
12,084
NRI Clinical Research, LLC
Clinical Research Center
14% Secured Debt (Maturity - September 8, 2016)
4,595
4,395
Warrants (Fully diluted 12.5%) (8)
252
480
Member Units (Fully diluted 24.8%) (8)
500
960
5,147
5,835
NRP Jones, LLC
Manufacturer of Hoses, Fittings and Assemblies
12% Secured Debt (Maturity - December 22, 2016)
12,100
11,288
Warrants (Fully diluted 12.2%)
817
1,250
Member Units (Fully diluted 43.2%) (8)
2,900
4,410
15,005
17,760
6
OMi Holdings, Inc.
Manufacturer of Overhead Cranes
Common Stock (Fully diluted 48.0%)
1,080
8,740
Pegasus Research Group, LLC (Televerde)
Telemarketing and Data Services
15% Secured Debt (Maturity - January 6, 2016)
4,991
4,952
Member Units (Fully diluted 43.7%) (8)
4,800
6,202
9,791
PPL RVs, Inc.
Recreational Vehicle Dealer
11.1% Secured Debt (Maturity - June 10, 2015)
8,310
8,265
Common Stock (Fully diluted 51.1%)
2,150
6,080
10,415
14,390
Principle Environmental, LLC
Noise Abatement Services
12% Secured Debt (Maturity - February 1, 2016)
3,506
2,987
12% Current / 2% PIK Secured Debt (Maturity - February 1, 2016)
3,931
3,878
3,925
Warrants (Fully diluted 14.2%)
1,200
3,860
Member Units (Fully diluted 22.6%)
1,863
6,150
9,928
17,441
River Aggregates, LLC
Processor of Construction Aggregates
12% Secured Debt (Maturity - March 30, 2016) (14)
3,662
2,250
Warrants (Fully diluted 20.0%)
202
Member Units (Fully diluted 40.0%)
550
Member Units (RA Properties, LLC) (Fully diluted 50.0%)
269
4,683
2,519
The MPI Group, LLC
Manufacturer of Custom Hollow Metal Doors, Frames and Accessories
4.5% Current / 4.5% PIK Secured Debt (Maturity - October 2, 2013)
1,079
6% Current / 6% PIK Secured Debt (Maturity - October 2, 2013)
5,639
5,621
5,451
Warrants (Fully diluted 52.3%)
1,096
7,796
6,530
Thermal and Mechanical Equipment, LLC
Commercial and Industrial Engineering Services
Prime Plus 2%, Current Coupon 9%, Secured Debt (Maturity - September 25, 2014) (9)
818
816
13% Current / 5% PIK Secured Debt (Maturity - September 25, 2014)
2,607
2,593
Member Units (Fully diluted 52.6%) (8)
1,000
10,080
4,409
13,505
Uvalco Supply, LLC
Farm and Ranch Supply Store
Member Units (Fully diluted 42.8%) (8)
1,113
3,230
Van Gilder Insurance Corporation
Insurance Brokerage
8% Current / 3% PIK Secured Debt (Maturity - January 31, 2014)
878
8% Current / 3% PIK Secured Debt (Maturity - January 31, 2016)
1,187
13% Current / 3% PIK Secured Debt (Maturity - January 31, 2016)
6,243
5,518
Warrants (Fully diluted 10.0%)
1,209
1,510
Common Stock (Fully diluted 15.5%)
2,350
11,282
11,433
Vision Interests, Inc.
Manufacturer / Installer of Commercial Signage
13% Secured Debt (Maturity - December 23, 2016)
3,204
3,152
Series A Preferred Stock (Fully diluted 50.9%)
3,000
2,000
Common Stock (Fully diluted 19.1%)
3,706
60
9,858
5,212
Ziegler’s NYPD, LLC
Prime Plus 2%, Current Coupon 9%, Secured Debt (Maturity - October 1, 2013) (9)
999
13% Current / 5% PIK Secured Debt (Maturity - October 1, 2013)
5,449
5,444
Warrants (Fully diluted 46.6%)
600
180
7,043
6,623
Subtotal Control Investments (26.6% of total investments at fair value)
235,029
7
Affiliate Investments (6)
American Sensor Technologies, Inc.
Manufacturer of Commercial / Industrial Sensors
Warrants (Fully diluted 19.6%)
50
5,600
Bridge Capital Solutions Corporation
Financial Services and Cash Flow Solutions
13% Secured Debt (Maturity - April 17, 2017)
5,000
4,776
Warrants (Fully diluted 7.5%)
200
390
4,976
5,166
Congruent Credit Opportunities Fund II, LP (12) (13)
Investment Partnership
LP Interests (Fully diluted 19.8%) (8)
22,536
22,996
Daseke, Inc.
Specialty Transportation Provider
Common Stock (Fully diluted 12.6%)
3,213
10,260
Dos Rios Partners (12) (13)
LP Interests (Dos Rios Partners, LP) (Fully diluted 27.69%)
1,105
LP Interests (Dos Rios Partners - A, LP) (Fully diluted 9.14%)
220
1,325
East Teak Fine Hardwoods, Inc.
Hardwood Products
Common Stock (Fully diluted 5.0%) (8)
380
Freeport Financial SBIC Fund LP (12) (13)
LP Interests (Fully diluted 9.9%)
297
Gault Financial, LLC (RMB Capital, LLC)
Purchases and Manages Liquidation of Distressed Assets
14% Secured Debt (Maturity - November 21, 2016)
12,165
11,692
Warrants (Fully diluted 22.5%)
400
240
12,092
11,932
Houston Plating and Coatings, LLC
Plating and Industrial Coating Services
Member Units (Fully diluted 11.1%) (8)
635
8,660
Indianhead Pipeline Services, LLC
Pipeline Support Services
12% Secured Debt (Maturity - February 6, 2017)
8,275
7,802
8,271
Preferred Equity (8% cumulative) (8)
Warrants (Fully diluted 10.6%)
459
1,990
Member Units (Fully diluted 12.1%) (8)
2,280
10,012
14,291
Integrated Printing Solutions, LLC
Specialty Card Printing
13% Secured Debt (Maturity - September 23, 2016)
12,500
11,880
Preferred Equity (Fully diluted 11.0%)
Warrants (Fully diluted 8.0%)
860
14,480
14,740
irth Solutions, LLC
Damage Prevention Technology Information Services
Member Units (Fully diluted 12.8%) (8)
624
2,990
KBK Industries, LLC
Specialty Manufacturer of Oilfield and Industrial Products
12.5% Secured Debt (Maturity - September 28, 2017)
9,000
8,920
Member Units (Fully diluted 17.9%) (8)
341
5,680
9,261
14,680
8
Olympus Building Services, Inc.
Custodial / Facilities Services
12% Secured Debt (Maturity - March 27, 2014)
2,915
2,871
12% Current / 3% PIK Secured Debt (Maturity - March 27, 2014)
1,029
470
4,370
4,300
OnAsset Intelligence, Inc.
Transportation Monitoring / Tracking Services
12% PIK Secured Debt (Maturity - June 30, 2014)
1,800
1,128
Preferred Stock (7% cumulative) (Fully diluted 3.9%) (8)
1,752
Warrants (Fully diluted 11.9%)
1,573
1,293
4,453
4,921
OPI International Ltd. (13)
Oil and Gas Construction Services
Common Equity (Fully diluted 11.5%) (8)
1,371
4,971
PCI Holding Company, Inc.
Manufacturer of Industrial Gas Generating Systems
12% Current / 4% PIK Secured Debt (Maturity - December 18, 2017)
4,857
4,769
Preferred Stock (20% cumulative) (Fully diluted 19.4%) (8)
1,669
6,438
Quality Lease and Rental Holdings, LLC
Rigsite Accommodation Unit Rental and Related Services
12% Secured Debt (Maturity - January 8, 2018)
37,350
36,822
Preferred Member Units (Rocaciea, LLC) (Fully diluted 20.0%)
39,322
Radial Drilling Services Inc.
Oil and Gas Technology
12% Secured Debt (Maturity - November 23, 2016)
4,200
3,553
Warrants (Fully diluted 24.0%)
758
560
4,311
4,113
Samba Holdings, Inc.
Intelligent Driver Record Monitoring Software and Services
12.5% Secured Debt (Maturity - November 17, 2016)
11,481
11,335
Common Stock (Fully diluted 19.4%)
1,707
3,930
13,042
15,411
Spectrio LLC
Audio Messaging Services
8% Secured Debt (Maturity - June 16, 2016)
280
12% Secured Debt (Maturity - June 16, 2016)
17,990
17,610
17,963
Warrants (Fully diluted 9.8%)
887
3,700
18,777
21,943
SYNEO, LLC
Manufacturer of Specialty Cutting Tools and Punches
12% Secured Debt (Maturity - July 13, 2016)
4,228
10% Secured Debt (Leadrock Properties, LLC) (Maturity - May 4, 2026)
1,440
1,413
Member Units (Fully diluted 11.1%)
1,036
6,677
Texas Reexcavation LC
Hydro Excavation Services
12% Current / 3% PIK Secured Debt (Maturity - December 31, 2017)
6,091
5,980
Class A Member Units (Fully diluted 16.3)%
8,880
Subtotal Affiliate Investments (20.3% of total investments at fair value)
187,622
9
Non-Control/Non-Affiliate Investments (7)
AGS LLC (10)
Developer, Manufacturer, and Operator of Gaming Machines
LIBOR Plus 10.00%, Current Coupon 11.50%, Secured Debt (Maturity - August 23, 2016) (9)
10,000
9,837
Ameritech College Operations, LLC
For-Profit Nursing and Healthcare College
18% Secured Debt (Maturity - March 9, 2017)
6,050
5,951
AM General LLC (11)
Specialty Vehicle Manufacturer
LIBOR Plus 9.00%, Current Coupon 10.25%, Secured Debt (Maturity - March 22, 2018) (9)
3,008
American Media, Inc. (11)
Magazine Operator
11.50% Secured Bond (Maturity - December 15, 2017)
1,862
1,939
Ancestry.com Inc. (11)
Genealogy Software Service
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - December 27, 2018) (9)
3,644
3,508
3,651
Anchor Hocking, LLC (11)
Household Products Manufacturer
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - May 21, 2020) (9)
7,000
6,931
7,064
Apria Healthcare Group, Inc. (11)
Home Healthcare Equipment
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - April 5, 2020) (9)
5,446
5,515
Artel, LLC (11)
Land-Based and Commercial Satellite Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 27, 2017) (9)
4,875
4,831
4,851
Atkins Nutritionals Holdings II, Inc. (11)
Weight Management Food Products
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - January 2, 2019) (9)
1,995
2,001
Audio Visual Services Group, Inc. (11)
Hotel & Venue Audio Visual Operator
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - November 9, 2018) (9)
4,963
4,871
5,012
LIBOR Plus 9.50%, Current Coupon 10.75%, Secured Debt (Maturity - May 9, 2019) (9)
4,906
9,777
B. J. Alan Company
Retailer and Distributor of Consumer Fireworks
14% Current / 2.5% PIK Secured Debt (Maturity - June 22, 2017)
11,093
11,008
BBTS Borrower LP (11)
Oil & Gas Exploration and Midstream Services
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity - June 4, 2019) (9)
6,974
Blackboard, Inc. (11)
Education Software Provider
LIBOR Plus 4.75%, Current Coupon 6.25%, Secured Debt (Maturity - October 4, 2018) (9)
1,355
LIBOR Plus 10.00%, Current Coupon 11.50%, Secured Debt (Maturity - April 4, 2019) (9)
1,859
2,040
3,214
3,411
10
Brand Connections, LLC
Venue-Based Marketing and Media
12% Secured Debt (Maturity - April 30, 2015)
7,463
7,351
Brasa Holdings Inc. (11)
Upscale Full Service Restaurants
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - July 18, 2019) (9)
3,483
3,395
3,526
LIBOR Plus 9.50%, Current Coupon 11.00%, Secured Debt (Maturity - January 19, 2020) (9)
6,000
5,934
6,120
9,329
9,646
Calloway Laboratories, Inc. (10)
Health Care Testing Facilities
10.00% Current / 2.00% PIK Secured Debt (Maturity - September 30, 2014)
6,020
5,939
5,575
Warrants (Fully diluted 1.5%)
17
5,956
5,592
CDC Software Corporation (11)
Enterprise Application Software
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - August 6, 2018) (9)
4,218
4,181
4,223
Cedar Bay Generation Company LP (11)
Coal-Fired Cogeneration Plant
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - April 23, 2020) (9)
8,523
8,440
8,544
Charlotte Russe, Inc (11)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019) (9)
4,951
4,975
CHI Overhead Doors, Inc. (11)
Manufacturer of Overhead Garage Doors
LIBOR Plus 4.25%, Current Coupon 5.75%, Secured Debt (Maturity - March 18, 2019) (9)
2,404
2,368
2,410
LIBOR Plus 9.50%, Current Coupon 11.00%, Secured Debt (Maturity - September 18, 2019) (9)
2,460
2,525
4,828
4,935
Collective Brands Finance, Inc. (11)
Specialty Footwear Retailer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - September 20, 2019) (9)
2,494
2,531
Compact Power Equipment Centers Inc.
Equipment / Tool Rental
6% Current / 6% PIK Secured Debt (Maturity - October 1, 2017)
3,800
3,782
Series A Stock (8% cumulative) (Fully diluted 4.2%) (8)
1,749
4,742
5,531
Confie Seguros Holding II Co. (11)
Insurance Brokerage Firm
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - November 9, 2018) (9)
4,923
4,856
CGSC of Delaware Holdings Corp. (11)
LIBOR Plus 7.00%, Current Coupon 8.25%, Secured Debt (Maturity - October 16, 2020) (9)
1,970
2,010
Connolly Holdings Inc. (11)
Audit Recovery Software
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - July 15, 2018) (9)
2,395
2,375
2,422
LIBOR Plus 9.25%, Current Coupon 10.50%, Secured Debt (Maturity - January 15, 2019) (9)
1,964
2,020
4,339
4,442
11
Creative Circle, LLC (11)
Professional Staffing Firm
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - September 28, 2017) (9)
8,933
8,852
8,955
CST Industries Inc. (11)
Storage Tank Manufacturer
LIBOR Plus 6.25%, Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017) (9)
11,875
11,729
11,890
Diversified Machine, Inc. (11)
Automotive Component Supplier
LIBOR Plus 7.75%, Current Coupon 9.25%, Secured Debt (Maturity - December 21, 2017) (9)
1,989
1,953
2,029
Drilling Info, Inc.
Information Services for the Oil and Gas Industry
Common Stock (Fully diluted 2.3%)
1,335
6,420
EB Sports Corp. (10)
Sporting Goods Manufacturer
11.50% Secured Debt (Maturity - December 31, 2015)
9,950
Emerald Performance Materials, Inc. (11)
Specialty Chemicals Manufacturer
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - May 18, 2018) (9)
4,456
4,421
4,467
EnCap Energy Fund Investments (12) (13)
LP Interests (EnCap Energy Capital Fund VIII, L.P.) (Fully diluted 0.1%) (8)
2,374
2,491
LP Interests (EnCap Energy Capital Fund VIII Co- Investors, L.P.) (Fully diluted 0.3%)
1,134
1,185
LP Interests (EnCap Energy Capital Fund IX, L.P.) (Fully diluted 0.1%)
366
LP Interests (EnCap Flatrock Midstream Fund II, L.P.) (Fully diluted 0.8%)
1,611
5,485
5,653
Engility Corporation (11) (13)
Defense Software
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - July 18, 2017) (9)
4,813
4,773
eResearch Technology, Inc. (11)
Provider of Technology-Driven Health Research
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - May 2, 2018) (9)
4,030
3,907
4,055
Fairway Group Acquisition Company (11) (13)
Specialty Food Retail Stores
LIBOR Plus 4.00%, Current Coupon 5.00%, Secured Debt (Maturity - August 17, 2018) (9)
3,980
3,988
Fender Musical Instruments Corporation (11)
Manufacturer of Musical Instruments
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - April 3, 2019) (9)
495
502
Fishchbein Intermediary Corp. (11)
Packaging and Material Handling Equipment
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - May 1, 2019) (9)
5,025
FC Operating, LLC (10)
Christian Specialty Retail Stores
LIBOR Plus 10.75%, Current Coupon 12.00%, Secured Debt (Maturity - November 14, 2017) (9)
5,850
5,744
FishNet Security, Inc. (11)
Information Technology Value-Added Reseller
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity - November 30, 2017) (9)
7,960
7,888
Fram Group Holdings, Inc. (11)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - July 29, 2017) (9)
964
961
958
LIBOR Plus 9.00%, Current Coupon 10.50%, Secured Debt (Maturity - January 29, 2018) (9)
996
976
1,957
1,934
Gastar Exploration USA, Inc. (11)
Oil & Gas Exploration & Production
8.63% Secured Bond (Maturity - May 15, 2018)
12
GFA Brands, Inc. (11) (13)
Distributor of Health Food Products
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - July 2, 2018) (9)
6,773
6,655
6,798
Grupo Hima San Pablo, Inc. (11)
Tertiary Care Hospitals
LIBOR Plus 7.00%, Current Coupon 8.50%, Secured Debt (Maturity - January 31, 2018) (9)
4,988
4,893
4,888
13.75 Secured Debt (Maturity - July 31, 2018) (9)
1,904
1,950
6,797
6,838
Hayden Acquisition, LLC
Manufacturer of Utility Structures
8% Secured Debt (Maturity - July 1, 2013) (15)
1,781
Healogics, Inc. (11)
Wound Care Management
Common Equity (Fully diluted 0.02%) (8)
Hearthside Food Solutions, LLC (11)
Contract Food Manufacturer
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - June 5, 2018) (9)
3,970
3,936
3,990
Heckmann Corporation (11) (13)
Water Treatment and Disposal Services
9.88% Unsecured Bond (Maturity - April 15, 2018)
3,500
3,649
Hudson Products Holdings, Inc. (11)
Manufacturer of Heat Transfer Equipment
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - June 7, 2017) (9)
4,255
4,222
4,289
iEnergizer Limited (11) (13)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019) (9)
6,874
6,913
Ipreo Holdings LLC (11)
Application Software for Capital Markets
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - August 5, 2017) (9)
5,637
5,569
5,700
iStar Financial Inc. (11) (13)
Real Estate Investment Trust
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - March 19, 2016) (9)
69
68
Ivy Hill Middle Market Credit Fund III, Ltd. (12) (13)
LIBOR Plus 6.50%, Current Coupon 6.70%, Secured Debt (Maturity - January 15, 2022)
1,692
Jackson Hewitt Tax Service Inc. (11)
Tax Preparation Services
LIBOR Plus 8.50%, Current Coupon 10.00%, Secured Debt (Maturity - October 15, 2017) (9)
4,844
4,672
4,717
Joernes Healthcare, LLC (11)
Health Care Equipment & Supplies
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - March 28, 2018) (9)
6,500
6,468
Keypoint Government Solutions, Inc. (11)
Pre-Employment Screening Services
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2017) (9)
4,788
4,887
Learning Care Group (US) No. 2 Inc. (11)
Provider of Early Childhood Education
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - May 8, 2019) (9)
5,490
LKCM Headwater Investments I, L.P. (12) (13)
LP Interests (Fully diluted 2.27%) (8)
925
13
Maverick Healthcare Group LLC (10)
Home Healthcare Products and Services
LIBOR Plus 9.00%, Current Coupon 10.75%, Secured Debt (Maturity - December 30, 2016) (9)
Media Holdings, LLC (11) (13)
Internet Traffic Generator
LIBOR Plus 13.00%, Current Coupon 15.00%, Secured Debt (Maturity - April 27, 2014) (9)
5,341
5,358
MediMedia USA, Inc. (11)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018) (9)
5,337
5,466
Medpace Intermediateco, Inc. (11)
Clinical Trial Development and Execution
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - June 19, 2017) (9)
3,626
3,587
Metal Services LLC (11)
Steel Mill Services
LIBOR Plus 6.50%, Current Coupon 7.75%, Secured Debt (Maturity - June 30, 2017) (9)
4,898
5,020
Milk Specialties Company (11)
Processor of Nutrition Products
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - November 9, 2018) (9)
4,942
5,037
Miramax Film NY, LLC (11)
Motion Picture Producer and Distributor
Class B Units (Fully diluted 0.2)%
719
Mitel US Holdings, Inc. (11)
Enterprise IP Telephone Provider
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - February 27, 2019) (9)
3,952
Modern VideoFilm, Inc. (10)
Post-Production Film Studio
LIBOR Plus 9.00%, Current Coupon 10.50%, Secured Debt (Maturity - December 19, 2017) (9)
5,139
4,928
4,785
Warrants (Fully diluted 2.5%)
151
5,079
4,786
National Vision, Inc. (11)
Discount Optical Retailer
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - August 2, 2018) (9)
3,209
3,167
3,225
Neenah Foundry Company (11)
Operator of Iron Foundries
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - April 26, 2017) (9)
7,500
7,355
7,505
NGPL PipeCo, LLC (11)
Natural Gas Pipelines and Storage Facilities
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - September 15, 2017) (9)
8,582
8,466
8,547
Nice-Pak Products, Inc. (11)
Pre-Moistened Wipes Manufacturer
LIBOR Plus 6.50%, Current Coupon 8.00%, Secured Debt (Maturity - June 18, 2014) (9)
4,972
4,798
NCP Investment Holdings, Inc.
Management of Outpatient Cardiac Cath Labs
Class A and C Units (Fully diluted 3.3)% (8)
20
2,580
North American Breweries Holdings, LLC (11)
Operator of Specialty Breweries
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - December 11, 2018) (9)
3,916
4,005
Northland Cable Television, Inc. (11)
Television Broadcasting
LIBOR Plus 6.00%, Current Coupon 7.75%, Secured Debt (Maturity - December 30, 2016) (9)
4,738
4,647
4,690
14
Oberthur Technologies SA (11) (13)
Smart Card, Printing, Identity, and Cash Protection Security
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - November 30, 2018) (9)
6,930
6,636
6,901
Orbitz Worldwide, Inc. (11) (13)
Online Travel Agent
LIBOR Plus 3.50%, Current Coupon 4.50%, Secured Debt (Maturity - September 20, 2017) (9)
1,333
1,343
LIBOR Plus 4.75%, Current Coupon 5.75%, Secured Debt (Maturity - March 20, 2019) (9)
1,167
1,173
2,516
Otter Products, LLC (11)
Protective Cases for Mobile Devices
LIBOR Plus 4.25%, Current Coupon 5.25%, Secured Debt (Maturity - April 29, 2019) (9)
1,001
1,004
Panolam Industries International, Inc. (11)
Decorative LaminateManufacturer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - August 23, 2017) (9)
3,946
3,912
3,933
Permian Holdings, Inc. (11)
10.50% Secured Bond (Maturity - January 15, 2018)
1,455
Philadelphia Energy Solutions Refining and Marketing LLC (11)
Oil & Gas Refiner
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - April 4, 2018) (9)
2,993
2,950
2,985
Polyconcept Financial B.V. (11)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - June 30, 2019) (9)
3,465
Preferred Proppants, LLC (11)
Producer of Sand Based Proppants
LIBOR Plus 7.50%, Current Coupon 9.00%, Secured Debt (Maturity - December 15, 2016) (9)
5,912
5,806
5,623
Primesight Limited (10) (13)
Outdoor Advertising Operator
11.25% Secured Debt (Maturity - October 17, 2015)
7,575
7,412
PRV Aerospace, LLC (11)
Aircraft Equipment Manufacturer
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - May 9, 2018) (9)
5,957
5,907
5,983
Radio One, Inc. (11)
Radio Broadcasting
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - March 31, 2016) (9)
2,917
2,882
2,986
Relativity Media, LLC (10)
Full-scale Film and Television Production and Distribution
10.00% Secured Debt (Maturity - May 24, 2015)
4,904
4,839
15.00% PIK Secured Debt (Maturity - May 24, 2015)
5,903
5,677
Class A Units (Fully diluted 0.2)%
292
10,808
11,099
Sabre Industries, Inc. (11)
Manufacturer of Telecom Structures and Equipment
LIBOR Plus 4.75%, Current Coupon 5.75%, Secured Debt (Maturity - August 24, 2018) (9)
6,398
6,532
SAExploration, Inc. (10) (13)
Geophysical Services Provider
11.00% Current / 2.50% PIK Secured Debt (Maturity - November 28, 2016)
8,107
Common Stock (Fully diluted 0.01%)
65
8,172
Shale-Inland Holdings, LLC (11)
Distributor of Pipe, Valves, and Fittings
8.75% Secured Bond (Maturity - November 15, 2019)
3,060
Sonneborn, LLC (11)
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - March 30, 2018) (9)
2,863
2,816
2,892
15
Sotera Defense Solutions, Inc. (11)
Defense Industry Intelligence Services
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - April 22, 2017) (9)
9,146
8,832
8,232
Sourcehov LLC (11)
Business Process Services
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - April 30, 2018) (9)
1,485
1,512
Surgery Center 2 Holdings, Inc. (11)
Ambulatory Surgical Centers
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - April 11, 2019) (9)
3,449
3,502
Sutherland Global Services, Inc. (11)
Business Process Outsourcing Provider
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - March 6, 2019) (9)
6,782
Targus Group International (11)
LIBOR Plus 9.50%, Current Coupon 11.00%, Secured Debt (Maturity - May 24, 2016) (9)
4,649
4,440
Technimark LLC (11)
Injection Molding
LIBOR Plus 4.25%, Current Coupon 5.50%, Secured Debt (Maturity - April 17, 2019) (9)
3,961
4,040
TeleGuam Holdings, LLC (11)
Telecommunications Equipment
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 1, 2018) (9)
6,965
LIBOR Plus 7.50%, Current Coupon 8.75%, Secured Debt (Maturity - June 1, 2019) (9)
2,475
9,440
9,490
Tervita Corporation (11) (13)
Oil and Gas Environmental Services
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018) (9)
3,491
3,459
3,487
ThermaSys Corporation (11)
Manufacturer of Industrial Heat Exchanges
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - May 3, 2019) (9)
7,922
8,004
The Tennis Channel, Inc. (10)
Television-Based Sports Broadcasting
Warrants (Fully diluted 0.1%)
235
Therakos, Inc. (11)
Immune System Disease Treatment
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - December 27, 2017) (9)
4,836
4,987
Totes Isotoner Corporation (11)
Weather Accessory Retail
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - July 7, 2017) (9)
4,532
4,546
TriNet HR Corporation (11) (13)
Outsourced Human Resources Solutions
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - October 24, 2018) (9)
3,993
3,997
UniTek Global Services, Inc. (11)
Provider of Outsourced Infrastructure Services
LIBOR Plus 7.50%, Current Coupon 9.00%, Secured Debt (Maturity - April 15, 2018) (9)
9,344
9,050
8,643
Universal Fiber Systems, LLC (10)
Manufacturer of Synthetic Fibers
LIBOR Plus 5.75%, Current Coupon 7.50%, Secured Debt (Maturity - June 26, 2015) (9)
11,027
10,957
11,096
US Xpress Enterprises, Inc. (11)
Truckload Carrier
LIBOR Plus 7.88%, Current Coupon 9.38%, Secured Debt (Maturity - November 13, 2016) (9)
6,313
6,314
Vantage Oncology, LLC (11)
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - June 15, 2017)
8,910
VFH Parent LLC (11)
Electronic Trading and Market Making
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - July 8, 2016) (9)
4,782
4,778
4,827
16
Visant Corporation (11)
School Affinity Stores
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 22, 2016) (9)
3,882
3,711
Vision Solutions, Inc. (11)
Provider of Information Availability Software
LIBOR Plus 4.50%, Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016) (9)
2,416
2,269
LIBOR Plus 8.00%, Current Coupon 9.50%, Secured Debt (Maturity - July 23, 2017) (9)
4,965
4,950
7,234
7,325
Walter Investment Management Corp. (11) (13)
Real Estate Services
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - November 28, 2017) (9)
2,406
2,385
2,418
Wenner Media LLC (11)
LIBOR Plus 9.50%, Current Coupon 10.75%, Secured Debt (Maturity - February 17, 2018) (9)
2,085
2,016
2,134
Western Dental Services, Inc. (11)
Dental Care Services
LIBOR Plus 7.00%, Current Coupon 8.25%, Secured Debt (Maturity - November 1, 2018) (9)
4,978
Wilton Brands LLC (11)
Specialty Housewares Retailer
LIBOR Plus 6.25%, Current Coupon 7.50%, Secured Debt (Maturity - August 30, 2018) (9)
1,925
1,891
Wireco Worldgroup Inc. (11)
Manufacturer of Synthetic Lifting Products
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - February 15, 2017) (9)
2,481
2,461
2,484
Xerium Technologies, Inc. (11)
Paper Production Equipment
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - May 17, 2019) (9)
2,014
YP Holdings LLC (11)
Online and Offline Advertising Operator
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - June 30, 2018) (9)
3,892
3,947
Zilliant Incorporated
Price Optimization and Margin Management Solutions
12% Secured Debt (Maturity - June 15, 2017)
6,957
Warrants (Fully diluted 2.7%)
1,071
8,028
Subtotal Non-Control/Non-Affiliate Investments (51.2% of total investments at fair value)
567,997
Total Portfolio Investments, June 30, 2013
990,648
Marketable Securities and Idle Funds Investments
Investments in Marketable Securities and Diversified, Registered Bond Funds
Other Marketable Securities and Idle Funds Investments (13)
22,502
Subtotal Marketable Securities and Idle Funds Investments (1.9% of total investments at fair value)
Total Investments, June 30, 2013
1,013,150
(1) All investments are Lower Middle Market portfolio investments, unless otherwise noted.
(2) Debt investments are generally income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted.
(3) See Note C – Fair Value Hierarchy for Investments and Debentures – Portfolio Investment Composition for summary geographic location of portfolio companies.
(4) Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.
(5) Control investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”) as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
(6) Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are not classified as Control investments.
(7) Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(8) Income producing through dividends or distributions.
(9) Index based floating interest rate is subject to contractual minimum interest rate.
(10) Private Loan portfolio investment. See Note C – Fair Value Hierarchy for Investments and Debentures – Portfolio Investment Composition for the definition of the term Private Loan.
(11) Middle Market portfolio investment. See Note C – Fair Value Hierarchy for Investments and Debentures – Portfolio Investment Composition for the definition of the term Middle Market.
(12) Other Portfolio investment. See Note C – Fair Value Hierarchy for Investments and Debentures – Portfolio Investment Composition for the definition of the term Other Portfolio.
(13) Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.
(14) Non-accrual and non-income producing investment.
(15) Fully impaired and non-income producing investment.
18
14,550
20,900
12% Secured Debt (Maturity - April 20, 2013)
Member Units (Fully diluted 41.0%) (8)
42
3,690
542
4,190
7,913
8,016
10,283
12,956
14% Secured Debt (Maturity - December 31, 2013)
450
7,800
8,250
14% Secured Debt (Maturity - May 31, 2013)
Class B Member Units (12% cumulative)
Member Units (Fully diluted 79.0%)
1,066
13,957
8,919
4,652
5,252
5,024
4,644
1,081
1,550
6,443
7,655
1,140
2,355
13,710
4,150
3,982
4,070
2,130
5,111
6,200
1,696
1,759
2,060
4,266
1,892
493
36
2,539
2,425
10,045
13,795
10% Secured Debt (Maturity - December 18, 2014)
12% Secured Debt (Maturity - December 18, 2014)
1,017
1,470
882
1,580
810
7,549
10,027
3,385
3,334
5,173
5,093
4,360
11,402
12,787
4,736
4,506
Warrants (Fully diluted 12.5%)
5,258
5,946
11,200
11,891
1,350
14,917
18,041
12% Secured Debt (Maturity - April 1, 2013)
5,997
7,077
13% Current / 5% PIK Secured Debt (Maturity - January 6, 2016)
4,946
3,790
6,196
8,781
8,460
8,404
10,554
4,750
3,945
3,594
3,539
10,547
18,354
12% Secured Debt (Maturity - March 30, 2016)
4,414
1,077
5,588
7,761
6,665
1,030
3,292
3,268
Member Units (Fully diluted 50.0%) (8)
5,298
12,575
2,760
8% Secured Debt (Maturity - January 31, 2014)
915
914
8% Secured Debt (Maturity - January 31, 2016)
1,361
1,349
13% Secured Debt (Maturity - January 31, 2016)
5,319
1,180
2,430
11,291
11,192
6.5% Current /6.5% PIK Secured Debt (Maturity - December 23, 2016)
3,146
2,930
110
9,852
6,186
998
5,314
5,300
6,898
6,478
Subtotal Control Investments (29.2% of total investments at fair value)
217,483
21
4,170
4,754
310
4,954
5,064
19,049
19,174
1,427
7,310
Common Stock (Fully diluted 5.0%)
9,828
9,348
9,748
9,588
8,280
8,725
8,186
Preferred Equity (Fully diluted 8.0%) (8)
1,676
1,490
Member Units (Fully diluted 4.1%) (8)
10,322
11,807
1,100
14,407
14,907
12% Secured Debt (Maturity - December 29, 2015)
3,543
2,750
4,167
8,913
5,550
9,254
22
3,050
1,014
4,459
12% Secured Debt (Maturity - April 18, 2013)
Preferred Stock (7% cumulative) (Fully diluted 5.8%) (8)
2,440
Warrants (Fully diluted 4.0%)
830
4,022
4,490
5,008
4,909
1,511
3,485
4,243
11,923
11,754
3,670
13,461
15,593
17,559
3,420
18,726
21,663
6,631
6,001
5,881
Subtotal Affiliate Investments (18.7% of total investments at fair value)
142,607
23
9,423
9,239
5,942
6,720
6,767
Associated Asphalt Partners, LLC (11)
Liquid Asphalt Supplier
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - March 9, 2018) (9)
9,400
9,250
9,259
4,901
4,919
4,938
9,802
9,857
10,134
10,042
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - October 4, 2018) (9)
1,319
1,379
1,852
1,927
3,171
3,306
7,974
7,828
3,525
2,030
5,322
5,555
5,479
5,361
24
4,239
4,199
4,260
LIBOR Plus 5.75%, Current Coupon 7.25%, Secured Debt (Maturity - August 17, 2017) (9)
2,371
2,421
LIBOR Plus 9.50%, Current Coupon 11.00%, Secured Debt (Maturity - February 17, 2018) (9)
2,457
2,463
4,884
Citadel Plastics Holding, Inc. (11)
Supplier of Commodity Chemicals / Plastic Parts
LIBOR Plus 5.25%, Current Coupon 6.75%, Secured Debt (Maturity - February 28, 2018) (9)
2,959
2,989
3,687
3,669
923
1,232
4,592
4,927
4,964
2,488
2,464
1,962
2,050
4,426
4,569
9,938
9,840
CST Industries (11)
12,188
12,022
12,110
1,961
1,985
5,769
Dycom Investments, Inc. (11) (13)
Telecomm Construction & Engineering Providers
7.13% Bond (Maturity - January 15, 2021)
1,053
4,451
4,512
7,928
7,930
Provider of Technology- Driven Health Research
LIBOR Plus 6.50%, Current Coupon 8.00%, Secured Debt (Maturity - June 29, 2018) (9)
3,361
25
1,735
442
664
2,841
2,958
Fairway Group Acquisition Company (11)
Retail Grocery
LIBOR Plus 6.75%, Current Coupon 8.25%, Secured Debt (Maturity - August 17, 2018) (9)
5,883
5,916
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 30, 2017) (9)
7,921
Flexera Software LLC (11)
Software Licensing
LIBOR Plus 9.75%, Current Coupon 11.00%, Secured Debt (Maturity - September 30, 2018) (9)
2,789
3,053
988
984
989
950
1,980
6,790
6,663
6,909
GMACM Borrower LLC (11)
Mortgage Originator and Servicer
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2015) (9)
987
1,011
Grede Holdings, LLC (11)
LIBOR Plus 5.50%, Current Coupon 7.00%, Secured Debt (Maturity - April 3, 2017) (9)
8% Secured Debt (Maturity - January 1, 2013) (14)
3,953
9.88% Bond (Maturity - April 15, 2018)
3,588
HOA Restaurant Group, LLC (11)
11.25% Bond (Maturity - April 1, 2017)
1,810
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - June 7, 2017) (9)
4,015
Hupah Finance Inc. (11)
Manufacturer of Industrial Machinery
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - January 19, 2019) (9)
2,978
2,924
3,015
Il Fornaio Corporation (11)
LIBOR Plus 5.25%, Current Coupon 6.50%, Secured Debt (Maturity - June 10, 2017) (9)
1,822
1,815
1,836
26
Insight Pharmaceuticals, LLC (11)
Pharmaceuticals Merchant Wholesalers
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - August 25, 2016) (9)
LIBOR Plus 6.50%, Current Coupon 8.00%, Secured Debt (Maturity - August 5, 2017) (9)
5,688
5,610
5,723
1,444
1,422
1,461
LIBOR Plus 6.50%, Current Coupon 6.71%, Secured Debt (Maturity - January 15, 2022)
1,681
7,211
7,281
Kadmon Pharmaceuticals, LLC (10)
Biopharmaceutical Products and Services
LIBOR Plus 13.00% / 12.00% PIK, Current Coupon with PIK 27.00%, Secured Debt (Maturity - April 30, 2013) (9)
6,056
Pre-employment Screening Services
4,903
4,900
4,992
5,332
4,612
4,557
4,427
4,902
5,038
Metals USA, Inc. (11) (13)
Operator of Metal Service Centers
LIBOR Plus 5.00%, Current Coupon 6.25%, Secured Debt (Maturity - December 14, 2019) (9)
7,426
Class B Units (Fully diluted 0.2%)
576
Mmodal, Inc. (11)
Healthcare Equipment and Services
LIBOR Plus 5.50%, Current Coupon 6.75%, Secured Debt (Maturity - August 16, 2019) (9)
3,940
5,005
4,780
150
4,930
27
Mood Media Corporation (11) (13)
Music Programming and Broadcasting
LIBOR Plus 5.50%, Current Coupon 7.00%, Secured Debt (Maturity - May 6, 2018) (9)
1,775
1,780
National Healing Corporation (11)
LIBOR Plus 10.00%, Current Coupon 11.50%, Secured Debt (Maturity - November 30, 2018) (9)
1,545
Common Equity (Fully diluted 0.02%)
1,472
1,595
3,226
3,179
3,274
NCI Building Systems, Inc. (11)
Non-Residential Building Products Manufacturer
LIBOR Plus 6.75%, Current Coupon 8.00%, Secured Debt (Maturity - May 2, 2018) (9)
2,450
2,335
2,455
Class A and C Units (Fully diluted 3.3%) (8)
2,474
8,679
8,548
8,901
3,921
4,020
4,812
4,710
4,692
6,648
Oneida Ltd. (11)
LIBOR Plus 7.75%, Current Coupon 9.25%, Secured Debt (Maturity - September 25, 2017) (9)
1,933
1,899
Decorative Laminate Manufacturer
4,048
4,010
4,038
Peppermill Casinos, Inc. (11)
Operator of Casinos and Gaming Operations
LIBOR Plus 6.00%, Current Coupon 7.25%, Secured Debt (Maturity - November 2, 2018) (9)
2,295
2,204
2,246
Phillips Plastic Corporation (11)
Custom Molder of Plastics and Metals
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - February 12, 2017) (9)
1,728
1,714
1,723
Physician Oncology Services, L.P. (11)
Provider of Radiation Therapy and Oncology Services
LIBOR Plus 6.25%, Current Coupon 7.75%, Secured Debt (Maturity - January 31, 2017) (9)
942
935
904
PL Propylene LLC (11) (13)
Propylene Producer
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - March 27, 2017) (9)
3,901
4,035
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - December 15, 2016) (9)
5,823
5,526
ProQuest LLC (11)
Academic Research Portal
LIBOR Plus 4.75%, Current Coupon 6.00%, Secured Debt (Maturity - April 13, 2018) (9)
4,918
4,997
5,972
5,917
5,987
28
2,932
2,891
2,983
4,825
5,087
5,214
5,294
Class A Units (Fully diluted 0.2%)
10,331
10,673
LIBOR Plus 5.75%, Current Coupon 7.00%, Secured Debt (Maturity - August 24, 2018) (9)
6,407
6,565
8.75% Bond (Maturity - November 15, 2019)
3,143
3,030
LIBOR Plus 5.38%, Current Coupon 6.63%, Secured Debt (Maturity - April 28, 2017) (9)
2,955
2,874
2,921
LIBOR Plus 9.25%, Current Coupon 10.50%, Secured Debt (Maturity - April 30, 2018) (9)
4,537
4,581
7,411
7,502
Surgery Center Holdings, Inc. (11)
LIBOR Plus 5.00%, Current Coupon 6.50%, Secured Debt (Maturity - February 6, 2017) (9)
4,881
LIBOR Plus 6% / 4% PIK, Current Coupon with PIK 14%, Secured Debt (Maturity - June 30, 2013) (9)
11,050
12,776
13,011
4,642
4,729
3,011
4,379
4,268
4,308
5,274
5,182
5,195
LIBOR Plus 7.50%, Current Coupon 9.00%, Secured Debt (Maturity - November 13, 2016) (9)
6,374
6,484
Vantage Specialties, Inc. (11)
Manufacturer of Specialty Chemicals
LIBOR Plus 5.50%, Current Coupon 7.00%, Secured Debt (Maturity - February 10, 2018) (9)
LIBOR Plus 6.00%, Current Coupon 7.50%, Secured Debt (Maturity - July 8, 2016) (9)
3,394
3,344
3,404
3,923
3,575
29
2,506
2,325
2,340
4,962
7,287
7,215
2,469
2,444
4,853
4,894
1,975
1,937
2,471
2,550
WP CPP Holdings, LLC (11)
Manufacturer of Aerospace and Defense Components
LIBOR Plus 4.50%, Current Coupon 5.75%, Secured Debt (Maturity - December 28, 2019) (9)
3,960
6,866
Warrants (Fully diluted 3.0%)
7,937
Subtotal Non-Control/Non-Affiliate Investments (49.1% of total investments at fair value)
456,975
Main Street Capital Partners, LLC (Investment Manager)
Asset Management
100% of Membership Interests
2,668
Total Portfolio Investments, December 31, 2012
819,733
30
Ceridian Corporation (13)
LIBOR Plus 5.75%, Current Coupon 5.96%, Secured Debt (Maturity - May 9, 2017)
10,025
10,013
Compass Investors Inc. (13)
LIBOR Plus 4.00%, Current Coupon 5.25%, Secured Debt (Maturity - December 27, 2019) (9)
7,005
6,994
First Data Corporation (13)
LIBOR Plus 4.00%, Current Coupon 4.21%, Secured Debt (Maturity - March 23, 2018)
4,763
4,767
Toll Road Investors Partnership II, LP Bond (13)
Zero Coupon Bond (Maturity - February 15, 2033)
1,834
Univision Communications Inc. (13)
LIBOR Plus 4.25%, Current Coupon 4.46%, Secured Debt (Maturity - March 31, 2017)
4,934
Subtotal Marketable Securities and Idle Funds Investments (3.0% of total investments at fair value)
28,469
Total Investments, December 31, 2012
848,202
(14) Fully impaired and non-income producing investment.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — ORGANIZATION AND BASIS OF PRESENTATION
1. Organization
Main Street Capital Corporation (“MSCC”) was formed on March 9, 2007 for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP (“MSMF”) and its general partner, Main Street Mezzanine Management, LLC (“MSMF GP”), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the “Investment Manager”), (iii) raising capital in an initial public offering, which was completed in October 2007 (the “IPO”), and (iv) thereafter operating as an internally managed business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). MSMF is licensed as a Small Business Investment Company (“SBIC”) by the United States Small Business Administration (“SBA”) and the Investment Manager acts as MSMF’s manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by MSCC, MSCC does not pay any external investment advisory fees, but instead incurs the operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The IPO and related transactions discussed above were consummated in October 2007 and are collectively termed the “Formation Transactions.”
On January 7, 2010, MSCC consummated transactions (the “Exchange Offer”) to exchange 1,239,695 shares of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP (“MSC II” and, together with MSMF, the “Funds”). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC (“MSC II GP”), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. During the first quarter of 2012, MSCC exchanged 229,634 shares of its common stock to acquire all of the remaining minority ownership in the total dollar value of the MSC II limited partnership interests, including approximately 5% owned by affiliates of MSCC (the “Final MSC II Exchange”). After the completion of the Final MSC II Exchange, MSCC owns 100% of MSC II. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests and the Final MSC II Exchange, are collectively termed the “Exchange Offer Transactions.”
MSCC has elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a result, MSCC generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that it distributes to its stockholders as dividends.
MSCC has direct and indirect wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The primary purpose of these entities is to hold certain investments that generate “pass through” income for tax purposes. The Investment Manager is also a direct wholly owned subsidiary that has elected to be a taxable entity. The Taxable Subsidiaries and the Investment Manager are each taxed at their normal corporate tax rates based on their taxable income.
Unless otherwise noted or the context otherwise indicates, the terms “we,” “us,” “our” and “Main Street” refer to MSCC and its consolidated subsidiaries, which include the Funds, the Taxable Subsidiaries and, beginning April, 1 2013, the Investment Manager (see Note A.2. for further discussion).
2. Basis of Presentation
Main Street’s financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). For the three months ended March 31, 2013 and the three and six months ended June 30, 2012, Main Street’s consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries, which include the Funds and the Taxable Subsidiaries. Beginning April 1, 2013, and for all periods thereafter, Main Street’s consolidated financial statements also include the balance sheet and income statement accounts and other information of the Investment Manager reflected as a consolidated subsidiary (see further discussion below). The Investment Portfolio, as used herein, refers to all of Main Street’s LMM portfolio investments, Middle Market portfolio investments,
Private Loan portfolio investments, Other Portfolio investments and, for all periods up to and including March 31, 2013, the investment in the Investment Manager, but excludes all “Marketable securities and idle funds investments”, and for all periods after March 31, 2013, the Investment Portfolio also excludes the Investment Manager (see Note C — Fair Value Hierarchy for Investments and Debentures - Portfolio Investment Composition for additional discussion of Main Street’s Investment Portfolio composition and definitions for the terms LMM, Middle Market, Private Loan and Other Portfolio). For all periods up to and including the period ending March 31, 2013, the Investment Manager was accounted for as a portfolio investment (see Note D) and was not consolidated with MSCC and its consolidated subsidiaries. For all periods after March 31, 2013, the Investment Manager is consolidated with MSCC and its other consolidated subsidiaries. “Marketable securities and idle funds investments” are classified as financial instruments and are reported separately on Main Street’s Consolidated Balance Sheets and Consolidated Schedule of Investments due to the nature of such investments (see Note B.11.). Main Street’s results of operations for the three and six months ended June 30, 2013 and 2012, cash flows for the six months ended June 30, 2013 and 2012, and financial position as of June 30, 2013 and December 31, 2012, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its consolidated subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to prior period balances to conform with the current presentation, including certain investments previously included as part of the LMM portfolio or Middle Market portfolio that are now classified as part of the Private Loan portfolio and the reclassification of Investment Portfolio and Marketable securities and idle funds investment related activity from cash flows from investing activities to cash flows from operating activities.
The accompanying unaudited consolidated financial statements of Main Street are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The results of operations for the three and six months ended June 30, 2013 and June 30, 2012 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Audit and Accounting Guide for Investment Companies issued by the American Institute of Certified Public Accountants (the “AICPA Guide”), Main Street is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in the AICPA Guide occurs if Main Street holds a controlling interest in an operating company that provides all or substantially all of its services directly to Main Street or to an investment company of Main Street. None of the portfolio investments made by Main Street qualify for this exception, except as discussed below with respect to the Investment Manager. Therefore, Main Street’s Investment Portfolio is carried on the balance sheet at fair value, as discussed further in Note B, with any adjustments to fair value recognized as “Net Change in Unrealized Appreciation (Depreciation)” on the Statement of Operations until the investment is realized, usually upon exit, resulting in any gain or loss being recognized as a “Net Realized Gain (Loss) from Investments.” For all periods prior to and including March 31, 2013, the Investment Manager was accounted for as a portfolio investment and included as part of the Investment Portfolio in the consolidated financial statements of Main Street (see Note D for further discussion of the Investment Manager). The Investment Manager was consolidated with MSCC and its other consolidated subsidiaries prospectively beginning April 1, 2013 as the controlled operating subsidiary was providing substantially all of its services directly or indirectly to Main Street or its portfolio companies.
Portfolio Investment Classification
Main Street classifies its Investment Portfolio in accordance with the requirements of the 1940 Act. Under the 1940 Act, (a) “Control Investments” are defined as investments in which Main Street owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which Main Street owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments. The line item on Main Street’s Consolidated Balance Sheets entitled “Investment in affiliated Investment Manager” represents Main Street’s investment in the Investment Manager that was accounted for as a part of the Investment Portfolio through the period ended March 31, 2013. As discussed further
33
above, the Investment Manager was consolidated beginning April 1, 2013 and is no longer accounted for as a part of the Investment Portfolio.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Valuation of the Investment Portfolio
Main Street accounts for its Investment Portfolio at fair value. As a result, Main Street follows the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification” or “ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires Main Street to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable, and willing and able to transact.
Main Street’s portfolio strategy calls for it to invest primarily in illiquid debt and equity securities issued by private, LMM companies and debt securities issued by Middle Market companies that are generally larger in size than the LMM companies. Main Street categorizes some of its investments in LMM companies and Middle Market companies as Private Loan portfolio investments, which are typically debt securities issued by companies that are consistent in size with either the LMM companies or Middle Market companies, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. Main Street’s portfolio also includes Other Portfolio investments which primarily consist of investments that are not consistent with the typical profiles for our LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. All of Main Street’s portfolio investments may be subject to restrictions on resale.
LMM investments and Other Portfolio investments generally have no established trading market while Middle Market securities generally have established markets that are not active. Private Loan investments may include investments which have no established trading market or have established markets that are not active. Main Street determines in good faith the fair value of its Investment Portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by its Board of Directors and in accordance with the 1940 Act. Main Street’s valuation policy and process are intended to provide a consistent basis for determining the fair value of the portfolio.
For LMM portfolio investments, Main Street reviews external events, including private mergers, sales and acquisitions involving comparable companies, and includes these events in the valuation process. For Middle Market portfolio investments, Main Street primarily uses observable inputs such as quoted prices in the valuation process. For Middle Market portfolio investments for which sufficient observable inputs are not available to determine fair value, Main Street generally uses a combination of observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value its LMM portfolio debt investments.
For valuation purposes, “control” LMM portfolio investments are composed of debt and equity securities in companies for which Main Street has a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Market quotations are generally not readily available for Main Street’s control LMM portfolio investments. As a result, for control LMM portfolio investments, Main Street determines the fair value using a combination of market and income approaches. Under the market approach, Main Street will typically use the enterprise value methodology to determine the fair value of these investments. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, private companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for estimating enterprise value. For any one portfolio company, enterprise value is generally described as a range of values from which a single estimate of enterprise value is derived. In estimating the enterprise value of a portfolio company, Main Street analyzes various factors including the portfolio company’s historical and projected financial results. Main Street allocates the enterprise value to investments in order of the legal priority of the various components of the portfolio company’s capital structure. Main Street will also use the income approach to determine the fair value of these securities, based on projections of the discounted future free cash flows that the portfolio company or the debt security will likely generate and which includes using a yield-to-maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments. The valuation approaches for Main Street’s control LMM portfolio investments estimate the value of the investment if Main Street were to sell, or exit, the investment. In addition, these valuation
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approaches consider the value associated with Main Street’s ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.
For valuation purposes, “non-control” LMM portfolio investments are composed of debt and equity securities in companies for which Main Street does not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Market quotations are generally not readily available for non-control LMM portfolio investments. For non-control LMM portfolio investments, Main Street uses a combination of the market and income approaches to value its equity investments and the income approach to value its debt investments similar to the approaches used for our control LMM portfolio investments and which includes using a yield-to-maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments. Main Street’s estimate of the expected repayment date of a LMM debt security is generally the legal maturity date of the instrument, as Main Street generally intends to hold its LMM loans and debt securities to maturity. The yield-to-maturity analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. Main Street will use the value determined by the yield-to-maturity analysis as the fair value for that security; however, because of Main Street’s general intent to hold its loans to maturity, the fair value will not exceed the face amount of the LMM debt security. A change in the assumptions that Main Street uses to estimate the fair value of its LMM debt securities using the yield-to-maturity analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or if a LMM debt security is in workout status, Main Street may consider other factors in determining the fair value of the LMM debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would most likely be received in a liquidation analysis.
Pursuant to its internal valuation process and the requirements under the 1940 Act, Main Street performs valuation procedures on its investments in each LMM portfolio company once a quarter. In addition to its internal valuation process, in arriving at estimates of fair value for its investments in its LMM portfolio companies, Main Street, among other things, consults with a nationally recognized independent advisor. The nationally recognized independent advisor is generally consulted relative to Main Street’s investments in each LMM portfolio company at least once in every calendar year, and for Main Street’s investments in new LMM portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent advisor on its investments in one or more LMM portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street’s investment in a LMM portfolio company is determined to be insignificant relative to the total Investment Portfolio. Main Street consulted with its independent advisor in arriving at Main Street’s determination of fair value on its investments in a total of 26 LMM portfolio companies for the six months ended June 30, 2013, representing approximately 40.2% of the total LMM portfolio at fair value as of June 30, 2013 and on a total of 22 LMM portfolio companies for the six months ended June 30, 2012, representing approximately 39.7% of the total LMM portfolio and investment in the affiliated Investment Manager at fair value as of June 30, 2012.
For valuation purposes, all of Main Street’s Middle Market portfolio investments are non-control investments for which Main Street does not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Main Street primarily uses observable inputs to determine the fair value of these investments through obtaining third party quotes or other independent pricing, to the extent such sufficient observable inputs are available to determine fair value. For Middle Market portfolio investments for which sufficient observable inputs are not available to determine fair value, Main Street generally uses a combination of observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value its LMM portfolio debt investments.
For valuation purposes, all of Main Street’s Private Loan portfolio investments are non-control investments for which Main Street does not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. As sufficient observable inputs to determine the fair value of these Private Loan portfolio investments through obtaining third party pricing or other independent pricing are not generally available, Main Street generally uses a combination of observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value its LMM portfolio debt investments.
For valuation purposes, all of Main Street’s Other Portfolio investments are non-control investments for which Main Street generally does not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Main Street’s Other Portfolio investments comprised 3.1% and 2.6%, respectively, of Main Street’s Investment Portfolio at fair value as of June 30, 2013 and December 31, 2012. Similar to the LMM investment portfolio, market quotations for Other Portfolio equity investments are generally not readily available. For its
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Other Portfolio equity investments, Main Street determines the fair value based on the fair value of the portfolio company as determined by independent third parties and based on Main Street’s proportional ownership in the portfolio company, as well as the financial position and assessed risk of each of these portfolio investments. For Other Portfolio debt investments with observable inputs, Main Street determines the fair value of these investments through obtaining third party quotes or other independent pricing, to the extent sufficient observable inputs are available to determine fair value. To the extent such observable inputs are not available, Main Street values these Other Portfolio debt investments through an approach similar to the income approach using a yield-to-maturity model used to value its LMM portfolio debt investments.
Due to the inherent uncertainty in the valuation process, Main Street’s determination of fair value for its Investment Portfolio may differ materially from the values that would have been used had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. Main Street determines the fair value of each individual investment and records changes in fair value as unrealized appreciation or depreciation.
Main Street uses a standard internal portfolio investment rating system in connection with its investment oversight, portfolio management and analysis and investment valuation procedures for its LMM portfolio companies. This system takes into account both quantitative and qualitative factors of the LMM portfolio company and the investments held therein.
The Board of Directors of Main Street has the final responsibility for reviewing and approving, in good faith, Main Street’s determination of the fair value for its Investment Portfolio consistent with the 1940 Act requirements. Main Street believes its Investment Portfolio as of June 30, 2013 and December 31, 2012 approximates fair value as of those dates based on the markets in which Main Street operates and other conditions in existence on those reporting dates.
2. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from these estimates under different conditions or assumptions. Additionally, as explained in Note B.1., the financial statements include investments in the Investment Portfolio whose values have been estimated by Main Street with the oversight, review and approval by Main Street’s Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the portfolio investment valuations, those estimated values may differ significantly from the values that would have been used had a readily available market for the investments existed, and it is reasonably possible that the differences could be material.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.
At June 30, 2013, cash balances totaling $36.8 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote.
4. Marketable Securities and Idle Funds Investments
Marketable securities and idle funds investments include investments in intermediate-term secured debt and independently rated debt investments. See the “Consolidated Schedule of Investments” for more information on Marketable securities and idle funds investments.
5. Interest, Dividend and Fee Income (Structuring and Advisory Services)
Main Street records interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. In accordance with Main Street’s valuation policy, Main Street evaluates accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if Main Street otherwise does not expect the debtor to be able to service all of its debt or other obligations, Main Street will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s
status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is fully impaired, sold or written off, Main Street removes it from non-accrual status.
Main Street holds debt and preferred equity instruments in its Investment Portfolio that contain payment-in-kind (“PIK”) interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed. To maintain RIC tax treatment (as discussed in Note B.9. below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though Main Street may not have collected the PIK interest and cumulative dividends in cash. For the three months ended June 30, 2013 and 2012, (i) approximately 3.7%, and 3.9%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 1.0%, and 0.3%, respectively, of Main Street’s total investment income was attributable to cumulative dividend income not paid currently in cash. For the six months ended June 30, 2013 and 2012, (i) approximately 4.4%, and 3.7%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.9%, and 0.3%, respectively, of Main Street’s total investment income was attributable to cumulative dividend income not paid currently in cash.
As of June 30, 2013, Main Street had one investment with positive fair value on non-accrual status, which comprised approximately 0.2% of the total Investment Portfolio at fair value and, together with another fully impaired investment, comprised approximately 0.7% of the total Investment Portfolio at cost. As of December 31, 2012, Main Street had no investments with positive fair value on non-accrual status and one fully impaired investment which comprised approximately 0.2% of the total Investment Portfolio at cost, excluding the investment in the affiliated Investment Manager.
Main Street may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into interest income over the life of the financing.
Main Street has received the following types of income from its Investment Portfolio:
(dollars in thousands)
Interest income
22,858
16,477
44,343
33,666
Fee income
1,680
2,805
2,757
Dividend income
3,193
2,168
5,615
3,489
Total interest, fee and dividend income
6. Deferred Financing Costs
Deferred financing costs include SBIC debenture commitment fees and SBIC debenture leverage fees on the SBIC debentures which are not accounted for under the fair value option under ASC 825 (as discussed further in Note B.11.). These fees range between 3.4% and 3.5% of the total commitment and draw amounts, as applicable. These deferred financing costs have been capitalized and are being amortized into interest expense over the term of the debenture agreement (ten years).
Deferred financing costs also include commitment fees and other costs related to our multi-year investment credit facility (the “Credit Facility”, as discussed further in Note F). These costs have been capitalized and are amortized into interest expense over their respective terms.
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7. Unearned Income — Debt Origination Fees and Original Issue Discount and Discounts / Premiums to Par Value
Main Street capitalizes debt origination fees received in connection with financings and reflects such fees as unearned income netted against the applicable debt investments. The unearned income from the fees is accreted into interest income based on the effective interest method over the life of the financing.
In connection with its portfolio debt investments, Main Street sometimes receives nominal cost warrants (“nominal cost equity”) that are valued as part of the negotiation process with the particular portfolio company. When Main Street receives nominal cost equity, Main Street allocates its cost basis in its investment between its debt security and its nominal cost equity at the time of origination based on amounts negotiated with the particular portfolio company. The allocated amounts are based upon the fair value of the nominal cost equity, which is then used to determine the allocation of cost to the debt security. Any discount recorded on a debt investment resulting from this allocation is reflected as unearned income, which is netted against the applicable debt investment, and accreted into interest income based on the effective interest method over the life of the debt investment. The actual collection of this interest is deferred until the time of debt principal repayment.
Main Street may also purchase debt securities at a discount or at a premium to the par value of the debt security. In the case of a purchase at a discount, Main Street records the investment at the par value of the debt security net of the discount, and the discount is accreted into interest income based on the effective interest method over the life of the debt investment. In the case of a purchase at a premium, Main Street records the investment at the par value of the debt security plus the premium, and the premium is amortized as a reduction to interest income based on the effective interest method over the life of the debt investment.
To maintain RIC tax treatment (as discussed below in Note B.9.), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though Main Street may not have collected the interest income. For the three months ended June 30, 2013 and 2012, approximately 3.3% and 3.8%, respectively, of Main Street’s total investment income was attributable to interest income from the accretion of discounts, net of any premium reduction, associated with debt investments. For the six months ended June 30, 2013 and 2012, approximately 3.1% and 3.7%, respectively, of Main Street’s total investment income was attributable to interest income for the accretion of discounts, net of any premium reduction, associated with debt investments.
8. Share-Based Compensation
Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation — Stock Compensation. Accordingly, for restricted stock awards, Main Street measures the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes the fair value of the awards as share-based compensation expense over the requisite service period or vesting term.
9. Income Taxes
MSCC has elected and intends to continue to qualify for the tax treatment applicable to a RIC under the Code, and, among other things, intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, MSCC is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, each year. Depending on the level of taxable income earned in a tax year, MSCC may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. As part of maintaining RIC status, undistributed taxable income (subject to a 4% excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared prior to the filing of the federal income tax return for the prior year.
The Taxable Subsidiaries hold certain portfolio investments of Main Street. The Taxable Subsidiaries are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by them are included in the consolidated financial statements. The Taxable Subsidiaries permit Main Street to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with Main Street for income tax purposes and may generate income tax expense, or benefit, as a result of their ownership of certain portfolio investments. This income tax expense, or benefit, and the related tax assets and liabilities are reflected in Main Street’s consolidated financial statements.
The Investment Manager has elected, for tax purposes, to be treated as a taxable entity, is not consolidated with Main Street for income tax purposes and is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. The Investment Manager permits Main Street to receive third party fees and continue to comply with the “source income” requirements contained in the RIC tax provisions. The taxable
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income, or loss, of the Investment Manager may differ from its book income due to temporary book and tax timing differences, as well as permanent differences. Through March 31, 2013, the Investment Manager provided for any income tax expense, or benefit, and any tax assets and liabilities in its separate financial statements. Beginning April 1, 2013, the Investment Manager is included in Main Street’s consolidated financial statements and reflected as a consolidated subsidiary and any income tax expense, or benefit, and any tax assets and liabilities are reflected in Main Street’s consolidated financial statements.
The Taxable Subsidiaries and the Investment Manager use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
10. Net Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation or Depreciation from Investments
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries and realized gains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation from investments reflects the net change in the fair value of the Investment Portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses.
11. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Main Street believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate the fair values of such items due to the short term nature of these instruments. Marketable securities and idle funds investments may include investments in certificates of deposit, U.S. government agency securities, independently rated debt investments, diversified bond funds, and publicly traded debt and equity investments and the fair value determination for these investments under the provisions of ASC 820 generally consists of Level 1 and 2 observable inputs, similar in nature to those discussed further in Note C.
As part of the Exchange Offer, Main Street elected the fair value option under ASC 825, Financial Instruments (“ASC 825”) relating to accounting for debt obligations at their fair value, for the MSC II SBIC debentures acquired (the “Acquired Debentures”) as part of the acquisition accounting related to the Exchange Offer and valued those obligations as discussed further in Note C. In order to provide for a more consistent basis of presentation, Main Street has continued to elect the fair value option for SBIC debentures issued by MSC II subsequent to the Exchange Offer. When the fair value option is elected for a given SBIC debenture, the deferred loan costs associated with the debenture are fully expensed in the current period to “Net Change in Unrealized Appreciation (Depreciation) — SBIC debentures” as part of the fair value adjustment. Interest incurred in connection with SBIC debentures which are valued at fair value is included in interest expense.
12. Earnings per Share
Basic and diluted per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period. Main Street adopted the amended guidance in ASC 260, Earnings Per Share, and based on the guidance, the unvested shares of restricted stock are participating securities and are included in the basic earnings per share calculation. As a result, for all periods presented, there is no difference between diluted earnings per share and basic earnings per share amounts.
As a result of the Exchange Offer which left a minority portion of MSC II’s equity interests owned by certain non-Main Street entities for the periods prior to March 31, 2012, the net earnings of MSC II attributable to the remaining noncontrolling interest in MSC II are excluded from all per share amounts presented, and the per share amounts only reflect the net earnings attributable to Main Street’s ownership interest in MSC II for the periods prior to March 31, 2012. During the first quarter of 2012, MSCC completed the Final MSC II Exchange to acquire all of the minority portion of MSC II’s
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equity interests not already owned by MSCC. The impact of the noncontrolling interests in MSC II for the three months ended March 31, 2012 is insignificant and has no impact on the reported per share results for the three months ended March 31, 2012 or any other period presented. As a result of the Final MSC II Exchange, subsequent to March 31, 2012, the non-controlling interest in MSC II no longer exists.
13. Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by Main Street as of the specified effective date. Main Street believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
NOTE C — FAIR VALUE HIERARCHY FOR INVESTMENTS AND DEBENTURES — PORTFOLIO COMPOSITION
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. Main Street accounts for its investments at fair value.
Fair Value Hierarchy
In accordance with ASC 820, Main Street has categorized its investments based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).
Investments recorded on Main Street’s balance sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1 — Investments whose values are based on unadjusted quoted prices for identical assets in an active market that Main Street has the ability to access (examples include investments in active exchange-traded equity securities and investments in most U.S. government and agency securities).
Level 2 — Investments whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the investment. Level 2 inputs include the following:
· Quoted prices for similar assets in active markets (for example, investments in restricted stock);
· Quoted prices for identical or similar assets in non-active markets (for example, investments in thinly traded public companies);
· Pricing models whose inputs are observable for substantially the full term of the investment (for example, market interest rate indices); and
· Pricing models whose inputs are derived principally from, or corroborated by, observable market data through correlation or other means for substantially the full term of the investment.
Level 3 — Investments whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (for example, investments in illiquid securities issued by private companies). These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the investment.
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Main Street conducts reviews of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain investments.
As of June 30, 2013 and December 31, 2012, Main Street’s LMM portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of Main Street’s LMM portfolio investments were categorized as Level 3 as of June 30, 2013 and December 31, 2012.
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As of June 30, 2013 and December 31, 2012, Main Street’s Middle Market portfolio investments consisted primarily of investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, observable inputs in the non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, many of Main Street’s Middle Market portfolio investments were categorized as Level 2 as of June 30, 2013 and December 31, 2012. For those Middle Market portfolio investments for which sufficient observable inputs were not available to determine fair value of the investments, Main Street categorized such investments as Level 3 as of June 30, 2013 and December 31, 2012.
As of June 30, 2013 and December 31, 2012, Main Street’s Private Loan portfolio investments primarily consisted of investments in interest-bearing debt securities in companies that are consistent with the size of companies in our LMM portfolio or our Middle Market portfolio, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of Main Street’s Private Loan portfolio investments were categorized investments as Level 3 as of June 30, 2013 and December 31, 2012.
As of June 30, 2013 and December 31, 2012, Main Street’s Other Portfolio debt investments consisted of investments in secured debt investments. The fair value determination for Other Portfolio debt investments consisted of observable inputs in non-active markets and, as such, were categorized as Level 2 as of June 30, 2013 and December 31, 2012.
As of June 30, 2013 and December 31, 2012, Main Street’s Other Portfolio equity investments consisted of illiquid securities issued by private companies. The fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of Main Street’s Other Portfolio equity investments were categorized as Level 3 as of June 30, 2013 and December 31, 2012.
As of June 30, 2013, Main Street’s Marketable securities and idle funds investments consisted primarily of investments in publicly traded debt and equity investments. The fair value determination for these investments consisted of a combination of observable inputs in active markets for which sufficient observable inputs were available to determine the fair value of these investments. As a result, all of Main Street’s Marketable securities and idle funds investments were categorized as Level 1 as of June 30, 2013. As of December 31, 2012, Main Street’s Marketable securities and idle funds investments consisted primarily of investments in secured and unsecured debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments. As a result, all of Main Street’s Marketable securities and idle funds investments were categorized as Level 2 as of December 31, 2012.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
· Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
· Current and projected financial condition of the portfolio company;
· Current and projected ability of the portfolio company to service its debt obligations;
· Type and amount of collateral, if any, underlying the investment;
· Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/EBITDA ratio) applicable to the investment;
· Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
· Pending debt or capital restructuring of the portfolio company;
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· Projected operating results of the portfolio company;
· Current information regarding any offers to purchase the investment;
· Current ability of the portfolio company to raise any additional financing as needed;
· Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
· Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
· Qualitative assessment of key management;
· Contractual rights, obligations or restrictions associated with the investment; and
· Other factors deemed relevant.
The significant unobservable inputs used in the fair value measurement of Main Street’s LMM equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is not applicable), are (i) EBITDA multiples and (ii) the weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. On the contrary, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of Main Street’s LMM, Middle Market, Private Loan and Other Portfolio debt securities are (i) risk adjusted discount rates used in the yield-to-maturity valuation technique (described in Note B.1. - Valuation of the Investment Portfolio) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the table below.
The following table provides a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 portfolio investments as of June 30, 2013:
Type of Investment
Fair Value as of June 30, 2013 (in thousands)
Valuation Technique
Significant Unobservable Inputs (4)
Range (3)
Weighted Average (3)
Equity investments
262,134
Discounted cash flow
Weighted average cost of capital
10.4% - 18.6%
14.6
%
Market comparable / Enterprise Value
EBITDA multiple (1)
4.0x - 7.0x
(2)
5.8
Debt investments
690,312
Risk adjusted discount rate
4.3% - 21.3%
12.8
Expected principal recovery
0.0% - 100.0%
99.3
Total Level 3 investments
952,446
(1) EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances applicable to each investment.
(2) Range excludes outliers that are greater than one standard deviation from the mean. Including these outliers, the range for EBITDA multiple is 4.0x - 13.5x and the range for risk adjusted discount factor is 4.3% - 70.0%.
(3) Does not include investments for which the valuation technique does not include the use of the applicable fair value input.
(4) Other unobservable inputs, which are not significant, may also be used to fair value Main Street’s Level 3 portfolio investments.
The following table provides a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 portfolio investments as of December 31, 2012:
Fair Value as of December 31, 2012 (in thousands)
220,359
11.0% - 19.0%
14.9
5.7
477,272
9.2% - 16.0%
13.3
99.5
697,631
(2) Range excludes outliers that are greater than one standard deviation from the mean. Including these outliers, the range for EBITDA multiple is 4.0x - 14.0x and the range for risk adjusted discount factor is 4.3% - 20.5% .
The following table provides a summary of changes in fair value of Main Street’s Level 3 portfolio investments for the six months ended June 30, 2013 (amounts in thousands):
Net
Transfers Into
Redemptions/
Changes from
Unrealized
Type of
Fair Value as of
Level 3
Repayments/
New
Appreciation
Investment
Hierarchy
Exits
Investments
to Realized
(Depreciation)
Debt
(84,294
290,261
(1,375
793
2,663
Equity
191,764
154
15,436
14,782
839
222,975
Equity warrants
28,595
(159
8,813
2,743
(833
39,159
(84,299
314,510
18,318
2,669
As of June 30, 2013 and December 31, 2012, the fair value determination for the SBIC debentures recorded at fair value primarily consisted of unobservable inputs. As a result, the SBIC debentures which are recorded at fair value were categorized as Level 3. Main Street determines the fair value of these instruments primarily using a yield-to-maturity approach that analyzes the discounted cash flows of interest and principal for each SBIC debenture recorded at fair value based on estimated market interest rates for debt instruments of similar structure, terms, and maturity. Main Street’s estimate of the expected repayment date of principal for each SBIC debenture recorded at fair value is the legal maturity date of the instrument, as Main Street generally does not intend to repay these SBIC debentures prior to maturity.
The significant unobservable inputs used in the fair value measurement of Main Street’s SBIC debentures recorded at fair value are the estimated market interest rates used to fair value each debenture using the yield valuation technique described above. Significant increases (decreases) in the yield-to-maturity valuation inputs in isolation would result in a significantly lower (higher) fair value measurement.
The following table provides a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 SBIC debentures as of June 30, 2013 (amounts in thousands):
Type of Instrument
Significant Unobservable Inputs
Range
Weighted Average
SBIC Debentures
87,123
Estimated market interest rates
7.1% - 9.2%
8.1%
The following table provides a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 SBIC debentures as of December 31, 2012 (amounts in thousands):
86,467
7.1% - 9.0%
8.0%
The following table provides a summary of changes for the Level 3 SBIC debentures recorded at fair value for the six months ended June 30, 2013 (amounts in thousands):
New SBIC
(Appreciation)
Instrument
Repayments
Debentures
Depreciation
SBIC Debentures at fair value
657
At June 30, 2013 and December 31, 2012, Main Street’s investments and SBIC debentures at fair value were categorized as follows in the fair value hierarchy for ASC 820 purposes:
Fair Value Measurements
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
At June 30, 2013
(Level 1)
(Level 2)
(Level 3)
LMM portfolio investments
555,314
Middle Market portfolio investments
445,244
159,649
285,595
Private Loan portfolio investments
78,937
Other Portfolio investments
34,600
32,600
Total portfolio investments
161,649
Total investments
At December 31, 2012
482,864
351,972
219,838
132,134
65,493
60,501
24,102
22,132
226,800
255,335
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Portfolio Investment Composition
Main Street’s lower middle market (“LMM”) portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Main Street’s LMM portfolio companies generally have annual revenues between $10 million and $150 million, and its LMM investments generally range in size from $5 million to $25 million. The LMM debt investments are typically secured by either a first or second lien on the assets of the portfolio company, primarily bear interest at fixed rates, and generally have a term of between five and seven years from the original investment date. In most LMM portfolio companies, Main Street usually receives nominally priced equity warrants and/or makes direct equity investments in connection with a debt investment.
Main Street’s middle market (“Middle Market”) portfolio investments primarily consist of direct or secondary investments in interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the LMM companies included in Main Street’s LMM portfolio. Main Street’s Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion and its Middle Market investments generally range in size from $3 million to $15 million. Main Street’s Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the company and typically have a term of between three and five years.
Main Street’s Private Loan (“Private Loan”) portfolio investments primarily consist of investments in interest-bearing debt securities in companies that are consistent with the size of companies in its LMM portfolio or its Middle Market portfolio, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien and typically have a term of between three and seven years.
Main Street’s other portfolio (“Other Portfolio”) investments primarily consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio, Main Street may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.
Investment income, consisting of interest, dividends and fees, can fluctuate dramatically due to various factors, including the level of new investment activity, repayments of debt investments or sales of equity interests. Investment income in any given year could be highly concentrated among several portfolio companies. For the three and six month periods ended June 30, 2013 and 2012, Main Street did not record investment income from any single portfolio company in excess of 10% of total investment income.
As of June 30, 2013, Main Street had debt and equity investments in 58 LMM portfolio companies with an aggregate fair value of approximately $555.3 million, with a total cost basis of approximately $438.7 million, and a weighted average annual effective yield on its LMM debt investments of approximately 15.1%. As of June 30, 2013, approximately 75% of Main Street’s total LMM portfolio investments at cost were in the form of debt investments and approximately 94% of such debt investments at cost were secured by first priority liens on the assets of Main Street’s LMM portfolio companies. At June 30, 2013, Main Street had equity ownership in approximately 93% of its LMM portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 33%. As of December 31, 2012, Main Street had debt and equity investments in 56 LMM portfolio companies with an aggregate fair value of approximately $482.9 million, with a total cost basis of approximately $380.5 million, and a weighted average annual effective yield on its LMM debt investments of approximately 14.3%. As of December 31, 2012, approximately 75% of Main Street’s total LMM portfolio investments at cost were in the form of debt investments and approximately 93% of such debt investments at cost were secured by first priority liens on the assets of Main Street’s LMM portfolio companies. At December 31, 2012, Main Street had equity ownership in approximately 93% of its LMM portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 33%. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and December 31, 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status.
As of June 30, 2013, Main Street had Middle Market portfolio investments in 95 companies, collectively totaling approximately $445.2 million in fair value with a total cost basis of approximately $440.4 million. The weighted average revenue for the 95 Middle Market portfolio company investments was approximately $576.8 million as of June 30, 2013. As of June 30, 2013, substantially all of Main Street’s Middle Market portfolio investments were in the form of debt investments and approximately 92% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on Main Street’s Middle Market portfolio debt investments was approximately 7.9% as of June 30, 2013. As of December 31, 2012, Main Street had Middle Market portfolio investments in 79 companies, collectively totaling approximately $352.0 million in fair value with a total cost basis of approximately $348.1 million. The weighted average revenue for the 79 Middle Market portfolio company investments was approximately $533.6 million as of
45
December 31, 2012. As of December 31, 2012, substantially all of its Middle Market portfolio investments were in the form of debt investments and approximately 91% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on Main Street’s Middle Market portfolio debt investments was approximately 8.0% as of December 31, 2012. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and December 31, 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments.
As of June 30, 2013, Main Street had Private Loan portfolio investments in 11 companies, collectively totaling approximately $78.9 million in fair value with a total cost basis of approximately $79.3 million. The weighted average revenue for the 11 Private Loan portfolio company investments was approximately $309.4 million as of June 30, 2013. As of June 30, 2013, 99% of Main Street’s Private Loan portfolio investments were in the form of debt investments and all such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on Main Street’s Private Loan portfolio debt investments was approximately 12.2% as of June 30, 2013. As of December 31, 2012, Main Street had Private Loan portfolio investments in 9 companies, collectively totaling approximately $65.5 million in fair value with a total cost basis of approximately $64.9 million. The weighted average revenue for the 9 Private Loan portfolio company investments was approximately $230.5 million as of December 31, 2012. As of December 31, 2012, 99% of its Private Loan portfolio investments were in the form of debt investments and all such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on Main Street’s Private Loan portfolio debt investments was approximately14.8% as of December 31, 2012. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and December 31, 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments.
As of June 30, 2013, Main Street had Other Portfolio investments in 6 companies, collectively totaling approximately $34.6 million in fair value and approximately $32.3 million in cost basis and which comprised 3.1% of Main Street’s Investment Portfolio at fair value as of June 30, 2013. As of December 31, 2012, Main Street had Other Portfolio investments in 3 companies, collectively totaling approximately $24.1 million in fair value and approximately $23.6 million in cost basis and which comprised 2.6% of Main Street’s Investment Portfolio at fair value as of December 31, 2012.
During the six months ended June 30, 2013, there were ten portfolio company investment transfers from the LMM and Middle Market portfolio investment categories to the Private Loan portfolio investment category totaling $69.6 million in fair value and $69.0 million in cost as of the date of transfer.
The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager).
Cost:
First lien debt
82.3
81.1
9.4
10.4
Second lien debt
5.5
6.0
2.4
1.9
0.4
0.6
100.0
Fair Value:
73.4
72.1
17.7
18.7
5.0
5.4
3.6
3.3
0.3
0.5
46
The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by geographic region of the United States and other countries at cost and fair value as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
West
24.4
25.7
Southwest
22.5
27.7
Northeast
17.4
17.2
Southeast
15.9
10.1
Midwest
14.2
17.6
Non-United States
5.6
1.7
26.0
31.3
24.3
25.3
16.1
15.8
14.4
9.1
17.0
1.5
Main Street’s LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments are in companies conducting business in a variety of industries. The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by industry at cost and fair value as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager).
47
Energy Equipment & Services
12.2
8.4
Media
7.6
7.2
Specialty Retail
5.9
6.1
Software
5.3
8.3
Commercial Services & Supplies
6.4
Health Care Providers & Services
Machinery
5.2
6.7
Construction & Engineering
4.2
4.7
Hotels, Restaurants & Leisure
2.9
3.5
Diversified Consumer Services
3.2
IT Services
2.8
Professional Services
2.2
Diversified Telecommunication Services
2.6
0.0
Electronic Equipment, Instruments & Components
Textiles, Apparel & Luxury Goods
2.1
0.7
Oil, Gas & Consumable Fuels
2.0
1.6
Insurance
Food Products
Electrical Equipment
0.8
Metals & Mining
Building Products
1.4
Aerospace & Defense
Communications Equipment
1.2
Consumer Finance
1.3
Chemicals
Containers & Packaging
Paper & Forest Products
1.1
1.0
Leisure Equipment & Products
Road & Rail
Trading Companies & Distributors
Construction Materials
Other (1)
7.9
7.3
(1) Includes various industries with each industry individually less than 1.0% of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at each date.
48
13.5
10.2
6.5
5.1
4.9
4.5
3.7
4.0
3.0
2.5
2.3
1.8
Transportation Infrastructure
0.2
6.3
At June 30, 2013 and December 31, 2012, Main Street had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
NOTE D — WHOLLY OWNED INVESTMENT MANAGER
As part of the Formation Transactions, the Investment Manager became a wholly owned subsidiary of MSCC. However, through March 31, 2013, the Investment Manager was accounted for as a portfolio investment since the Investment Manager is not an investment company and since it had historically conducted a significant portion of its investment management activities for parties outside of MSCC and its consolidated subsidiaries. Effective April 1, 2013, the Investment Manager was consolidated prospectively as the controlled operating subsidiary was considered to be providing substantially all of its services directly or indirectly to Main Street or its portfolio companies.
The Investment Manager receives recurring investment management fees from MSC II pursuant to a separate investment advisory agreement. Under the investment advisory agreement, MSC II is obligated to pay a 2% annualized management fee based upon the MSC II assets under management. Subsequent to the Exchange Offer, the investment in the
49
Investment Manager was reduced to reflect the remaining pro rata portion of the MSC II equity and the related portion of the MSC II management fees that were not acquired in the Exchange Offer. Upon completion of the Final MSC II Exchange in the first quarter of 2012, the investment in the Investment Manager was further reduced to reflect MSCC’s ownership of all of the MSC II equity and the related MSC II management fees. The Investment Manager may also receive certain management, consulting and advisory fees for providing these services to third parties (the “External Services”). During May 2012, MSCC and the Investment Manager executed an investment sub-advisory agreement with HMS Adviser, LP (“HMS Adviser”), which is the investment advisor to HMS Income Fund, Inc. (“HMS Income”), a non publicly-traded BDC whose registration statement on Form N-2 was declared effective by the SEC in June 2012, to provide certain investment advisory services to HMS Adviser. MSCC is initially providing such investment advisory services to HMS Adviser, but it is ultimately intended that the Investment Manager provide such services because the fees MSCC receives from such arrangement could otherwise have negative consequences on its ability to meet the source-of-income requirement necessary for it to maintain its RIC tax treatment (MSCC or the Investment Adviser, whichever is providing such investment advisory services, the “Sub-Adviser”). Certain relief must be obtained from the SEC before the Investment Manager is permitted to provide these services to HMS Adviser, which relief is being sought, but there can be no assurance that it will be obtained. Under the investment sub-advisory agreement, the Sub-Adviser is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. However, the Sub-Adviser has agreed to waive all such fees from the effective date of HMS Adviser’s registration statement on Form N-2 through December 31, 2013. As a result, as of June 30, 2013, the Sub-Adviser has not received any base management fee or incentive fees under the investment sub-advisory agreement, and the Sub-Adviser is not due any unpaid compensation for any base management fee or incentive fees under the investment sub-advisory agreement.
Through March 31, 2013, the investment in the Investment Manager was accounted for using fair value accounting, with the fair value determined by Main Street and approved, in good faith, by Main Street’s Board of Directors, based on the total estimated present value of the net cash flows received for the External Services, over the estimated dollar averaged life of the related investment management, advisory or consulting contract, and was also based on comparable public market transactions. The net cash flows utilized in the valuation of the Investment Manager excluded any revenues and expenses from MSCC and its subsidiaries, but included the revenues attributable to External Services, and were reduced by an estimated allocation of costs related to providing such External Services. Any change in fair value of the investment in the Investment Manager was recognized on Main Street’s statement of operations as “Unrealized appreciation (depreciation) in Investment in affiliated Investment Manager,” with a corresponding increase (in the case of appreciation) or decrease (in the case of depreciation) to “Investment in affiliated Investment Manager” on Main Street’s balance sheet. As of March 31, 2013 (the last period the Investment Manager was considered to be a portfolio investment for accounting purposes) and December 31, 2012, the fair value of the investment in the Investment Manager was zero. Beginning April 1, 2013, the Investment Manager was fully consolidated with MSCC and its other consolidated subsidiaries in Main Street’s consolidated financial statements and, as of April 1, 2013, all assets and liabilities were included in the consolidated balance sheet at fair value.
The Investment Manager has elected, for tax purposes, to be treated as a taxable entity, is not consolidated with Main Street for income tax purposes and is taxed at normal corporate tax rates based on its taxable income, or loss, and, as a result of its activities, may generate income tax expense or benefit. The Investment Manager permits Main Street to receive third party fees and continue to comply with the “source income” requirements contained in the RIC tax provisions. The taxable income, or loss, of the Investment Manager may differ from its book income, or loss, due to temporary book and tax timing differences, as well as permanent differences. Through March 31, 2013, the Investment Manager provided for any income tax expense, or benefit, and any tax assets or liabilities in its separate financial statements. Beginning April 1, 2013, the Investment Manager is included in Main Street’s consolidated financial statements and reflected as a consolidated subsidiary and any income tax expense, or benefit, and any tax assets or liabilities are reflected in Main Street’s consolidated financial statements.
MSCC has a support services agreement with the Investment Manager that is structured to provide reimbursement to the Investment Manager for any personnel, administrative and other costs it incurs in conducting its operational and investment management activities in excess of the fees received for providing management advisory services. As a wholly owned subsidiary of MSCC, the Investment Manager manages the day-to-day operational and investment activities of MSCC and its subsidiaries. The Investment Manager pays personnel and other administrative expenses, except those specifically required to be borne by MSCC which principally include direct costs that are specific to MSCC’s status as a publicly traded entity. The expenses paid by the Investment Manager include the cost of salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations.
Pursuant to the support services agreement with MSCC, the Investment Manager is reimbursed each quarter by MSCC for its cash operating expenses, less fees that the Investment Manager receives from MSC II and third parties, associated with providing investment management and other services to MSCC, its subsidiaries and third parties. Through March 31, 2013, the management fees paid by MSC II to the Investment Manager were reflected as “Expenses reimbursed to
affiliated Investment Manager” on the statements of operations along with any additional net costs reimbursed by MSCC to the Investment Manager pursuant to the support services agreement. Beginning April 1, 2013, these costs reimbursed by MSCC are included in Main Street’s consolidated financials statements, after elimination of any intercompany activity, in the statement of operations as either compensation and related expenses or as a part of general and administrative expenses.
In the separate stand-alone financial statements of the Investment Manager as summarized below, as part of the Formation Transactions the Investment Manager recognized an $18 million intangible asset related to the investment advisory agreement with MSC II consistent with Staff Accounting Bulletin No. 54, Application of “Pushdown” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase (“SAB 54”). Under SAB 54, push-down accounting is required in “purchase transactions that result in an entity becoming substantially wholly owned.” In this case, MSCC acquired 100% of the equity interests in the Investment Manager in the Formation Transactions. Because the $18 million value attributed to MSCC’s investment in the Investment Manager was derived from the long-term, recurring management fees under the investment advisory agreement with MSC II, the same methodology used to determine the $18 million valuation of the Investment Manager in connection with the Formation Transactions was utilized to establish the push-down accounting basis for the intangible asset. The intangible asset is being amortized over the estimated economic life of the investment advisory agreement with MSC II. Through March 31, 2013, amortization expense was recorded by the Investment Manager in its separate financial statements, but this amortization expense was not included in the expenses reimbursed by MSCC to the Investment Manager based upon the support services agreement since it is non-cash and non-operating in nature. Upon consolidation of the Investment Manager effective April 1, 2013, and for all periods thereafter, the effects of the intangible asset and related amortization expense have been fully eliminated in Main Street’s consolidated financial statements.
Summarized financial information from the separate financial statements of the Investment Manager through March 31, 2013 is as follows:
As of March 31
As of December 31,
Cash
524
741
Accounts receivable
Accounts receivable - MSCC
106
Intangible asset (net of accumulated amortization of $6,021 and $5,681 as of March 31, 2013 and December 31, 2012, respectively)
11,979
12,319
Deposits and other
556
462
13,244
17,657
Accounts payable and accrued liabilities
1,410
5,483
11,834
12,174
Total liabilities and equity
51
Three Months Ended March 31,
Management fee income from Main Street Capital II
776
1,160
Other management advisory fees
102
Total income
1,262
Salaries, benefits and other personnel costs
(2,357
(2,731
(4,647
Occupancy expense
(83
(108
(165
Professional expenses
(22
(77
(32
Amortization expense - intangible asset
(319
(340
(631
Other expenses
(288
(273
(617
Expense reimbursement from MSCC
2,161
2,413
Total net expenses
(908
(1,116
(1,893
Net Loss
As a result of the consolidation of the Investment Manager beginning in the second quarter of 2013, the balance sheet and income statement accounts of the Investment Manager are included in Main Street’s consolidated financial statements and the “Investment in affiliated Investment Manager” and “Expenses reimbursed to affiliated Investment Manager” accounts included in Main Street’s historical consolidated financial statements have zero balances. In addition, as a result of the consolidation of the accounts of the Investment Manager beginning with the second quarter of 2013, the expenses on Main Street’s income statement that were included in “Expenses reimbursed to affiliated Investment Manager” in prior periods are now included in “Compensation and related” or “General and administrative” expenses. The consolidation of the Investment Manager has no net effect on net investment income or total expenses reported in any of the comparable periods presented.
The following unaudited supplemental pro forma information has been provided for illustrative purposes only to show the effects on the individual line items in Main Street’s consolidated statements of operations affected for these periods prior to consolidation of the Investment Manager. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, as well as other factors. No per share amounts are shown as the consolidation of the Investment Manager would not have changed any per share results. The following pro forma information has been provided for the three and six months ended June 2013 and 2012 as though the Investment Manager had been consolidated as of the beginning of each period presented.
Three months ended June 30,
Six months ended June 30,
(Actual)
(Pro-forma)
(5,305
(899
(2,395
(1,874
48,043
NOTE E — SBIC DEBENTURES
SBIC debentures payable at June 30, 2013 and December 31, 2012 were $225 million at each date. SBIC debentures provide for interest to be paid semi-annually, with principal due at the applicable 10-year maturity date of each debenture. The weighted average annual interest rate on the SBIC debentures as of June 30, 2013 and December 31, 2012 was 4.8% and 4.7%, respectively. The first principal maturity due under the existing SBIC debentures is in 2014, and the remaining weighted average duration as of June 30, 2013 is approximately 5.9 years. For the three months ended June 30, 2013 and 2012, Main Street recognized interest expense attributable to the SBIC debentures of $2.8 million and $2.9 million,
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respectively. For the six months ended June 30, 2013 and 2012, Main Street recognized interest expense attributable to the SBIC debentures of $5.5 million and $5.7 million, respectively. Main Street has incurred leverage and other miscellaneous fees ranging from 3.4% to 3.5% of the debenture principal amount. In accordance with SBA regulations, the Funds are precluded from incurring additional non-SBIC debt without the prior approval of the SBA. The Funds are subject to annual compliance examinations by the SBA. There have been no historical findings resulting from these examinations.
As of June 30, 2013, the recorded value of the SBIC debentures was $212.1 million which consisted of (i) $87.1 million recorded at fair value, or $12.9 million less than the $100 million face value of the SBIC debentures held in MSC II, and (ii) $125.0 million reported at face value and held in MSMF. As of June 30, 2013, if Main Street had adopted the fair value option under ASC 825 for all of its SBIC debentures, Main Street estimates the fair value of its SBIC debentures would be approximately $207.7 million, or $17.3 million less than the $225 million face value of the SBIC debentures.
NOTE F — CREDIT FACILITY
Main Street maintains the Credit Facility to provide additional liquidity in support of future investment and operational activities. The Credit Facility, as amended, currently provides for $372.5 million in total commitments from a diversified group of ten lenders. The Credit Facility contains an accordion feature which allows Main Street to increase the total commitments under the facility up to $425 million from new or existing lenders on the same terms and conditions as the existing commitments.
Borrowings under the Credit Facility bear interest, subject to Main Street’s election, on a per annum basis equal to (i) the applicable LIBOR rate (0.19%, as of June 30, 2013) plus 2.50% or (ii) the applicable base rate (Prime Rate, 3.25% as of June 30, 2013) plus 1.50%. Main Street pays unused commitment fees of 0.375% per annum on the unused lender commitments under the Credit Facility. The Credit Facility is secured by a first lien on the assets of MSCC and its subsidiaries, excluding the assets of the Funds. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining an interest coverage ratio of at least 2.0 to 1.0, (ii) maintaining an asset coverage ratio of at least 2.5 to 1.0, and (iii) maintaining a minimum tangible net worth. The Credit Facility includes an initial revolving period through September 2015 followed by a two-year term out period with a final maturity in September 2017, and contains two, one-year extension options which could extend both the revolving period and the final maturity by up to two years, subject to certain conditions including lender approval.
At June 30, 2013, Main Street had $215.0 million in borrowings outstanding under the Credit Facility. Main Street recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs, of $1.2 million and $1.3 million, respectively, for the three months ended June 30, 2013 and 2012 and $2.4 million and $2.3 million, respectively, for the six months ended June 30, 2013 and 2012. As of June 30, 2013, the interest rate on the Credit Facility was 2.69%, and Main Street was in compliance with all financial covenants of the Credit Facility.
NOTE G — NOTES
On April 2, 2013, Main Street issued $80.0 million in aggregate principal amount of 6.125% Notes due 2023 (the “Notes”). On April 15, 2013, the underwriters fully exercised their option to purchase an additional $12.0 million in aggregate principal amount of Notes to cover over-allotments, bringing the total size of the offering to $92.0 million. The Notes are unsecured obligations and rank pari passu with our current and future senior unsecured indebtedness; senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under our Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of the Funds. The Notes mature on April 1, 2023, and may be redeemed in whole or in part at any time or from time to time at Main Street’s option on or after April 1, 2018. The Notes bear interest at a rate of 6.125% per year payable quarterly on January 1, April 1, July 1 and October 1 of each year, beginning July 1, 2013. Main Street recognized interest expense related to the Notes, including amortization of deferred loan costs, of $1.5 million for the three and six months ended June 30, 2013. The total net proceeds to Main Street from the Notes, after underwriting discounts and estimated offering expenses payable by Main Street, were approximately $89.0 million. Main Street has listed the Notes on the New York Stock Exchange under the trading symbol “MSCA”. Main Street may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of June 30, 2013, the outstanding balance of the Notes was $92.0 million.
The Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Notes Indenture.
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NOTE H — FINANCIAL HIGHLIGHTS
Per Share Data:
Net asset value at the beginning of the period
15.19
Net investment income (1) (3)
Net realized gain (loss) from investments (1) (2) (3)
0.01
0.18
Net change in unrealized appreciation (1) (2) (3)
0.43
0.75
Income tax provision (1) (2) (3)
(0.08
(0.10
Net increase in net assets resulting from operations (1) (3)
Dividends paid to stockholders from net investment income
(1.27
(0.82
Dividends paid to stockholders from realized gains/losses
Total dividends paid
Impact of the net change in monthly dividends declared prior to the end of the period
(0.01
Accretive effect of public stock offerings (issuing shares above NAV per share)
0.74
Accretive effect of DRIP issuance (issuing shares above NAV per share)
0.07
0.04
Other (4)
(0.03
(0.02
Net asset value at the end of the period
16.89
(1) Based on weighted average number of common shares outstanding for the period.
(2) Net realized gains or losses, net change in unrealized appreciation or depreciation, and income taxes can fluctuate significantly from period to period.
(3) Per share amounts are net of the amounts attributable to the noncontrolling equity interests in MSC II for the periods prior to the completion of the Final MSC II Exchange during the first quarter of 2012.
(4) Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(in thousands, except percentages)
Net asset value at end of period
Average net asset value
647,856
454,883
Average outstanding debt
411,857
342,714
Ratio of total expenses, including income tax expense, to average net asset value (1) (2) (3)
3.27
4.06
Ratio of operating expenses to average net asset value (1) (3)
2.83
3.44
Ratio of operating expenses, excluding interest expense, to average net asset value (1) (3)
1.68
Ratio of net investment income to average net asset value (1) (3)
5.42
5.63
Portfolio turnover ratio (3)
18.51
22.86
Total investment return (3) (4)
-5.52
17.97
Total return based on change in net asset value (3) (5)
7.41
11.82
(1) Ratios are net of the amounts attributable to the noncontrolling equity interests in MSC II for the periods prior to the completion of the Final MSC II Exchange during the first quarter of 2012.
(2) Total expenses are the sum of operating expenses and income tax expense. Income tax expense includes the accrual of deferred taxes on the net unrealized appreciation from portfolio investments held in Taxable Subsidiaries, which is non-cash in nature and may vary significantly from period to period. Main Street is required to include deferred taxes in calculating its total expenses even though these deferred taxes are not currently payable.
(3) Not annualized.
(4) Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on the last day of each period reported on the table and assumes reinvestment of dividends at prices obtained by Main Street’s dividend reinvestment plan during the period. The return does not reflect sales load.
(5) Total return based on change in net asset value was calculated using the sum of ending net asset value plus dividends to stockholders and other non-operating changes during the period, as divided by the beginning net asset value.
NOTE I — DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street paid a supplemental dividend of $0.35 per share in January 2013, regular monthly dividends of $0.15 per share for each month of January, February and March 2013 and regular monthly dividends of $0.155 per share for each month of April, May and June 2013, with such dividends totaling $43.9 million, or $1.265 per share. The regular monthly dividends equal a total of approximately $16.2 million, or $.465 per share, for the three months ended June 30, 2013, and $31.8 million, or $0.915 per share, for the six months ended June 30, 2013. The second quarter 2013 regular monthly dividends represent a 10.7% increase from the monthly dividends paid for the second quarter of 2012. During May 2013, Main Street declared a $0.20 per share supplemental semi-annual dividend that was paid in July 2013. For the three and six months ended June 30, 2012, Main Street paid total monthly dividends of approximately $11.4 million, or $0.420 per share, and $22.2 million, or $0.825 per share, respectively, for each period.
MSCC has elected to be treated for federal income tax purposes as a RIC. As a RIC, MSCC generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that MSCC distributes to its stockholders as dividends. MSCC must generally distribute at least 90% of its investment company taxable income to qualify for pass-through tax treatment and maintain its RIC status. As part of maintaining RIC status, undistributed taxable income (subject to a 4% excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared prior to the filing of the federal income tax return for the prior year.
The determination of the tax attributes for Main Street’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for dividends will generally include both ordinary income and capital gains, but may also include qualified dividends or return of capital.
Listed below is a reconciliation of “Net increase in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the six months ended June 30, 2013 and 2012.
(amounts in thousands)
(estimated)
23,839
581
Net realized income allocated to noncontrolling interest
(65
Net change in unrealized appreciation on investments
(4,728
2,833
1,876
Pre-tax book (income) loss not consolidated for tax purposes
4,959
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
(1,017
1,351
Estimated taxable income (1)
40,665
26,889
Taxable income earned in prior year and carried forward for distribution in current year
44,415
7,934
Taxable income prior to period end and carried forward for distribution
(46,402
(27,571
Dividend accrued as of period end and paid in the following period
5,427
3,789
Total distributions accrued or paid to common stockholders
44,105
11,041
(1) Main Street’s taxable income for each period is an estimate and will not be finally determined until the company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate.
The Taxable Subsidiaries hold certain portfolio investments for Main Street. The Taxable Subsidiaries are consolidated with Main Street for financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in Main Street’s consolidated financial statements as investments and recorded at fair value. The principal purpose of the Taxable Subsidiaries is to permit Main Street to hold equity investments in portfolio companies which are “pass through” entities for tax purposes in order to continue to comply with the “source income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with Main Street for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities as a result of their ownership of portfolio investments.
The Investment Manager provides investment management advisory services and other services and receives fee income for such services (see further discussion of the Investment Manager in Note D). Beginning April 1, 2013, the Investment Manager is included in Main Street’s consolidated financial statements and reflected as a consolidated subsidiary, but the Investment Manager has elected, for tax purposes, to be treated as a taxable entity and is not consolidated with Main Street for income tax purposes and as a result may generate income tax expense, or benefit, and tax assets and liabilities as a result of its activities. The Investment Manager permits Main Street to receive third party fees and continue to comply with the “source income” requirements contained in the RIC tax provisions.
The income tax expense, or benefit, generated by the Taxable Subsidiaries and the Investment Manager, if any, is reflected in Main Street’s Consolidated Statement of Operations. For the three months ended June 30, 2013 and 2012, we recognized a net income tax provision of $0.8 million and $1.0 million, respectively, related to deferred taxes of $0.1 million and $0.6 million, respectively, and other taxes of $0.7 million and $0.4 million, respectively. For the six months ended June 30, 2013 and 2012, we recognized a net income tax provision of $2.8 million and $2.9 million, respectively, related to deferred taxes of $1.4 million and $1.6 million, respectively, and other taxes of $1.4 million and $1.3 million, respectively. The deferred taxes related primarily to net unrealized appreciation on equity investments held in our Taxable Subsidiaries. For the three and six months ended June 30, 2013, the other taxes include $0.5 million and $0.9 million, respectively, related to an accrual for excise tax on our estimated spillover taxable income and $0.2 million and $0.5 million, respectively, related to accruals for state and other taxes. For the three and six months ended June 30, 2012, the other taxes include $0.2 million and $0.9 million, respectively, related to an accrual for excise tax on our estimated spillover taxable income and $0.2 million and $0.4 million, respectively, related to accruals for state and other taxes.
The net deferred tax liability at June 30, 2013 and December 31, 2012 was $11.0 million and $11.8 million, respectively, primarily related to timing differences from net unrealized appreciation of portfolio investments held by the Taxable Subsidiaries, partially offset by net loss carryforwards (primarily resulting from historical realized losses on portfolio investments held by the Taxable Subsidiaries and the operating activities of the Investment Manager), basis differences of portfolio investments held by the Taxable Subsidiaries which are “pass through” entities for tax purposes and excess deductions resulting from the restricted stock plans (see further discussion in Note L). Due to the consolidation of the Investment Manager (see further discussion in Note D) on April 1, 2013, the Company recorded a deferred tax asset of $2.4 million through additional paid-in capital relating to the periods through March 31, 2013.
As a result of certain realization requirements of ASC 718, Compensation — Stock Compensation, Main Street has not recorded any deferred tax assets for tax deductions related to equity compensation greater than equity compensation recognized for financial reporting. Equity will be increased by $1.1 million if and when such deferred tax assets are ultimately realized by reducing taxes payable. Main Street uses tax law ordering when determining when excess tax benefits have been realized.
NOTE J — COMMON STOCK
In December 2012, Main Street completed a follow-on public stock offering of 2,875,000 shares of common stock, including the underwriters’ full exercise of the over-allotment option, at a price to the public of $28.00 per share, resulting in total gross proceeds of approximately $80.5 million, less (i) underwriters’ commissions of approximately $3.2 million and (ii) offering costs of approximately $0.2 million.
In June 2012, Main Street completed a public stock offering of 4,312,500 shares of common stock, including the underwriters’ full exercise of the over-allotment option, at a price to the public of $22.50 per share, resulting in total gross
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proceeds of approximately $97.0 million, less (i) underwriters’ commissions of approximately $3.9 million and (ii) offering costs of approximately $0.2 million.
NOTE K — DIVIDEND REINVESTMENT PLAN (“DRIP”)
Main Street’s DRIP provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if Main Street declares a cash dividend, the company’s stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. Main Street has the option to satisfy the share requirements of the DRIP through the issuance of shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of MSCC’s common stock on the valuation date determined for each dividend by Main Street’s Board of Directors. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs. Main Street’s DRIP is administered by its transfer agent on behalf of Main Street’s record holders and participating brokerage firms. Brokerage firms and other financial intermediaries may decide not to participate in Main Street’s DRIP but may provide a similar dividend reinvestment plan.
For the six months ended June 30, 2013, $8.3 million of the total $43.9 million in dividends paid to stockholders represented DRIP participation. During this period, Main Street satisfied the DRIP participation requirements with the issuance of 173,926 newly issued shares and with the purchase of 92,679 shares of common stock in the open market. For the six months ended June 30, 2012, $5.2 million of the total $22.2 million in dividends paid to stockholders represented DRIP participation. During this period, Main Street satisfied the DRIP participation requirements with the issuance of 200,961 newly issued shares and with the purchase of 22,650 shares of common stock in the open market. The shares disclosed above relate only to Main Street’s DRIP and exclude any activity related to broker-managed dividend reinvestment plans.
NOTE L — SHARE-BASED COMPENSATION
Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation — Stock Compensation. Accordingly, for restricted stock awards, Main Street measured the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes the fair value of the awards as share-based compensation expense over the requisite service period or vesting term.
Main Street’s Board of Directors approves the issuance of shares of restricted stock to Main Street employees pursuant to the Main Street Capital Corporation 2008 Equity Incentive Plan. These shares generally vest over a four-year period from the grant date. The fair value is expensed over the four-year service period starting on the grant date and the following table summarizes the restricted stock issuances approved by Main Street’s Board of Directors and the remaining shares of restricted stock available for issuance as of June 30, 2013.
Restricted stock authorized under the plan
2,000,000
Less restricted stock granted on:
July 1, 2008
(245,645
July 1, 2009
(98,993
July 1, 2010
(149,357
June 20, 2011
(117,728
June 20, 2012
(133,973
Quarter ended December 31, 2012
(12,476
Quarter ended March 31, 2013
(1,100
June 20, 2013
(246,823
Restricted stock available for issuance as of June 30, 2013
993,905
The following table summarizes the restricted stock issued to Main Street’s independent directors pursuant to the Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan. These shares vest on the day immediately preceding the annual meeting of stockholders following the respective grant date and are expensed over a one-year service period starting on the grant date.
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200,000
(20,000
(8,512
(7,920
(6,584
August 3, 2011
(1,658
(5,060
June 13, 2013
(4,304
145,962
For each of the three months ended June 30, 2013 and 2012, Main Street recognized total share-based compensation expense of $0.6 million and $0.6 million, respectively, and for each of the six months ended June 30, 2013 and 2012, Main Street recognized total share-based expense of $1.2 million and $1.2 million, respectively, related to the restricted stock issued to Main Street employees and independent directors.
As of June 30, 2013, there was $10.9 million of total unrecognized compensation expense related to Main Street’s non-vested restricted shares. This compensation expense is expected to be recognized over a remaining weighted-average period of approximately 3.4 years as of June 30, 2013.
NOTE M — COMMITMENTS AND CONTINGENCIES
At June 30, 2013, Main Street had a total of $101.3 million in outstanding commitments comprised of (i) eight commitments to fund revolving loans that had not been fully drawn and (ii) five capital commitments that had not been fully called.
Main Street may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on Main Street in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, Main Street does not expect any current matters will materially affect its financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on Main Street’s financial condition or results of operations in any future reporting period.
NOTE N — RELATED PARTY TRANSACTIONS
As discussed further in Note D, subsequent to the completion of the Formation Transactions, the Investment Manager was treated as a wholly owned portfolio company of MSCC and was included as part of our Investment Portfolio through March 31, 2013. At December 31, 2012, the Investment Manager had a receivable of $4.1 million due from MSCC related to operating expenses incurred by the Investment Manager required to support Main Street’s business. Beginning April 1, 2013, the accounts of the Investment Manager are included in Main Street’s consolidated financial statements and reflected as a consolidated subsidiary and any balances between the Investment Manager and MSCC or any of its other consolidated subsidiaries have been eliminated in consolidation.
In June 2013, Main Street adopted a deferred compensation plan for the non-employee members of its board of directors, which allows the directors at their option to defer all or a portion of the fees paid for their services as directors and have such deferred fees paid in shares of Main Street common stock within 90 days after the participant’s end of service as a director. As of June 30, 2013, $225,000 of directors’ fees had been deferred under this plan. These deferred fees represented 8,239 shares of Main Street common shares. These shares will not be issued or included as outstanding on the consolidated statement of changes in net assets until each applicable participant’s end of service as a director, but will be included in operating expenses and weighted average shares outstanding on Main Street’s consolidated statement of operations as earned.
NOTE O — SUBSEQUENT EVENTS
In July 2013, Main Street closed a LMM portfolio investment in Garreco, LLC (‘‘Garreco’’) to facilitate a recapitalization of the company. The investment consists of $5.8 million in senior secured term debt and a $1.2 million direct
58
equity investment. Garreco is headquartered in Heber Springs, Arkansas, and is a manufacturer and supplier of consumable products used to create dentures, crowns, and bridges in dental laboratories and clinics.
In July 2013, Main Street completed a new portfolio investment totaling $5.0 million of invested capital in ASC Interests, LLC (“ASC”). The investment in ASC consists of $3.5 million in first lien, senior secured debt and a $1.5 million direct equity investment, and the proceeds of Main Street’s investment were used by ASC to complete a management-led buyout of ASC Owners Group, LLC, dba American Shooting Centers. ASC, operating under the name American Shooting Centers since 1989, operates a 563 acre shooting complex located in George Bush Park, Harris County, Texas. ASC is among the premier outdoor shooting facilities in the United States. ASC’s complex consists of rifle and pistol shooting lanes, a trap and skeet facility and sporting clays fields.
In August 2013, Main Street also completed a follow on investment totaling $20.0 million in second lien senior subordinated secured debt in Daseke, Inc. (“Daseke”), to support Daseke’s acquisition of Central Oregon Truck Company, Inc. (“COTC”). Founded in 1992 and based in Redmond, Oregon, COTC provides dedicated flatbed transportation and logistical services to the contiguous United States as well as parts of Canada.
In August 2013, Main Street closed a new portfolio investment totaling $16.8 million of invested capital in Southern RV, LLC and Southern RV Real Estate, LLC (collectively, “Southern RV”). Main Street’s investment in Southern RV consists of $14.6 million in first lien, senior secured term debt, of which $3.3 million is a first lien mortgage loan, and a $2.2 million direct equity investment. Southern RV is one of the largest dealers of new and used recreational vehicles (“RV”) and related services in the Gulf Coast region.
In August 2013, Main Street announced the appointment of John E. Jackson as a new independent member of its Board of Directors. Simultaneous with Mr. Jackson’s appointment to the Board, Todd A. Reppert retired as Executive Vice Chairman of Main Street and from the Investment Committee and Credit Committee and from the Board of Directors of MSCC in conjunction with a new investment initiative led by him which will focus on making debt and equity investments in private U.S. companies that are generally smaller than those currently being pursued by Main Street for investment. Mr. Reppert will remain involved in managing Main Street’s wholly owned SBIC funds while certain regulatory approvals are sought. As a part of his retirement, the Board accelerated the vesting of all of the unvested shares of restricted stock previously granted to him under the 2008 Equity Incentive Plan. The vesting of these 55,597 shares will result in share-based compensation expense of $1.3 million during the three months ended September 30, 2013.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Cautionary Statement Concerning Forward Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“the SEC”) on March 8, 2013, for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the consolidated financial statements and related notes and other financial information included in the Annual Report on Form 10-K for the year ended December 31, 2012.
ORGANIZATION
Main Street Capital Corporation (“MSCC”) was formed on March 9, 2007 for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP (“MSMF”) and its general partner, Main Street Mezzanine Management, LLC (“MSMF GP”), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the “Investment Manager”), (iii) raising capital in an initial public offering, which was completed in October 2007 (the “IPO”), and (iv) thereafter operating as an internally managed business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). MSMF is licensed as a Small Business Investment Company (“SBIC”) by the United States Small Business Administration (“SBA”) and the Investment Manager acts as MSMF’s manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by us, we do not pay any external investment advisory fees, but instead we incur the operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The IPO and related transactions discussed above were consummated in October 2007 and are collectively termed the “Formation Transactions.”
Unless otherwise noted or the context otherwise indicates, the terms “we,” “us,” “our” and “Main Street” refer to MSCC and its consolidated subsidiaries, which include the Funds, the Taxable Subsidiaries and, beginning April 1, 2013, the Investment Manager.
OVERVIEW
We are a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market (“LMM”) companies and debt capital to middle market (“Middle Market”) companies. Our portfolio investments are typically made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in diverse industry sectors. We seek to partner with entrepreneurs, business owners and management teams and generally provide “one stop” financing alternatives within our LMM portfolio. We invest primarily in secured debt investments, equity investments, warrants and other securities of LMM companies based in the United States and in secured debt investments of Middle Market companies generally headquartered in the United States. Our principal investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity and equity related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Our LMM companies generally have annual revenues between $10 million and $150 million, and our LMM portfolio investments generally range in size from $5 million to $25 million. Our Middle Market investments are made in businesses that are generally larger in size than our LMM portfolio companies, with annual revenues typically between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $3 million to $15 million. Our private loan (“Private Loan”) investments are made in businesses that are consistent with the size of companies in our LMM portfolio or our Middle Market portfolio, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. The structure, terms and conditions for these Private Loan investments are typically consistent with the structure, terms and conditions for the loans made in our LMM portfolio or Middle Market portfolio.
Our other portfolio (“Other Portfolio”) investments primarily consist of investments which are not consistent with the typical profiles for our LMM, Middle Market or Private Loan portfolio investments, including investments which may be managed by third parties. In our Other Portfolio, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.
We seek to fill the current financing gap for LMM businesses, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a company’s capital structure, from senior secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options, or a “one stop” financing solution. Providing customized, “one stop” financing solutions has become even more relevant to our LMM portfolio companies in the current investing environment. We generally seek to partner directly with entrepreneurs, management teams and business owners in making our investments. Our LMM portfolio debt investments are generally secured by a first lien on the assets of the portfolio company and typically have a term of between five and seven years. We believe that our LMM investment strategy has a lower correlation to the broader debt and equity markets.
As of June 30, 2013, we had debt and equity investments in 58 LMM portfolio companies with an aggregate fair value of approximately $555.3 million, with a total cost basis of approximately $438.7 million, and a weighted average annual effective yield on our LMM debt investments of approximately 15.1%. As of June 30, 2013 approximately 75% of our total LMM portfolio investments at cost were in the form of debt investments and approximately 94% of such debt investments at cost were secured by first priority liens on the assets of our LMM portfolio companies. At June 30, 2013, we had equity ownership in approximately 93% of our LMM portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 33%. As of December 31, 2012, we had debt and equity investments in 56 LMM portfolio companies with an aggregate fair value of approximately $482.9 million, with a total cost basis of approximately $380.5 million, and a weighted average annual effective yield on our LMM debt investments of approximately 14.3%. As of December 31, 2012, approximately 75% of our total LMM portfolio investments at cost were in the form of debt investments and approximately 93.0% of such debt investments at cost were secured by first priority liens on the assets of our LMM portfolio companies. At December 31, 2012, we had equity ownership in approximately 93% of our LMM portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 33%. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and December 31, 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status.
Additionally, we pursue investments in Middle Market companies. Our Middle Market portfolio investments primarily consist of direct or secondary purchases of interest-bearing debt securities in privately held companies that are generally larger in size than the LMM companies included in our LMM portfolio. Our Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the company and have an expected duration of between three and five years.
As of June 30, 2013, we had Middle Market portfolio investments in 95 companies, collectively totaling approximately $445.2 million in fair value with a total cost basis of approximately $440.4 million. The weighted average revenue for the 95 Middle Market portfolio company investments was approximately $576.8 million as of June 30, 2013. As of June 30, 2013, substantially all of our Middle Market portfolio investments were in the form of debt investments and approximately 92% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on our Middle Market portfolio debt investments was approximately 7.9% as of June 30, 2013. As of December 31, 2012, we had Middle Market portfolio investments in 79 companies, collectively totaling approximately $352.0 million in fair value with a total cost basis of approximately $348.1 million. The weighted average revenue for the 79 Middle Market portfolio company investments was approximately $533.6 million as of December 31, 2012. As of December 31, 2012, substantially all of our Middle Market portfolio investments were in the form of debt investments and approximately 91% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on our Middle Market portfolio debt investments was approximately 8.0% as of December 31, 2012. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and December 31, 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments.
Our Private Loan portfolio investments primarily consist of investments in interest-bearing debt securities in companies that are consistent with the size of the companies included in our LMM portfolio or our Middle Market portfolio. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years.
As of June 30, 2013, we had Private Loan portfolio investments in 11 companies, collectively totaling approximately $78.9 million in fair value with a total cost basis of approximately $79.3 million. The weighted average revenue for the 11 Private Loan portfolio company investments was approximately $309.4 million as of June 30, 2013. As of June 30, 2013, 99% of our Private Loan portfolio investments were in the form of debt investments and all such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on our Private Loan portfolio debt investments was approximately 12.2% as of June 30, 2013. As of December 31, 2012, we had Private Loan portfolio investments in 9 companies, collectively totaling approximately $65.5 million in fair value with a total cost basis of approximately $64.9 million. The weighted average revenue for the 9 Private Loan portfolio company investments was approximately $230.5 million as of December 31, 2012. As of December 31, 2012, 99% of our Private Loan portfolio investments were in the form of debt investments and all such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average annual effective yield on our Private Loan portfolio debt investments was approximately 14.8% as of December 31, 2012. The weighted average annual yields were computed using the effective interest rates for all debt investments at June 30, 2013 and 2012, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments.
As of June 30, 2013, we had Other Portfolio investments in 6 companies, collectively totaling approximately $34.6 million in fair value and approximately $32.3 million in cost basis and which comprised 3.1% of our Investment Portfolio at fair value as of June 30, 2013. As of December 31, 2012, we had Other Portfolio investments in 3 companies, collectively totaling approximately $24.1 million in both fair value and approximately $23.6 million in cost basis and which comprised 2.6% of our Investment Portfolio at fair value as of December 31, 2012.
Our portfolio investments are generally made through MSCC and the Funds. MSCC and the Funds share the same investment strategies and criteria, although they are subject to different regulatory regimes. An investor’s return in MSCC will depend, in part, on the Funds’ investment returns as MSMF and MSC II are both wholly owned subsidiaries of MSCC.
The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate the identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our
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individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
MSCC and its consolidated subsidiaries are internally managed by the Investment Manager, a wholly owned subsidiary of MSCC, which employs all of the executive officers and other employees of Main Street. Because the Investment Manager is wholly owned by MSCC, Main Street does not pay any external investment advisory fees, but instead incurs the operating costs associated with employing investment and portfolio management professionals through the Investment Manager. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly-traded and privately-held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the three and six months ended June 30, 2013, the ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 1.6% and 1.6%, respectively, on an annualized basis, compared to 1.9% and 2.0%, respectively, on an annualized basis for the three and six months ended June 30, 2012 and 1.8% for the year ended December 31, 2012.
During May 2012, MSCC and the Investment Manager executed an investment sub-advisory agreement with HMS Adviser, LP (“HMS Adviser”), which is the investment advisor to HMS Income Fund, Inc. (“HMS Income”), a non publicly-traded BDC whose registration statement on Form N-2 was declared effective by the SEC in June 2012, to provide certain investment advisory services to HMS Adviser. MSCC is initially providing such investment advisory services to HMS Adviser, but it is ultimately intended that the Investment Manager provide such services because the fees MSCC receives from such arrangement could otherwise have negative consequences on its ability to meet the source-of-income requirement necessary for it to maintain its RIC tax treatment (MSCC or the Investment Adviser, whichever is providing such investment advisory services, the “Sub-Adviser”). Certain relief must be obtained from the SEC before the Investment Manager is permitted to provide these services to HMS Adviser, which relief is being sought, but there can be no assurance that it will be obtained. Under the investment sub-advisory agreement, the Sub-Adviser is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. However, the Sub-Adviser has agreed to waive all such fees from the effective date of HMS Adviser’s registration statement on Form N-2 through December 31, 2013. As a result, as of June 30, 2013, the Sub-Adviser has not received any base management fee or incentive fees under the investment sub-advisory agreement and the Sub-Adviser is not due any unpaid compensation for any base management fee or incentive fees under the investment sub-advisory agreement.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). For the three months ended March 31, 2013 and the three and six months ended June 30, 2012, our consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries, which include the Funds and the Taxable Subsidiaries. Beginning April 1, 2013, and for all periods thereafter, our consolidated financial statements also include the balance sheet and income statement accounts and other information for the Investment Manager reflected as a consolidated subsidiary (see further discussion below). The Investment Portfolio, as used herein, refers to all of our LMM portfolio investments, Middle Market portfolio investments, Private Loan portfolio investments, Other Portfolio investments and, for all periods up to and including March 31, 2013, the investment in the Investment Manager, but excludes all “Marketable securities and idle funds investments,” and for all periods after March 31, 2013, the Investment Portfolio also excludes the Investment Manager. For all periods up to and including the period ending March 31, 2013, the Investment Manager was accounted for as a portfolio investment and was not consolidated with MSCC and its consolidated subsidiaries. For all periods after March 31, 2013, the Investment Manager is consolidated with MSCC and its other consolidated subsidiaries. Marketable securities and idle funds investments are classified as financial instruments and are reported separately on our Consolidated Balance Sheets and Consolidated Schedule of Investments due to the nature of such investments. Our results of operations for the three and six months ended June 30, 2013 and 2012, cash flows for the six months ended June 30, 2013 and 2012, and financial position as of June 30, 2013 and December 31, 2012, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its consolidated subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to prior period balances to conform with the current presentation, including certain investments previously included as part of the LMM portfolio or Middle Market portfolio that are now classified as part of the Private Loan portfolio and the reclassification of Investment Portfolio and Marketable securities and idle funds investment related activity from cash flows from investing activities to cash flows from operating activities.
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Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Audit and Accounting Guide for Investment Companies issued by the American Institute of Certified Public Accountants (the “AICPA Guide”), we are precluded from consolidating portfolio company investments, including those in which we have a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in the AICPA Guide occurs if we hold a controlling interest in an operating company that provides all or substantially all of its services directly to us, or to an investment company of ours. None of the portfolio investments made by us qualify for this exception, except as discussed below with respect to the Investment Manager. Therefore, the Investment Portfolio is carried on the balance sheet at fair value, with any adjustments to fair value recognized as “Net Change in Unrealized Appreciation (Depreciation)” on our Statement of Operations until the investment is realized, usually upon exit, resulting in any gain or loss being recognized as a “Net Realized Gain (Loss) from Investments.” For all periods prior to and including March 31, 2013, the Investment Manager was accounted for as a portfolio investment and included as part of the Investment Portfolio in our consolidated financial statements. The Investment Manager was consolidated with MSCC and its other consolidated subsidiaries prospectively beginning April 1, 2013 as the controlled operating subsidiary was providing substantially all of its services directly or indirectly to Main Street or its portfolio companies.
Portfolio Investment Valuation
The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our Investment Portfolio and the related amounts of unrealized appreciation and depreciation. As of June 30, 2013 and December 31, 2012, approximately 91% and 89%, respectively, of our total assets at each date represented our Investment Portfolio valued at fair value. We are required to report our investments at fair value. We follow the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification” or “ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.
Our business strategy calls for us to invest primarily in illiquid debt and equity securities issued by private, LMM companies and debt securities issued by Middle Market companies that are generally larger in size than the LMM companies. We also categorize some of our investments in LMM companies and Middle Market companies as Private Loan portfolio investments, which are typically debt securities issued by companies that are consistent in size with either the LMM companies or Middle Market companies, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. Our portfolio also includes Other Portfolio investments which primarily consist of investments which are not consistent with the typical profiles for our LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. All of these portfolio investments may be subject to restrictions on resale.
LMM investments and Other Portfolio investments generally have no established trading market while Middle Market securities generally have established markets that are not active. Private Loan investments may include investments which have no established trading market or have established markets that are not active. We determine in good faith the fair value of our Investment Portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors and in accordance with the 1940 Act. Our valuation policy and process is intended to provide a consistent basis for determining the fair value of our portfolio.
For LMM investments, we review external events, including private mergers, sales and acquisitions involving comparable companies, and include these events in the valuation process. For Middle Market portfolio investments, we primarily use observable inputs such as quoted prices in the valuation process. For Middle Market portfolio investments for
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which sufficient observable inputs are not available to determine fair value, we generally use a combination of observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value our LMM portfolio debt investments.
For valuation purposes, “control” LMM portfolio investments are composed of debt and equity securities in companies for which we have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Market quotations are generally not readily available for our control LMM portfolio investments. As a result, for control LMM portfolio investments, we determine the fair value using a combination of market and income approaches. Under the market approach, we will typically use the enterprise value methodology to determine the fair value of these investments. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, private companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for estimating enterprise value. For any one portfolio company, enterprise value is generally described as a range of values from which a single estimate of enterprise value is derived. In estimating the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. We allocate the enterprise value to investments in order of the legal priority of the various components of the portfolio company’s capital structure. We will also use the income approach to determine the fair value of these securities, based on projections of the discounted future free cash flows that the portfolio company or the debt security will likely generate, and which includes using a yield-to-maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments. The valuation approaches for our control LMM portfolio investments estimate the value of the investment if we were to sell, or exit, the investment. In addition, these valuation approaches consider the value associated with our ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.
For valuation purposes, “non-control” LMM portfolio investments are composed of debt and equity securities in companies for which we do not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Market quotations are generally not readily available for non-control LMM portfolio investments. For our non-control LMM portfolio investments, we use a combination of the market and income approaches to value our equity investments and the income approach to value our debt investments similar to the approaches used for our control LMM portfolio investments, and which includes using a yield-to-maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments. Our estimate of the expected repayment date of a LMM debt security is generally the legal maturity date of the instrument, as we generally intend to hold our LMM loans and debt securities to maturity. The yield-to-maturity analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. We will use the value determined by the yield-to-maturity analysis as the fair value for that security; however, because of our general intent to hold our loans to maturity, the fair value will not exceed the face amount of the LMM debt security. A change in the assumptions that we use to estimate the fair value of our LMM debt securities using the yield-to-maturity analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or if a LMM debt security is in workout status, we may consider other factors in determining the fair value of the LMM debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would most likely be received in a liquidation analysis.
Our Middle Market portfolio investments primarily consist of direct or secondary investments in interest-bearing debt securities in companies that are generally larger in size than the LMM companies included in our Investment Portfolio. For valuation purposes, all of our Middle Market portfolio investments are non-control investments for which we do not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. We primarily use observable inputs to determine the fair value of these investments through obtaining third party quotes or other independent pricing, to the extent such sufficient observable inputs are available to determine fair value. For Middle Market portfolio investments for which sufficient observable inputs are not available to determine fair value, we generally use a combination of observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value our LMM portfolio debt investments.
Our Private Loan portfolio investments primarily consist of direct or secondary investments in interest-bearing debt securities in companies that are consistent with the size of companies included in our LMM portfolio or our Middle Market portfolio. For valuation purposes, all of our Private Loan portfolio investments are non-control investments for which we do not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. As sufficient observable inputs to determine the fair value of these Private Loan portfolio investments through obtaining third party pricing or other independent pricing are not generally available, we generally use a combination of
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observable inputs through obtaining third party quotes or other independent pricing and an approach similar to the income approach using a yield-to-maturity model used to value our LMM portfolio debt investments.
For valuation purposes, all of our Other Portfolio investments are non-control investments for which we generally do not have a controlling interest in the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. Our Other Portfolio investments comprised 3.1% and 2.6%, respectively, of our Investment Portfolio at fair value as of June 30, 2013 and December 31, 2012. Similar to the LMM investment portfolio, market quotations for Other Portfolio equity investments are generally not readily available. For our Other Portfolio equity investments, we determine the fair value based on the fair value of the portfolio company as determined by independent third parties and based on our proportional ownership in the portfolio company, as well as the financial position and assessed risk of each of these portfolio investments. For Other Portfolio debt investments with observable inputs, we determine the fair value of these investments through obtaining third party quotes or other independent pricing, to the extent such sufficient observable inputs are available to determine fair value. To the extent observable inputs are not available, we value these Other Portfolio debt investments through an approach similar to the income approach using a yield-to-maturity model used to value our LMM portfolio debt investments.
Due to the inherent uncertainty in the valuation process, our determination of fair value for our Investment Portfolio may differ materially from the values that would have been used had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.
Revenue Recognition
Interest and Dividend Income
We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policy, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is fully impaired, sold or written off, we will remove it from non-accrual status.
Fee Income
We may periodically provide services, including structuring and advisory services, to our portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into interest income over the life of the financing.
Payment-in-Kind (“PIK”) Interest and Cumulative Dividends
We hold debt and preferred equity instruments in our Investment Portfolio that contain payment-in-kind (“PIK”) interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed. To maintain RIC tax treatment (as discussed below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though we may not have collected the PIK interest and cumulative dividends in cash. We will stop accruing PIK interest and cumulative dividends and will write off any accrued and uncollected interest and dividends in arrears when it is determined that such PIK interest and dividends in arrears are no longer collectible.
Share-Based Compensation
We account for our share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, we measured the grant date fair value based upon the market price of our common stock on the date of the grant and will amortize this fair value to share-based compensation expense over the requisite service period or vesting term.
Income Taxes
The Taxable Subsidiaries hold certain portfolio investments for us. The Taxable Subsidiaries are consolidated with us for financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in our consolidated financial statements. The principal purpose of the Taxable Subsidiaries is to permit us to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for income tax purposes and may generate income tax expense, or benefit, and the related tax assets and liabilities, as a result of their ownership of various portfolio investments. This income tax expense, or benefit, if any, and related tax assets and liabilities, are reflected in our consolidated financial statements.
The Investment Manager has elected, for tax purposes, to be treated as a taxable entity, is not consolidated with us for income tax purposes and is taxed at normal corporate tax rates based on its taxable income, or loss, and, as a result of its activities, may generate income tax expense or benefit. The Investment Manager permits us to receive third party fees and continue to comply with the “source income” requirements contained in the RIC tax provisions. The taxable income, or loss, of the Investment Manager may differ from its book income, or loss, due to temporary book and tax timing differences, as well as permanent differences. Through March 31, 2013, the Investment Manager provided for any tax expense, or benefit, and related tax assets or liabilities, in its separate financial statements. Beginning April 1, 2013, the Investment Manager is included in our consolidated financial statements reflected as a consolidated subsidiary and any income tax expense, or benefit, and related tax assets and liabilities are reflected in our consolidated financial statements.
INVESTMENT PORTFOLIO COMPOSITION
LMM portfolio investments principally consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies. The LMM debt investments are primarily secured by either a first or second lien on the assets of the portfolio company, generally bear interest at fixed rates, and generally mature between five and seven years from the original investment date. In most LMM portfolio companies, we also receive nominally priced equity warrants and/or make direct equity investments, usually in connection with a debt investment.
Middle Market portfolio investments primarily consist of direct or secondary investments in interest-bearing debt securities in companies that are generally larger in size than the LMM companies included in our LMM portfolio. Our Middle Market portfolio debt investments are generally secured by either a first or second priority lien and typically have a term of between three and five years.
Our Private Loan portfolio investments primarily consist of investments in interest-bearing debt securities in companies that are consistent with the size of companies included in our LMM portfolio or our Middle Market portfolio. Our
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Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years.
The following tables summarize the composition of our total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager).
The following tables summarize the composition of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by geographic region of the United States or other countries at cost and fair value as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
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Our LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments are in companies conducting business in a variety of industries. The following tables summarize the composition of our total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, by industry at cost and fair value as of June 30, 2013 and December 31, 2012 (this information excludes the Other Portfolio investments and the Investment Manager).
(1) Includes various industries with each industry individually less than 1.0% of the total LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at each date.
Our LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments carry a number of risks including, but not limited to: (1) investing in LMM, Middle Market, Private Loan and Other Portfolio companies which may have limited operating histories and financial resources; (2) holding investments that generally are not publicly traded and which may be subject to legal and other restrictions on resale; and (3) other risks common to investing in below investment grade debt and equity investments in our Investment Portfolio.
PORTFOLIO ASSET QUALITY
We utilize an internally developed investment rating system to rate the performance of each LMM portfolio company and to monitor our expected level of returns on each of our LMM investments in relation to our expectations for the portfolio company. The investment rating system takes into consideration various factors, including but not limited to each investment’s expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry participants and the portfolio company’s future outlook. Investment Rating 1 represents a LMM portfolio company
that is performing in a manner which significantly exceeds expectations. Investment Rating 2 represents a LMM portfolio company that, in general, is performing above expectations. Investment Rating 3 represents a LMM portfolio company that is generally performing in accordance with expectations. Investment Rating 4 represents a LMM portfolio company that is underperforming expectations. Investments with such a rating require increased monitoring and scrutiny by us. Investment Rating 5 represents a LMM portfolio company that is significantly underperforming. Investments with such a rating require heightened levels of monitoring and scrutiny by us and involve the recognition of significant unrealized depreciation on such investment. All new LMM portfolio investments receive an initial Investment Rating of 3.
The following table shows the distribution of our LMM portfolio investments on the 1 to 5 investment rating scale at fair value as of June 30, 2013 and December 31, 2012:
Investments at
Percentage of
Rating
Total Portfolio
182,907
32.9
167,154
34.6
118,630
21.4
117,157
219,309
39.5
174,754
36.2
34,468
6.2
23,799
Totals
Based upon our investment rating system, the weighted average rating of our LMM portfolio was approximately 2.2 as of June 30, 2013 and 2.1 as of December 31, 2012.
For the total Investment Portfolio, as of June 30, 2013, we had one investment with positive fair value on non-accrual status which comprised 0.2% of the total Investment Portfolio at fair value and, together with another fully impaired investment, comprised approximately 0.7% of the total Investment Portfolio at cost. As of December 31, 2012, we had no investments with positive fair value on non-accrual status and one fully impaired investment which comprised approximately 0.2% of the total Investment Portfolio at cost, excluding the investment in the affiliated Investment Manager.
The broader fundamentals of the United States economy remain mixed, and unemployment remains elevated. In the event that the United States economy contracts, it is likely that the financial results of small- to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by economic cycles or other conditions, which could also have a negative impact on our future results.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Net Change
Amount
(dollars in millions)
27.8
20.8
7.0
(10.0
(8.0
(2.0
Net investment income
17.8
Net realized gain (loss) from investments
(3.3
4.1
Net realized income
18.6
9.5
96
Net change in unrealized appreciation (depreciation) from:
17.5
(11.2
SBIC debentures, marketable securities and idle funds and investment in the Investment Manager
(0.1
(1.8
15.7
(9.5
(0.8
(1.0
Net increase in net assets resulting from operations attributable to common stock
24.0
24.2
(0.2
)%
70
(0.0
Distributable net investment income (a)
18.4
13.4
Distributable net realized income (a)
19.2
91
Distributable net investment income per share -
Basic and diluted (a)
0.53
0.49
Distributable net realized income per share -
0.55
0.37
(a) Distributable net investment income and distributable net realized income are net investment income and net realized income, respectively, as determined in accordance with U.S. GAAP, excluding the impact of share-based compensation expense which is non-cash in nature. We believe presenting distributable net investment income and distributable net realized income, and related per share amounts, is useful and appropriate supplemental disclosure of information for analyzing our financial performance since share-based compensation does not require settlement in cash. However, distributable net investment income and distributable net realized income are non-U.S. GAAP measures and should not be considered as a replacement to net investment income, net realized income, and other earnings measures presented in accordance with U.S. GAAP. Instead, distributable net investment income and distributable net realized income should be reviewed only in connection with such U.S. GAAP measures in analyzing our financial performance. A reconciliation of net investment income and net realized income in accordance with U.S. GAAP to distributable net investment income and distributable net realized income is presented in the table above.
Investment Income
For the three months ended June 30, 2013, total investment income was $27.8 million, a 33% increase over the $20.8 million of total investment income for the corresponding period of 2012. This comparable period increase was principally attributable to (i) a 6.4 million increase in interest income from higher average levels of portfolio debt investments and increased activity in the Investment Portfolio and (ii) a $1.0 million increase in dividend income from Investment Portfolio equity investments, partially offset by (i) a $0.3 million decrease in fee income due to lower LMM new deal activity and (ii) a $0.2 million decrease in Marketable securities and idle funds investments income. The $7.0 million increase in investment income in the second quarter of 2013 includes a $1.2 million net increase in investment income related to accelerated prepayment and repricing activity for certain portfolio debt investments and Marketable securities and idle funds investments when compared to the same period in 2012.
Expenses
For the three months ended June 30, 2013, total expenses increased to $10.0 million from $8.0 million for the corresponding period of 2012. This comparable period increase in operating expenses was principally attributable to (i) higher interest expenses of $1.4 million primarily as a result of the $92.0 million Notes offering in April 2013 and (ii) an increase in general and administrative expenses of $0.6 million, which is composed of $0.2 million in higher compensation and related expenses primarily as a result of additional personnel and a $0.4 million increase related to other general and administrative expenses compared to the corresponding period of 2012. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.6% on an annualized basis for the three months ended June 30, 2013, compared to 1.9% for the comparable period in the prior year.
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Distributable Net Investment Income
Distributable net investment income increased 38% to $18.4 million, or $0.53 per share, compared with $13.4 million, or $0.49 per share, in the corresponding period of 2012. The increase in distributable net investment income was primarily due to the higher level of total investment income partially offset by higher operating expenses, due to the changes discussed above. Distributable net investment income on a per share basis for the three months ended June 30, 2013 reflects (i) an increase of approximately $0.03 per share from the comparable period in 2012 attributable to the increase in the comparable levels of accelerated prepayment and repricing activity for certain portfolio debt investments and Marketable securities and idle funds investments as discussed above and (ii) a greater number of average shares outstanding compared to the corresponding period in 2012 primarily due to the June 2012 and December 2012 follow-on stock offerings.
Net Investment Income
Net investment income for the three months ended June 30, 2013 was $17.8 million, or a 39% increase, compared to net investment income of $12.8 million for the corresponding period of 2012. The increase in net investment income was principally attributable to the increase in total investment income partially offset by higher operating expenses as discussed above.
Distributable Net Realized Income
Distributable net realized income was $19.2 million, or $0.55 per share, for the three months ended June 30, 2013 compared with distributable net realized income of $10.1 million, or $0.37 per share, in the corresponding period of 2012. The $9.1 million increase was primarily attributable to (i) the increase in net realized gain from investments of $4.1 million due primarily to the realized losses of $3.3 million incurred in the second quarter of 2012, and (ii) higher distributable net investment income in the three months ended June 30, 2013 compared to the corresponding period of 2012 as discussed above. The $0.8 million net realized gain from investments during the second quarter of 2013 was primarily attributable to net realized gains related to Middle Market debt and Marketable securities and idle funds investments.
Net Realized Income
The higher levels of net investment income and net realized gain from investments in the three months ended June 30, 2013 compared to the corresponding period of 2012, both as discussed above, resulted in a $9.1 million increase in net realized income compared with the corresponding period of 2012.
Net Increase in Net Assets Resulting from Operations Attributable to Common Stock
The net increase in net assets resulting from operations attributable to common stock during the three months ended June 30, 2013 was $24.0 million, or $0.69 per share, compared with a net increase of $24.2 million, or $0.88 per share, in the second quarter of 2012. This $0.2 million decrease from the comparable period in the prior year was the result of the $9.1 million increase in net realized income as discussed above, offset by a $9.5 million decrease in the net change in unrealized appreciation to $6.2 million in the second quarter of 2013, compared to $15.7 million for the comparable period in the prior year. The total net change in unrealized appreciation for the second quarter of 2013 of $6.2 million included a $6.3 million net change in unrealized appreciation from portfolio investments and a net change in unrealized appreciation of $0.6 million from the SBIC debentures held by MSC II, partially offset by a net unrealized depreciation from Marketable securities and idle funds investments of $0.7 million. The $6.3 million net change in unrealized appreciation from portfolio investments for the three months ended June 30, 2013 was principally attributable to (i) unrealized appreciation on 21 LMM portfolio investments totaling $10.0 million, partially offset by unrealized depreciation on 4 LMM portfolio investments totaling $1.0 million and (ii) net unrealized appreciation on Other Portfolio investments of $1.5 million, partially offset by (iii) $1.8 million of net unrealized depreciation on the Middle Market portfolio investments, (iv) $0.9 million of net unrealized depreciation on Private Loan portfolio investments, and (v) accounting reversals of net unrealized appreciation from prior periods of $1.5 million related to portfolio investment exits and repayments. For the three months ended June 30, 2013, we also recognized a net income tax provision of $0.8 million primarily related to other taxes of $0.7 million which include a $0.5 million accrual for excise tax on our estimated spillover taxable income and $0.2 million related to accruals for state and other taxes.
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Comparison of the six months ended June 30, 2013 and June 30, 2012
53.4
41.4
12.0
(18.3
(15.7
(2.6
35.1
4.8
(4.4
35.5
30.5
16.4
22.0
(5.6
(1.5
(1.6
0.1
20.4
(5.5
(2.8
(2.9
47.6
47.9
(0.3
36.3
26.9
Net realized gain from investments
36.7
31.7
Basic and diluted (a) (b)
1.05
0.99
0.06
1.06
1.17
(0.11
(9
(b) Per share amounts exclude the earnings attributable to the noncontrolling equity interests in MSC II not owned by Main Street for the periods prior to the completion of the Final MSC II Exchange during the first quarter of 2012.
For the six months ended June 30, 2013, total investment income was $53.4 million, a 29% increase over the $41.4 million of total investment income for the corresponding period of 2012. This comparable period increase was principally attributable to (i) a 10.6 million increase in interest income from higher average levels of portfolio debt investments and increased activity in the Investment Portfolio, and (ii) a $2.1 million increase in dividend income from portfolio equity investments, offset by (i) a $0.8 million decrease in interest and dividend income from Marketable securities and idle funds investments. The $12.0 million increase in investment income in the second quarter of 2013 includes a $1.5 million decrease in the amount of non-recurring investment income associated with debt repayment and financing activities in LMM portfolio investments included in investment income in the first six months of 2013 offset by a $1.5 million increase in the amount of
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investment income related to higher accelerated prepayment and repricing activity of certain Middle Market and Private Loan portfolio debt investments and Marketable securities and idle funds investments in the first six months of 2013, both when compared to the comparable period.
For the six months ended June 30, 2013, total expenses increased to $18.3 million from $15.7 million for the corresponding period of 2012. This comparable period increase in operating expenses was principally attributable to (i) higher interest expenses of $1.4 million primarily as a result of the $92.0 million Notes offering in April 2013 and (ii) an increase in general and administrative expenses of $1.2 million, which is composed an increase of $0.7 million related to compensation and related expenses primarily as a result of additional personnel and an increase of $0.5 million related to other general and administrative expenses compared to the corresponding period of 2012. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.6% on an annualized basis for the six months ended June 30, 2013, compared to 2.0% for the comparable period in the prior year.
Distributable net investment income increased 35% to $36.3 million, or $1.05 per share, compared with $26.9 million, or $0.99 per share, in the corresponding period of 2012. The increase in distributable net investment income was primarily due to the higher level of total investment income partially offset by higher operating expenses, due to the changes discussed above. The distributable net investment income on a per share basis for the six months ended June 30, 2013 reflects the impact of a greater number of average shares outstanding compared to the corresponding period in 2012 primarily due to the June 2012 and December 2012 follow-on stock offerings.
Net investment income for the six months ended June 30, 2013 was $35.1 million, or a 37% increase, compared to net investment income of $25.7 million for the corresponding period of 2012. The increase in net investment income was principally attributable to the increase in total investment income partially offset by higher operating expenses as discussed above.
Distributable net realized income was $36.7 million, or $1.06 per share, for the six months ended June 30, 2013 compared with distributable net realized income of $31.7 million, or $1.17 per share, in the corresponding period of 2012. The $5.0 million increase was primarily attributable to higher distributable net investment income in the six months ended June 30, 2013 compared to the corresponding period of 2012 as discussed above, partially offset by a decrease in net realized gain from investments of $4.4 million. The $0.4 million net realized gain from investments during the six months ended June 30, 2013 was primarily attributable to related to Middle Market debt and Marketable securities investments and idle funds investments.
The higher net investment income, partially offset by lower level of net realized gain from investments, in the six months ended June 30, 2013 compared to the corresponding period of 2012, both as discussed above, resulted in a $5.0 million increase in net realized income compared with the corresponding period of 2012.
The net increase in net assets resulting from operations attributable to common stock during the six months ended June 30, 2013 was $47.6 million, or $1.37 per share, compared with a net increase of $47.9 million, or $1.77 per share, in the corresponding period of 2012. This $0.3 million decrease from the comparable period in the prior year was primarily the result of a $5.5 million decrease in the net change in unrealized appreciation to $14.9 million in the second quarter of 2013, compared to $20.4 million for the comparable period in the prior year,
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partially offset by the increase in net realized income as discussed above. The total net change in unrealized appreciation for the six months ended June 30, 2013 of $14.9 million included $16.4 million of net unrealized appreciation from portfolio investments, partially offset by net unrealized depreciation of $0.7 million on the SBIC debentures held by MSC II and by the net unrealized depreciation from Marketable securities and idle funds investments of $0.8 million. The $16.4 million net change in unrealized appreciation from portfolio investments for the six months ended June 30, 2013 was principally attributable to (i) unrealized appreciation on 25 LMM portfolio investments totaling $19.6 million, partially offset by unrealized depreciation on 13 LMM portfolio investments totaling $4.4 million, (ii) $2.9 million of net unrealized appreciation on the Middle Market investments and (iii) $1.8 million of net unrealized appreciation on the Other portfolio, partially offset by (i) accounting reversals of net unrealized appreciation from prior periods of $2.8 million related to portfolio investment exits and repayments and (ii) $0.7 million of net unrealized depreciation on the Private Loan investments. For the six months ended June 30, 2013, we also recognized a net income tax provision of $2.8 million related to deferred taxes of $1.4 million and other taxes of $1.4 million. The deferred taxes related primarily to net unrealized appreciation on equity investments held in our taxable subsidiaries. The other taxes include $0.9 million related to an accrual for excise tax on our estimated spillover taxable income and $0.5 million related to accruals for state and other taxes.
Liquidity and Capital Resources
Cash Flows
For the six months ended June 30, 2013, we experienced a net decrease in cash and cash equivalents in the amount of $22.3 million. During the period, we used $155.2 million of cash for our operating activities, which resulted primarily from (i) cash flows we generated from the ordinary operating profits earned through our operating activities totaling $28.8 milllion, which is our $36.3 million of distributable net investment income, excluding the non-cash effects of the accretion of unearned income of $5.1 million, payment-in-kind interest income of $2.4 million, cumulative dividends of $0.5 million and the amortization expense for deferred financing costs of $0.5 million, (ii) cash uses totaling $409.7 million from (a) the funding of new portfolio company investments and settlement of accruals for portfolio investments existing as of December 31, 2012, which together total $353.6 million, (b) the funding of new Marketable securities and idle funds investments and settlement of accruals for Marketable securities and idle funds investments existing as of December 31, 2012, which together total $52.5 million, and (c) $3.6 million related to decreases in payables and accruals, and (iii) cash proceeds totaling $225.7 million from (a) $178.8 million in cash proceeds from the sales and repayments of debt and equity investments, (b) $42.5 million of cash proceeds from the sale of Marketable securities and idle funds investments, and (c) decreases in other assets of $4.4 million.
During the six months ended June 30, 2013, $132.9 million in cash was provided by financing activities, which principally consisted of $89.0 million of net proceeds from the issuance of Notes and $83.0 million in net cash proceeds from our credit facility (the “Credit Facility”), partially offset by $38.8 million in cash dividends paid to stockholders.
Capital Resources
As of June 30, 2013, we had $41.2 million in cash and cash equivalents, $21.8 million in Marketable Securities and and idle funds investments and $157.5 million of unused capacity under the Credit Facility, which we maintain to support our future investment and operating activities. As of June 30, 2013, our net asset value totaled $655.4 million, or $18.72 per share.
The Credit Facility was amended during the three months ended June 30, 2013 to provide for an increase from $287.5 million to $372.5 million in total commitments and to a diversified group of ten lenders. The Credit Facility contains an accordion feature which allows us to increase the total commitments under the facility up to $425.0 million from new or existing lenders on the same terms and conditions as the existing commitments.
Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) the applicable LIBOR rate (0.19%, as of June 30, 2013) plus 2.50% or (ii) the applicable base rate (Prime Rate, 3.25% as of June 30, 2013) plus 1.50%. We pay unused commitment fees of 0.375% per annum on the unused lender commitments under the Credit Facility. The Credit Facility is secured by a first lien on the assets of MSCC and its subsidiaries, excluding the assets of the Funds. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining an interest coverage ratio of at least 2.0 to 1.0, (ii) maintaining an asset coverage ratio of at least 2.5 to 1.0, and (iii) maintaining a minimum tangible net worth. The Credit Facility includes an initial revolving period through September 2015 followed by a two-year term out period with a final maturity in September 2017, and contains two, one-year extension options which could extend both the revolving period and the final maturity by up to two years, subject to certain conditions including lender approval. At June 30, 2013, we had $215.0 million in borrowings outstanding under the Credit
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Facility. As of June 30, 2013, the interest rate on the Credit Facility was 2.69%, and we were in compliance with all financial covenants of the Credit Facility.
Due to each of the Funds’ status as a licensed SBIC, we have the ability to issue, through the Funds, debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, an SBIC can have outstanding debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which effectively approximates the amount of its equity capital. Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time with no prepayment penalty. On June 30, 2013, we, through the Funds, had $225 million of outstanding indebtedness guaranteed by the SBA, which carried a weighted average annual fixed interest rate of approximately 4.8%. The first maturity related to the SBIC debentures does not occur until 2014, and the remaining weighted average duration is approximately 5.9 years as of June 30, 2013.
In April, 2013, we issued $92.0 million, including the underwriter’s full exercise of the over-allotment option, in aggregate principal amount of 6.125% Notes due 2023 (the “Notes”). The Notes are unsecured obligations and rank pari passu with our current and future senior unsecured indebtedness; senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under our Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of the Funds. The Notes mature on April 1, 2023, and may be redeemed in whole or in part at any time or from time to time at our option on or after April 1, 2018. As of June 30, 2013, the outstanding balance of the Notes was $92.0 million. Main Street may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder.
We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents and a combination of future debt and equity capital. Our primary uses of funds will be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.
We periodically invest excess cash balances into Marketable securities and idle funds investments. The primary investment objective of Marketable securities and idle funds investments is to generate incremental cash returns on excess cash balances prior to utilizing those funds for investment in our LMM, Middle Market and Private Loan portfolio investments. Marketable securities and idle funds investments generally consist of debt investments, independently rated debt investments, certificates of deposit with financial institutions, diversified bond funds and public traded debt and equity investments. The composition of Marketable securities and idle funds investments will vary in a given period based upon, among other things, changes in market conditions, the underlying fundamentals in our Marketable securities and idle funds investments, our outlook regarding future LMM, Middle Market and Private Loan portfolio investment needs, and any regulatory requirements applicable to us.
If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price unless our stockholders approve such a sale and our Board of Directors makes certain determinations. We did not seek approval to sell shares of our common stock below the then current net asset value per share of our common stock from our stockholders at our 2013 annual meeting of stockholders because our common stock price per share has been trading significantly above the current net asset value per share of our common stock. We would therefore need future approval from our stockholders to issue shares below the then current net asset value per share if we desire to issue shares of our common stock at a price below the then current net asset value per share.
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. In January 2008, we received an exemptive order from the SEC to exclude SBA-guaranteed debt securities issued by MSMF and any other wholly owned subsidiaries of ours which operate as SBICs from the asset coverage requirements of the 1940 Act as applicable to us, which, in turn, enables us to fund more investments with debt capital.
Although we have been able to secure access to additional liquidity, including recent public stock offerings, our expanded $372.5 million Credit Facility, and the available leverage through the SBIC program, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.
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Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial statements upon adoption.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, and may in the future experience, the impacts of inflation on their operating results, including periodic escalations in their costs for raw materials and required energy consumption.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At June 30, 2013, we had a total of $101.3 million in outstanding commitments comprised of (i) eight commitments to fund revolving loans that had not been fully drawn and (ii) five capital commitments that had not been fully called.
Contractual Obligations
As of June 30, 2013, the future fixed commitments for cash payments in connection with our SBIC debentures and the Notes for each of the next five years and thereafter are as follows:
2018 and
2014
2015
2016
2017
thereafter
23,100
44,700
146,200
225,000
Interest due on SBIC debentures
5,455
10,893
10,382
9,241
8,353
17,690
62,014
Notes
Interest due on Notes
5,713
5,729
31,431
57,132
8,288
22,606
39,195
19,970
58,766
287,321
436,146
As of June 30, 2013, we had $215.0 million in borrowings outstanding under our Credit Facility and the Credit Facility is currently scheduled to mature in September 2017. The Credit Facility contains two, one year extension options which could extend the maturity to September 2019. See further discussion of the Credit Facility terms in Liquidity and Capital Resources — Capital Resources.
Related Party Transactions
Subsequent to the completion of the Formation Transactions, the Investment Manager was treated as a wholly owned portfolio company of MSCC and was included as part of our Investment Portfolio through March 31, 2013. At December 31, 2012, the Investment Manager had a receivable of $4.1 million due from MSCC related to operating expenses incurred by the Investment Manager required to support our business. Beginning April 1, 2013, the accounts of the Investment Manager are included as a part of our consolidated financial statements and the Investment Manager is reflected as a consolidated subsidiary, as opposed to being a part of our Investment Portfolio, and any intercompany balances between the Investment Manager and MSCC or any of its other consolidated subsidiaries have been eliminated in consolidation.
In June 2013, we adopted a deferred compensation plan for the non-employee members of our board of directors, which allows the directors at their option to defer all or a portion of the fees paid for their services as directors and have such deferred fees paid in shares of our common stock within 90 days after the participant’s end of service as a director. As of June 30, 2013, $225,000 of directors’ fees had been deferred under this plan. These deferred fees represented 8,239 shares of our common shares. These shares will not be issued or included as outstanding on the consolidated statement of changes in net assets until each applicable participant’s end of service as a director, but will be included in operating expenses and weighted average shares outstanding on our consolidated statement of operations as earned.
Recent Developments
In July 2013, we closed a LMM portfolio investment in Garreco, LLC (‘‘Garreco’’) to facilitate a recapitalization of the company. The investment consists of $5.8 million in senior secured term debt and a $1.2 million direct equity investment.
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Garreco is headquartered in Heber Springs, Arkansas, and is a manufacturer and supplier of consumable products used to create dentures, crowns, and bridges in dental laboratories and clinics.
In July 2013, we completed a new portfolio investment totaling $5.0 million of invested capital in ASC Interests, LLC (“ASC”). Our investment in ASC consists of $3.5 million in first lien, senior secured debt and a $1.5 million direct equity investment, and the proceeds of our investment were used by ASC to complete a management-led buyout of ASC Owners Group, LLC, dba American Shooting Centers. ASC, operating under the name American Shooting Centers since 1989, operates a 563 acre shooting complex located in George Bush Park, Harris County, Texas. ASC is among the premier outdoor shooting facilities in the United States. ASC’s complex consists of rifle and pistol shooting lanes, a trap and skeet facility and sporting clays fields.
In August 2013, we completed a follow on investment totaling $20.0 million in second lien senior subordinated secured debt in Daseke, Inc. (“Daseke”), to support Daseke’s addition of Central Oregon Truck Company, Inc. (“COTC”). Founded in 1992 and based in Redmond, Oregon, COTC provides dedicated flatbed transportation and logistical services to the contiguous United States as well as parts of Canada.
In August 2013, we closed a new portfolio investment totaling $16.8 million of invested capital in Southern RV, LLC and Southern RV Real Estate, LLC (collectively, “Southern RV”). Our investment in Southern RV consists of $14.6 million in first lien, senior secured term debt, of which $3.3 million is a first lien mortgage loan, and a $2.2 million direct equity investment. Southern RV is one of the largest dealers of new and used recreational vehicles (“RV”) and related services in the Gulf Coast region.
In August 2013, we announced the appointment of John E. Jackson as a new independent member of our Board of Directors. Simultaneous with Mr. Jackson’s appointment to the Board, Todd A. Reppert retired as Executive Vice Chairman of Main Street and from the Investment Committee and Credit Committee and from the Board of Directors of MSCC in conjunction with a new investment initiative led by him which will focus on making debt and equity investments in private U.S. companies that are generally smaller than those currently being pursued by us for investment. Mr. Reppert will remain involved in managing our wholly owned SBIC funds while certain regulatory approvals are sought. As a part of his retirement, the Board accelerated the vesting of all of the unvested shares of restricted stock previously granted to him under our 2008 Equity Incentive Plan.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from the Investment Portfolio and Marketable securities and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent of any debt investments that include floating interest rates. The majority of our debt investments are made with either fixed interest rates or floating rates that are subject to contractual minimum interest rates for the term of the investment. As of June 30, 2013, approximately 55% of our debt investment portfolio (at cost) bore interest at floating rates with 99% of those floating-rate debt investments (at cost) subject to contractual minimum interest rates. As of June 30, 2013, none of our Marketable securities and idle funds investments bore interest at floating rates. Our interest expense will be affected by changes in the published LIBOR rate in connection with our Credit Facility; however, the long term interest rates on our outstanding SBIC debentures and our 6.125% Notes, which comprise the majority of our outstanding debt, are fixed for the 10-year life of such debt. As of June 30, 2013, we had not entered into any interest rate hedging arrangements. At June 30, 2013, based on the applicable levels of our Credit Facility and floating-rate debt investments, a 1% change in interest rates would not have a material effect on our level of net investment income.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, Chief Executive Officer and President, our Chief Financial Officer, our Chief Compliance Officer and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chairman, Chief Executive Officer and President, our Chief Financial Officer, our Chief Compliance Officer and our Chief Accounting Officer, have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934. There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, that we filed with the SEC on March 8, 2013, except as described below.
It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and there are ongoing investigations by regulators and governmental authorities in various jurisdictions. Following a review of LIBOR conducted at the request of the U.K. government, on September 28, 2012, recommendations for reforming the setting and governing of LIBOR were released, which are referred to as the Wheatley Review. The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of S-5 statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of the compilation of lending rates and new regulatory oversight and enforcement mechanisms for rate-setting and a reduction in the number of currencies and tenors for which LIBOR is published. Based on the Wheatley Review and on a subsequent public and governmental consultation process, on March 25, 2013, the U.K. Financial Services Authority published final rules for the U.K. Financial Conduct Authority’s regulation and supervision of LIBOR, which are referred to as the FCA Rules. In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013, and on July 9, 2013, NYSE Euronext was chosen to serve as the independent LIBOR administrator commencing in 2014. It is uncertain what additional regulatory changes or what changes, if any, in the method of determining LIBOR may be required or made by the U.K. government or other governmental or regulatory authorities. Accordingly, uncertainty as to the nature of such changes may adversely affect the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Pending legislation may allow us to incur additional leverage.
As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to 150%. In addition, recent legislation introduced in the U.S. Senate would modify SBA regulations in a manner that may permit us to incur additional SBA leverage. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in our securities may increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2013, we issued 9,166 shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate value for the shares of common stock issued during the three months ended June 30, 2013, under the dividend reinvestment plan was approximately $0.3 million.
Item 5. Other Information
On August 6, 2013, our Board of Directors appointed John E. Jackson as a member of the Board to serve until our 2014 Annual Meeting of Stockholders. Mr. Jackson was also appointed to serve on the Audit Committee of the Board.
Mr. Jackson, age 55, is currently President and Chief Executive Officer of Spartan Energy Partners, LP, a gas gathering, treating and processing company. Mr. Jackson was Chairman, Chief Executive Officer and President of Price Gregory Services, Inc., a pipeline-related infrastructure service provider in North America, from February 2008 until its sale in October of 2009. He served as a director of Hanover Compressor Company (“Hanover”), now known as Exterran Holdings, Inc. (NYSE: EXH), from July 2004 until May 2010. Mr. Jackson served as Hanover’s President and Chief Executive Officer from October 2004 to August 2007 and as Chief Financial Officer from January 2002 to October 2004. Mr. Jackson has been a director of Seitel, Inc., a privately owned provider of onshore seismic data to the oil and gas industry in North America, since August 2007, and Select Energy Services, a privately owned total water management company for oil and gas companies, since January 2012. He also serves on the board of several non-profit organizations. Mr. Jackson’s qualifications to serve on our Board include his extensive background in executive and director roles of public and private companies.
Mr. Jackson will be entitled to receive compensation for his service on the Board consistent with our director compensation program for non-employee directors. In connection with his appointment to the Board, we entered into our standard form of indemnification agreement with Mr. Jackson, the form of which was previously filed as Exhibit (k)(13) to our Pre-Effective Amendment No. 3 to Registration Statement on Form N-2 (Reg. No. 333-142879) filed on September 21, 2007.
The Board has determined that Mr. Jackson qualifies as an “audit committee financial expert” under the SEC’s rules and as an independent director under the 1940 Act and the listing standards of the New York Stock Exchange. There are no arrangements or understandings between Mr. Jackson and any other persons pursuant to which he was selected as a director. There are no current or proposed transactions between us and Mr. Jackson or his immediate family members that would require disclosure under Item 404(a) of Regulation S-K promulgated by the SEC.
Simultaneous with Mr. Jackson’s appointment to the Board, Todd A. Reppert announced his retirement as Executive Vice Chairman of Main Street and from the Investment Committee and Credit Committee and the Board of Directors of MSCC. Mr. Reppert’s retirement is in conjunction with a new investment initiative led by him which will focus on making debt and equity investments in private U.S. companies that are generally smaller than those currently being pursued by us for investment. Mr. Reppert’s retirement was not the result of any disagreement with management or the Board related to our operations, policies or practices. In recognition of his valuable service to Main Street as an officer and director since its inception and in exchange for certain non-compete obligations, the Board accelerated the vesting of all of the unvested shares of restricted stock previously granted to him under our 2008 Equity Incentive Plan. Mr. Reppert will remain involved in managing our wholly owned SBIC funds under a Management Agreement approved by the Board, which is filed herewith and incorporated herein by reference, while certain regulatory approvals are sought. Mr. Reppert will be paid $41,666 per month under the Management Agreement for providing the non-employee management services for the SBIC funds.
Item 6. Exhibits
Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit Number
Description of Exhibit
10.1*
Seventh Amendment to Amended and Restated Credit Agreement dated May 8, 2013 (previously filed as Exhibit 10.1 to Main Street Capital Corporation’s Current Report on Form 8-K filed on May 8, 2013 (File No. 1-33723)).
10.2*
Supplement and Joinder Agreement to Amended and Restated Credit Agreement dated May 30, 2013 (previously filed as Exhibit 10.1 to Main Street Capital Corporation’s Current Report on Form 8-K filed May 31, 2013 (File No. 1-33723)).
10.3†
Main Street Capital Corporation Deferred Compensation Plan for Non-Employee Directors, dated June 3, 2013.
10.4†
Management Agreement between Main Street Capital Corporation, Main Street Capital Partners, LLC and Todd A. Reppert dated August 6, 2013.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
* Exhibit previously filed with the Securities and Exchange Commission, as indicated, and incorporated herein by reference.
† Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 9, 2013
/s/ Vincent D. Foster
Vincent D. Foster
Chairman, President and Chief Executive Officer (principal executive officer)
/s/ Dwayne L. Hyzak
Dwayne L. Hyzak
Chief Financial Officer and Senior Managing Director (principal financial officer)
/s/ Shannon D. Martin
Shannon D. Martin
Vice President and Chief Accounting Officer (principal accounting officer)
EXHIBIT INDEX
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