As
filed with the Securities and Exchange Commission on April 24, 2009
Securities Act File No. 333-155806
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 2
Main Street Capital Corporation
(Exact name of registrant as specified in charter)
1300 Post Oak Boulevard, Suite 800
Houston, TX 77056
(713) 350-6000
(Address and telephone number,
including area code, of principal executive offices)
Vincent D. Foster
Chief Executive Officer
Main Street Capital Corporation
1300 Post Oak Boulevard, Suite 800
Houston, TX 77056
(Name and address of agent for service)
COPIES TO:
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Jason B. Beauvais
Vice President, General Counsel
and Secretary
Main Street Capital Corporation
1300 Post Oak Boulevard, Suite 800
Houston, TX 77056
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Steven B. Boehm, Esq.
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
Tel: (202) 383-0100
Fax: (202) 637-3593 |
Approximate date of proposed public offering: From time to time after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than
securities offered in connection with a dividend reinvestment plan, check the following
box. þ
It is proposed that this filing will become effective (check appropriate box):
o when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities |
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Aggregate |
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Registration |
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Being Registered |
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Offering Price |
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Fee |
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Common Stock, $0.01 par value per share |
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300,000,000 |
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11,790(1) |
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(1) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED April 24, 2009
PROSPECTUS
$300,000,000
Main Street Capital Corporation
Common Stock
We may offer, from time to time, up to $300,000,000 of our common stock, $0.01 par
value per share, in one or more offerings. Our common stock may be offered at prices
and on terms to be disclosed in one or more supplements to this prospectus. The
offering price per share of our common stock, less any underwriting commissions or
discounts, will not be less than the net asset value per share of our common stock at
the time of the offering, except (i) with the consent of the majority of our common
stockholders or (ii) under such other circumstances as the Securities and Exchange
Commission may permit. On June 17, 2008, our common stockholders voted to allow us to
issue common stock at a price below net asset value per share for a period of one year
ending on the earlier of June 16, 2009 or the date of our 2009 annual stockholders
meeting. Our stockholders did not specify a maximum discount below net asset value at
which we are able to issue our common stock; however, we cannot issue shares of our
common stock below net asset value unless our Board of Directors determines that it
would be in our and our stockholders best interests to do so. Shares of closed-end
investment companies such as us frequently trade at a discount to their net asset
value. This risk is separate and distinct from the risk that our net asset value per
share may decline. We cannot predict whether our common stock will trade above, at or
below net asset value. You should read this prospectus and the applicable prospectus
supplement carefully before you invest in our common stock.
Our common stock may be offered directly to one or more purchasers through agents
designated from time to time by us, or to or through underwriters or dealers. The
prospectus supplement relating to the offering will identify any agents or underwriters
involved in the sale of our common stock, and will disclose any applicable purchase
price, fee, commission or discount arrangement between us and our agents or
underwriters or among our underwriters or the basis upon which such amount may be
calculated. See Plan of Distribution. We may not sell any of our common stock through
agents, underwriters or dealers without delivery of a prospectus supplement describing
the method and terms of the offering of such common stock.
We are a principal investment fund focused on providing customized debt and equity
financing to lower middle-market companies that operate in diverse industries. We seek
to fill the current financing gap for lower middle-market businesses, which have
limited access to financing from commercial banks and other traditional sources.
Our investment objective is to maximize our portfolios total return by generating
current income from our debt investments and realizing capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. We are an internally managed, closed-end, non-diversified
management investment company that has elected to be treated as a business development
company under the Investment Company Act of 1940.
Our common stock is listed on the Nasdaq Global Select Market under the symbol
MAIN. On April 23, 2009, the last reported sale price of our common stock on the
Nasdaq Global Select Market was $11.70 per share.
Investing in our common stock involves a high degree of risk, and should be considered highly speculative. See Risk Factors beginning on page 8 to read about factors you should consider, including the risk of leverage, before investing in our common stock.
This prospectus and the accompanying prospectus supplement contain important
information about us that a prospective investor should know before investing in our
common stock. Please read this prospectus and the accompanying prospectus supplement
before investing and keep them for future reference. We file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission. This information is available free of charge by contacting us at
1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056 or by telephone at
(713) 350-6000 or on our website at www.mainstcapital.com. Information contained on our
website is not incorporated by reference into this prospectus, and you should not
consider that information to be part of this prospectus. The Securities and Exchange
Commission also maintains a website at www.sec.gov that contains such information.
Neither the Securities and Exchange Commission nor any state securities commission
has approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2009
TABLE OF CONTENTS
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EX-99.N.1 |
EX-99.N.2 |
This prospectus is part of a registration statement that we have filed with the
Securities and Exchange Commission, or SEC, using the shelf registration process.
Under the shelf registration process, we may offer, from time to time, up to
$300,000,000 of our common stock on terms to be determined at the time of the offering.
This prospectus provides you with a general description of the common stock that we may
offer. Each time we use this prospectus to offer common stock, we will provide a
prospectus supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. Please carefully read this prospectus and any
accompanying prospectus supplement together with the additional information described
under Available Information and Risk Factors before you make an investment
decision.
No dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus or any accompanying supplement to
this prospectus. You must not rely on any unauthorized information or representations
not contained in this prospectus or any accompanying prospectus supplement as if we had
authorized it. This prospectus and any accompanying prospectus supplement do not
constitute an offer to sell or a solicitation of any offer to buy any security other
than the registered securities to which they relate, nor do they constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction to any
person to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. The information contained in this prospectus and any accompanying
prospectus supplement is accurate as of the dates on their covers.
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It is not complete
and may not contain all of the information that you may want to consider. You should read
the entire prospectus and any prospectus supplement carefully, including the section
entitled Risk Factors.
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 (the
Fund) and its general partner, Main Street Mezzanine
Management, LLC (the General Partner),
(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). The
transactions discussed above were consummated in October 2007
and are collectively termed the Formation
Transactions. The
Fund is licensed as a Small Business Investment Company
(SBIC) by the United States Small Business
Administration (SBA) and the Investment Manager acts
as the Funds manager and investment adviser. The
Investment Manager also acts as the manager and investment
adviser to Main Street Capital II, LP (MSC II), a
privately owned, affiliated SBIC which commenced investment
operations in January 2006. MSCC did not acquire any interest in
MSC II in connection with the Formation Transactions and
currently does not hold any equity interest in MSC II. Unless otherwise noted or the context
otherwise indicates, the terms we, us,
our and Main Street refer to the Fund
and the General Partner prior to the IPO and to MSCC and its
subsidiaries, including the Fund and the General Partner,
subsequent to the IPO.
Main Street
We are a principal investment firm focused on providing
customized financing solutions to lower middle-market companies,
which we generally define as companies with annual revenues
between $10 million and $100 million. Our investment
objective is to maximize our portfolios total return by
generating current income from our debt investments and
realizing 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 investments generally range in size from
$2 million to $15 million. Our ability to invest
across a companys capital structure, from senior secured
loans to subordinated debt to equity securities, allows us to
offer portfolio companies a comprehensive suite of financing
solutions, or one-stop financing.
Our investments are made through both MSCC and the Fund. Since
the IPO, MSCC and the Fund have co-invested in substantially
every investment we have made. MSCC and the Fund share the same
investment strategies and criteria in the lower middle-market,
although they are subject to different regulatory regimes. See
Regulation. An investors return in
MSCC will depend, in part, on the Funds investment returns
as the Fund is a wholly owned subsidiary of MSCC.
We typically seek to work with entrepreneurs, business owners
and management teams to provide customized financing for
strategic acquisitions, business expansion and other growth
initiatives, ownership transitions and recapitalizations. In
structuring transactions, we seek to protect our rights, manage
our risk and create value by: (i) providing financing at
lower leverage ratios; (ii) generally taking first priority
liens on assets; and (iii) providing significant equity
incentives for management teams of our portfolio companies. We
seek to avoid competing with other capital providers for
transactions because we believe competitive transactions often
have execution risks and can result in potential conflicts among
creditors and lower returns due to more aggressive valuation
multiples and higher leverage ratios.
As of December 31, 2008, Main Street had debt and equity
investments in 31 portfolio companies. Approximately 84% of our
total portfolio investments at cost, excluding our 100% equity
interest in the Investment Manager, were in the form of debt
investments and 91% of such debt investments at cost were
secured by first priority liens on the assets of our portfolio
companies. As of December 31, 2008, Main Street had a
weighted average effective yield on its debt investments of 14%.
Weighted average yields are computed using the effective
interest rates for all debt investments at December 31,
2008, including amortization of deferred debt origination fees
and accretion of original issue discount. At December 31,
2008, we had equity ownership in approximately 94% of our
portfolio companies and the average fully diluted equity
ownership in those portfolio companies was approximately 25%.
You should be aware that investments in the lower middle-market carry a number of
risks including, but not limited to, investing in companies which have a limited operating
history and financial resources and other risks common to investing in below investment
grade debt and equity investments in private, smaller companies. Please see Risk
Factors Risks Related to Our Investments for a more complete discussion of the risks
involved with investing in the lower middle-market.
Our principal executive offices are located at 1300 Post Oak Boulevard, Suite 800,
Houston, Texas 77056, and our telephone number is (713) 350-6000. We maintain a website at
http://www.mainstcapital.com. Information contained on our website is not incorporated by
reference into this prospectus or any prospectus supplement, and you should not consider
that information to be part of this prospectus or any prospectus supplement.
1
Business Strategies
Our investment objective is to maximize our portfolios total return by generating
current income from our debt investments and realizing capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. We have adopted the following business strategies to achieve
our investment objective:
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Delivering Customized Financing Solutions. We believe our ability to
provide a broad range of customized financing solutions to lower
middle-market companies sets us apart from other capital providers
that focus on providing a limited number of financing solutions. We
offer to our portfolio companies customized debt financing solutions
with equity components that are tailored to the facts and
circumstances of each situation. Our ability to invest across a
companys capital structure, from senior secured loans to subordinated
debt to equity securities, allows us to offer our portfolio companies
a comprehensive suite of financing solutions, or one-stop financing. |
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Focusing on Established Companies in the Lower Middle-Market. We
generally invest in companies with established market positions,
experienced management teams and proven revenue streams. Those
companies generally possess better risk-adjusted return profiles than
newer companies that are building management or are in the early
stages of building a revenue base. In addition, established lower
middle-market companies generally provide opportunities for capital
appreciation. |
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Leveraging the Skills and Experience of Our Investment Team. Our
investment team has significant experience in lending to and investing
in lower middle-market companies. The members of our investment team
have broad investment backgrounds, with prior experience at private
investment funds, investment banks and other financial services
companies, and currently include seven certified public accountants and
one chartered financial analyst. The expertise of our investment team
in analyzing, valuing, structuring, negotiating and closing
transactions should provide us with competitive advantages by allowing
us to consider customized financing solutions and non-traditional and
complex structures. |
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Investing Across Multiple Industries. We seek to maintain a portfolio
of investments that is appropriately balanced among various companies,
industries, geographic regions and end markets. This portfolio balance
is intended to mitigate the potential effects of negative economic
events for particular companies, regions and industries. |
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Capitalizing on Strong Transaction Sourcing Network. Our investment
team seeks to leverage its extensive network of referral sources for
investments in lower middle-market companies. We have developed a
reputation in our marketplace as a responsive, efficient and reliable
source of financing, which has created a growing stream of proprietary
deal flow for us. |
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Benefiting from Lower Cost of Capital. The Funds SBIC license has
allowed it to issue SBA-guaranteed debentures. SBA-guaranteed
debentures carry long-term fixed rates that are generally lower than
rates on comparable bank and other debt. Because lower cost SBA
leverage is, and will continue to be, a significant part of our
capital base through the Fund, our relative cost of debt capital should be lower than
many of our competitors. In addition, the SBIC leverage that we receive through the Fund represents a
stable, long-term component of our capital structure. |
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2
Investment Criteria
Our investment team has identified the following investment criteria that it
believes are important in evaluating prospective portfolio companies. Our
investment team uses these criteria in evaluating investment opportunities.
However, not all of these criteria have been, or will be, met in connection with
each of our investments.
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Proven Management Team with Meaningful Financial Commitment. We look
for operationally-oriented management with direct industry experience
and a successful track record. In addition, we expect the management
team of each portfolio company to have meaningful equity ownership in
the portfolio company to better align our respective economic
interests. We believe management teams with these attributes are more
likely to manage the companies in a manner that protects our debt
investment and enhances the value of our equity investment. |
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Established Companies with Positive Cash Flow. We seek to invest in
established companies in the lower middle-market with sound historical
financial performance. We typically focus on companies that have
historically generated EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) of $1.0 million to $10.0 million and
commensurate levels of free cash flow. We generally do not intend to
invest in start-up companies or companies with speculative business
plans. |
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Defensible Competitive Advantages/Favorable Industry Position. We
primarily focus on companies having competitive advantages in their
respective markets and/or operating in industries with barriers to
entry, which may help to protect their market position and
profitability. |
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Exit Alternatives. We expect that the primary means by which we exit
our debt investments will be through the repayment of our investment
from internally generated cash flow and/or refinancing. In addition,
we seek to invest in companies whose business models and expected
future cash flows may provide alternate methods of repaying our
investment, such as through a strategic acquisition by other industry
participants or a recapitalization. |
Formation Transactions
As part of the Formation Transactions, the Investment Manager,
which employs all of the executive officers and other employees
of MSCC, became a wholly owned subsidiary of MSCC. However, the
Investment Manager is accounted for as a portfolio investment of
Main Street, since the Investment Manager is not a registered
investment company and since it conducts a significant portion
of its investment management activities for MSC II, a separate
SBIC fund in which MSCC does not have an equity interest. The
Investment Manager receives recurring investment management fees
from MSC II pursuant to a separate investment advisory
agreement, paid quarterly, which currently total
$3.3 million per year. The portfolio investment in the
Investment Manager is accounted for using fair value accounting,
with the fair value determined by MSCC and approved, in good
faith, by MSCCs Board of Directors. MSCCs valuation
of the Investment Manager is based upon the discounted net cash flows
from third party recurring investment managers fees. The net
cash flows utilized in the valuation of the Investment Manager
exclude any revenues and expenses from all related parties
(including MSCC) but include the management fees from MSC II and
an estimated allocation of costs related to providing services
to MSC II. For more information on the Investment Manager, see
Note D Wholly Owned Investment
Manager to our consolidated financial statements.
3
In connection with the Formation Transactions, MSCC entered into
a support services agreement with the Investment Manager. The
agreement requires the Investment Manager to manage the
day-to-day operational and investment activities of Main Street.
The Investment Manager generally incurs all normal operating and
administrative expenses, except those specifically required to
be borne by MSCC, which principally include costs that are
specific to MSCCs 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 Main Streets day-to-day
operations.
The Investment Manager is reimbursed for its expenses associated
with providing operational and investment management services to
MSCC and its subsidiaries. Each quarter, as part of the support
services agreement, MSCC makes payments to cover all expenses
incurred by the Investment Manager, less amounts the Investment
Manager receives from MSC II pursuant to a separate investment
advisory services agreement. Based on this separate investment
advisory services agreement, MSC II paid the Investment Manager
approximately $3.3 million in 2008 for these services.
The IPO involved the public offering and sale of
4,300,000 shares of our common stock, including shares sold
upon the underwriters exercise of the over-allotment
option, at a price to the public of $15.00 per share of our
common stock, resulting in net proceeds to us of approximately
$60.2 million, after deducting underwriters
commissions totaling approximately $4.3 million. As a
result of the IPO and the Formation Transactions described
above, we are a closed-end, non-diversified management
investment company that has elected to be treated as a BDC under
the 1940 Act. 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 net operating costs associated
with employing investment and portfolio management professionals
through the Investment Manager.
Immediately following the completion of the Formation
Transactions, Main Street Equity Interests, Inc.
(MSEI) was created as a wholly-owned consolidated
subsidiary of MSCC to hold certain of our portfolio investments.
MSEI has elected for tax purposes to be treated as a taxable
entity and is taxed at normal corporate tax rates based on its
taxable income. The taxable income of MSEI may differ from its
book income due to deferred tax timing differences as well as
permanent differences.
We co-invested with MSC II in several existing portfolio
investments prior to the IPO, but did not
co-invest
with MSC II subsequent to the IPO and prior to June 2008. On
June 4, 2008, we received exemptive relief from the SEC to
allow us to resume co-investing with MSC II in accordance with
the terms of such exemptive relief.
4
The Offering
We may offer, from time to time, up to $300,000,000 of our common stock, on terms
to be determined at the time of the offering. Our common stock may be offered at
prices and on terms to be disclosed in one or more prospectus supplements. The
offering price per share of our common stock, less any underwriting commissions or
discounts, will not be less than the net asset value per share of our common stock at
the time of the offering, except (i) with the consent of the majority of our common
stockholders (which we received from our stockholders at our June 17, 2008 annual
stockholders meeting, for a period of one year ending on the earlier of June 16, 2009
or the date of our 2009 annual stockholders meeting) or (ii) under such other
circumstances as the SEC may permit. Our stockholders did not specify a maximum
discount below net asset value at which we are able to issue our common stock;
however, we cannot issue shares of our common stock below net asset value unless our
Board of Directors determines that it would be in our and our stockholders best
interests to do so.
Our common stock may be offered directly to one or more purchasers by us or
through agents designated from time to time by us, or to or through underwriters or
dealers. The prospectus supplement relating to the offering will disclose the terms of
the offering, including the name or names of any agents or underwriters involved in
the sale of our common stock by us, the purchase price, and any fee, commission or
discount arrangement between us and our agents or underwriters or among our
underwriters or the basis upon which such amount may be calculated. See Plan of
Distribution. We may not sell any of our common stock through agents, underwriters or
dealers without delivery of a prospectus supplement describing the method and terms of
the offering of our common stock.
Set forth below is additional information regarding the offering of our common
stock:
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Use of proceeds
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We intend to use all of the net proceeds from selling our
common stock to make investments in lower middle-market
companies in accordance with our investment objective and
strategies described in this prospectus or any prospectus
supplement, pay our operating expenses and dividends to
our stockholders and for general corporate purposes.
Pending such use, we will |
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invest the net proceeds
primarily in short-term securities consistent with our BDC
election and our election to be taxed as a regulated investment
company (RIC). See Use
of Proceeds. |
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Nasdaq Global Select
Market symbol
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MAIN |
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Dividends
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We have paid quarterly, but, beginning in the fourth quarter of
2008, will pay monthly, dividends to our stockholders out of
assets legally available for distribution. Our dividends, if
any, will be determined by our Board of Directors. |
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Taxation
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MSCC has elected to be treated for federal
income tax purposes as a RIC under Subchapter M
of the Code. Accordingly, we generally will not
pay corporate-level federal income taxes on any
net ordinary income or capital gains that we
distribute to our stockholders as dividends. To
maintain our RIC tax treatment, we must meet
specified source-of-income and asset
diversification requirements and distribute
annually at least 90.0% of our net ordinary
income and realized net short-term capital
gains in excess of realized net long-term
capital losses, if any. Depending on the level
of taxable income earned in a tax year, we 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. Any such carryover taxable income must
be distributed through a dividend declared
prior to filing the final tax return related to
the year which generated such taxable income.
See Material U.S. Federal Income Tax
Considerations. |
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Dividend reinvestment plan
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We have adopted a dividend reinvestment plan
for our stockholders. The dividend reinvestment
plan is an opt out reinvestment plan. As a
result, if we declare dividends, then
stockholders cash dividends will be
automatically reinvested in additional shares
of our common stock, unless they specifically
opt out of the dividend reinvestment plan so
as to receive cash dividends. Stockholders who
receive dividends in the form of stock will be
subject to the same federal, state and local
tax consequences as stockholders who elect to
receive their dividends in cash. See Dividend
Reinvestment Plan. |
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Trading at a discount
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Shares of closed-end investment companies
frequently trade at a discount to their net
asset value. This risk is separate and distinct
from the risk that our net asset value per
share may decline. We cannot predict whether
our shares will trade above, at or below net
asset value. |
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Risk factors |
Investing in our common stock involves a high degree of risk. You should consider carefully the
information found in Risk Factors, including the following risks: |
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The current state of the economy and financial markets increases the liklihood of
adverse effects on our financial position and results of operations. Continued economic
adversity could impair our portfolio companies financial positions and operating results
and affect the industries in which we invest, which could, in turn, harm our operating
results. |
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Our investment portfolio is and will continue to be recorded at fair value, with our Board
of Directors having final responsibility for overseeing, reviewing and approving, in good faith,
our estimate of fair value and, as a result, there is and will continue to be uncertainty as to
the value of our portfolio investments. |
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Our financial condition and results of operations
depends on our ability to effectively manage and deploy capital. |
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We may face increasing competition for investment opportunities. |
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We have a limited operating history as a BDC and as a RIC. |
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Regulations governing our operation as a BDC will affect
our ability to, and the way in which we raise additional capital. |
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Our wholly-owned subsidiary, the Fund,
is licensed by the SBA, and therefore subject to SBIC regulations. |
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Because we borrow money, the potential for gain or loss on amounts invested
in us is
magnified and may increase the risk of investing in us. |
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We, through the Fund, issue debt securities guaranteed by the SBA and sold in the
capital markets. As a result of its guarantee of the debt securities, the SBA has fixed
dollar claims on the assets of the Fund that are superior to the claims of our common
stockholders. |
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We will be subject to corporate-level income tax if we are unable to qualify as a RIC
under Subchapter M of the Code. |
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We may not be able to pay you dividends, our dividends may not grow over time, and a
portion of dividends paid to you may be a return of capital. |
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Because we intend to distribute substantially all of our income to our stockholders to
maintain our status as a RIC, we will continue to need additional capital to finance our
growth, and regulations governing our operation as a BDC will affect our ability to, and
the way in which we, raise additional capital. |
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Stockholders may incur dilution if we sell shares of our common stock in one or more
offerings at prices below the then current net asset value per share of our common stock
or issue securities to subscribe to, convert to or purchase shares of our common stock. |
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Our investments in portfolio companies involve higher levels of risk, and we could lose all or part of
our investment. Investing in lower middle-market companies involves a number of
significant risks. Among other things, these companies: |
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may have limited financial resources and may be unable to meet their
obligations under their debt instruments that we hold, which may be accompanied by
a deterioration in the value of any collateral and a reduction in the likelihood
of us realizing any guarantees from subsidiaries or affiliates of our portfolio
companies that we may have obtained in connection with our investment, as well as
a corresponding decrease in the value of the equity components of our investments; |
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may have shorter operating histories, narrower product lines, smaller
market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors actions and
market conditions, as well as general economic downturns; |
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are more likely to depend on the management talents and efforts of a
small group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a material adverse impact
on our portfolio company and, in turn, on us; |
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generally have less predictable operating results, may from time to
time be parties to litigation, may be engaged in rapidly changing businesses with
products subject to a substantial risk of obsolescence, and may require
substantial additional capital to support their operations, finance expansion or
maintain their competitive position; and |
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generally have less publicly available information about their
businesses, operations and financial condition. We are required to rely on the
ability of our management team and investment professionals to obtain adequate
information to evaluate the potential returns from investing in these companies.
If we are unable to uncover all material information about these companies, we may
not make a fully informed investment decision, and may lose all or part of our
investment. |
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Our portfolio companies may incur
debt that ranks equally with, or senior to, our investments in such companies. |
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We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to
the proportion of our assets that may be invested in securities of a single issuer. |
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Shares of closed-end investment companies, including BDCs, may trade at a discount to
their net asset value. |
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We may be unable to invest a significant portion of the net proceeds from an offering on acceptable
terms, which could harm our financial condition and operating results. |
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The market price of our common stock may be volatile and fluctuate significantly. |
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See Risk Factors beginning on page 8 for a more complete discussion of these and other risks you should carefully
consider before deciding to invest in shares of
our common stock. |
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Available Information
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We file annual, quarterly and current reports, proxy statements and other
information with the SEC under the Securities
Exchange Act of 1934, or the Exchange Act. You can inspect any materials we file with
the SEC, without charge, at the SECs Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. The information we file with the SEC is available free of charge by contacting
us at 1300 Post Oak Boulevard, Suite 800, Houston, TX 77056, by telephone at (713) 350-6000 or
on our website at http://www.mainstcapital.com. The SEC also maintains a website that contains
reports, proxy statements and other information regarding registrants, including us, that file
such information electronically with the SEC. The address of the SECs web site is
http://www.sec.gov. Information contained on our website or on the SECs web site about us is
not incorporated into this prospectus, and you should not consider information contained on
our website or on the SECs website to be part of this prospectus. |
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6
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses
that an investor in this offering will bear directly or indirectly. We caution you that
some of the percentages indicated in the table below are estimates and may vary. Except
where the context suggests otherwise, whenever this prospectus contains a reference to fees
or expenses paid by you, us or Main Street, or that we will pay fees or expenses,
stockholders will indirectly bear such fees or expenses as investors in us.
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Stockholder Transaction Expenses: |
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Sales load (as a percentage of offering price) |
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% (1) |
Offering expenses |
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% (2) |
Dividend reinvestment plan expenses |
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% (3) |
Total stockholder transaction expenses (as a percentage of offering price) |
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% (4) |
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Annual Expenses (as a percentage of net assets attributable to common stock): |
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Operating expenses |
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6.3 |
% (5) |
Interest payments on borrowed funds |
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2.8 |
% (6) |
Total annual expenses |
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9.1 |
% (7) |
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In the event that our common stock is sold to or through underwriters, a corresponding prospectus supplement will disclose
the applicable sales load. |
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In the event that we conduct on offering of our common stock, a corresponding prospectus supplement will disclose the
estimated offering expenses. |
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The expenses of administering our dividend reinvestment plan are included in operating expenses. |
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Total stockholder transaction expenses may include sales load and will be disclosed in a future prospectus supplement, if any. |
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Operating expenses include the expenses of the Investment
Manager as if it were
consolidated with MSCC for accounting purposes, including expenses incurred by the
Investment Manager in managing MSC II pursuant to an investment advisory services
agreement between the Investment Manager and MSC II and other third party consulting
arrangements. Based on this investment
advisory services agreement, MSC II paid the Investment Manager approximately $3.3
million in 2008 for these services. In accordance with the terms of the support services agreement between MSCC and the Investment Manager, MSCC is only required
to
reimburse the Investment Manager for expenses incurred by the Investment Manager in
providing investment management and other services to MSCC less amounts the
Investment Manager receives from MSC II and other third parties. Consequently, MSCC is only incurring the
expenses of the Investment Manager net of fees received for third party investment
advisory and consulting services. Our percentage of operating expenses to net assets attributable to
common stock only including the expenses incurred by MSCC net of the investment
advisory and consulting service fees received by the Investment
Manager from MSC II and other third parties would be 3.4%.
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(6) |
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Interest payments on borrowed funds principally consist of approximately $3.2 million of annual interest payments on funds
borrowed directly by the Fund. As of December 31, 2008, the Fund had $55.0 million of outstanding indebtedness guaranteed
by the SBA. This does not include MSCCs undrawn $30 million investment credit facility which
would bear interest, subject to MSCCs election, on a per annum basis equal to (i) the
applicable LIBOR rate plus 2.75% or (ii) the applicable base rate plus 0.75%.
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(7) |
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The total annual expenses are the sum of operating expenses and interest payments on borrowed funds. In the future we may
borrow money to leverage our net assets and increase our total assets. |
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Example
The following example demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a hypothetical
investment in our common stock. In calculating the following expense amounts, we have
assumed we would have no additional leverage and that our annual operating expenses would
remain at the levels set forth in the table above. In the event that shares to which this
prospectus relates are sold to or through underwriters, a corresponding prospectus
supplement will restate this example to reflect the applicable sales load.
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1 Year |
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3 Years |
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5 Years |
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10 Years |
You would pay the
following expenses
on a $1,000
investment,
assuming a 5.0%
annual return |
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94 |
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270 |
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430 |
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774 |
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The example and the expenses in the table above should not be considered a
representation of our future expenses, and actual expenses may be greater or less than
those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our
performance will vary and may result in a return greater or less than 5.0%. In addition,
while the example assumes reinvestment of all dividends at net asset value, participants in
our dividend reinvestment plan will receive a number of shares of our common stock,
determined by dividing the total dollar amount of the dividend payable to a participant by
(i) the market price per share of our common stock at the close of trading on the dividend
payment date in the event that we use newly issued shares to satisfy the share requirements
of the divided reinvestment plan or (ii) the average purchase price of all shares of common
stock purchased by the administrator of the dividend reinvestment plan in the event that
shares are purchased in the open market to satisfy the share requirements of the dividend
reinvestment plan, which may be at, above or below net asset value. See Dividend
Reinvestment Plan for additional information regarding our dividend reinvestment plan.
7
RISK FACTORS
Investing in our common stock involves a number of significant risks. In addition to the
other information contained in this prospectus and any accompanying prospectus supplement,
you should consider carefully the following information before making an investment in our
common stock. The risks set out below are not the only risks we face. Additional risks and
uncertainties not presently known to us or not presently deemed material by us might also
impair our operations and performance. If any of the following events occur, our business,
financial condition and results of operations could be materially and adversely affected. In
such case, our net asset value and the trading price of our common stock could decline, and
you may lose all or part of your investment.
Risks Relating to Economic Conditions
The
current state of the economy and financial markets increases the
likelihood of adverse effects on our financial position and
results of operations. Continued economic adversity could impair
our portfolio companies financial positions and operating
results and affect the industries in which we invest, which
could, in turn, harm our operating results.
Beginning in late 2007, the United States entered a recession.
Throughout 2008, the economy continued to deteriorate and many
believe that the current recession could continue for an
extended period. During 2008, banks and others in the financial
services industry reported significant write-downs in the fair
value of their assets, which has led to the failure of a number
of banks and investment companies, a number of distressed
mergers and acquisitions, the government take-over of the
nations two largest government-sponsored mortgage
companies, and the passage of the $700 billion Emergency
Economic Stabilization Act of 2008 in October 2008 and the
$787 billion American Recovery and Reinvestment Act of 2009
(the 2009 Stimulus Bill). In addition, the stock
market has declined significantly, with both the S&P 500
and the NASDAQ Global Select Market (on which our stock trades),
declining by nearly 40% between December 31, 2007 and
December 31, 2008. As the recession deepened during 2008,
unemployment rose and consumer confidence declined, which led to
significant reductions in spending by both consumers and
businesses.
Although we have been able to secure access to additional
liquidity, including the recently obtained $30 million
investment credit facility and the increase in available
leverage through the SBIC program as part of the 2009 Stimulus
Bill, the current turmoil in the debt markets and uncertainty in
the equity capital markets provides no assurance that debt or
equity capital will be available to us in the future on
favorable terms, or at all.
The deterioration in consumer confidence and a general reduction
in spending by both consumers and businesses has had an adverse
effect on a number of the industries in which some of our
portfolio companies operate. In the event that the United States
economy remains in a protracted period of weakness, the results
of some of the lower middle-market companies like those in which
we invest, will continue to experience deterioration, which
could ultimately lead to difficulty in meeting their debt
service requirements and an increase in their defaults. In
addition, the end markets for certain of our portfolio
companies products and services have experienced, and
continue to experience, negative economic trends. We can provide
no assurance that the performance of certain of our portfolio
companies will not be negatively impacted by economic or other
conditions which could have a negative impact on our future
results.
Risks Relating to Our Business and Structure
Our
investment portfolio is and will continue to be recorded at fair
value, with our Board of Directors having final responsibility
for overseeing, reviewing and approving, in good faith, our
estimate of fair value and, as a result, there is and will
continue to be uncertainty as to the value of our portfolio
investments.
Under the 1940 Act, we are required to carry our portfolio
investments at market value or, if there is no readily available
market value, at fair value as determined by us with our Board
of Directors having final responsibility for overseeing,
reviewing and approving, in good faith, our estimate of fair
value. Typically, there is not a public market for the
securities of the privately held companies in which we have
invested and will generally continue to invest. As a result, we
value these securities quarterly at fair value based on input
from management, a third party independent valuation firm and
our audit committee and with the oversight, review and approval
of our Board of Directors.
The determination of fair value and consequently, the amount of
unrealized gains and losses in our portfolio, are to a certain
degree, subjective and dependent on a valuation process approved
by our Board of Directors. Certain factors that may be
considered in determining the fair value of our investments
include external events, such as private mergers, sales and
acquisitions involving comparable companies. Because such
valuations, and particularly valuations of private securities
and private companies, are inherently uncertain, may fluctuate
over short periods of time and may be based on estimates, our
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. Due to this uncertainty, our fair value
determinations may cause our net asset value on a given date to
materially understate or overstate the value that we may
ultimately realize on one or more of our investments. As a
result, investors purchasing our common stock based on an
overstated net asset value would pay a higher price than the
value of our investments might warrant. Conversely, investors
selling shares during a period in which the net asset value
understates the value of our investments will receive a lower
price for their shares than the value of our investments might
warrant.
Our financial condition and results of operations depends on our ability to effectively
manage and deploy capital.
Our ability to achieve our investment objective of
maximizing our portfolios 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, depends on our ability to effectively manage
8
and deploy capital, which depends, in turn, on our investment teams ability to
identify, evaluate and monitor, and our ability to finance and invest in, companies that meet
our investment criteria.
Accomplishing our investment objective on a cost-effective basis is largely a function
of our investment teams handling of the investment process, its ability to provide
competent, attentive and efficient services and our access to investments offering acceptable
terms. In addition to monitoring the performance of our existing investments, members of our
investment team are also called upon, from time to time, to provide managerial assistance to
some of our portfolio companies. These demands on their time may distract them or slow the
rate of investment.
Even if we are able to grow and build upon our investment operations, any failure to
manage our growth effectively could have a material adverse effect on our business, financial
condition, results of operations and prospects. The results of our operations will depend on
many factors, including the availability of opportunities for investment, readily accessible
short and long-term funding alternatives in the financial markets and economic conditions.
Furthermore, if we cannot successfully operate our business or implement our investment
policies and strategies as described herein, it could negatively impact our ability to pay
dividends.
We may face increasing competition for investment opportunities.
We compete for investments with other BDCs and investment funds
(including private equity funds, mezzanine funds and other
SBICs), as well as traditional financial services
companies such as commercial banks and other sources of funding.
Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing
resources than we do. For example, some competitors may have a
lower cost of capital and access to funding sources that are not
available to us, including from federal government agencies
through federal rescue programs such as the U.S. Department
of Treasurys Financial Stability Plan (formerly known as
the Troubled Asset Relief Program). In addition, some of our
competitors may have higher risk tolerances or different risk
assessments than we have. These characteristics could allow our
competitors to consider a wider variety of investments,
establish more relationships and offer better pricing and more
flexible structuring than we are able to do. We may lose
investment opportunities if we do not match our
competitors pricing, terms and structure. If we are forced
to match our competitors pricing, terms and structure, we
may not be able to achieve acceptable returns on our investments
or may bear substantial risk of capital loss. A significant part
of our competitive advantage stems from the fact that the market
for investments in lower middle-market companies is underserved
by traditional commercial banks and other financing sources. A
significant increase in the number
and/or the
size of our competitors in this target market could force us to
accept less attractive investment terms. Furthermore, many of
our competitors have greater experience operating under, or are
not subject to, the regulatory restrictions that the 1940 Act
imposes on us as a BDC.
We are dependent upon our key investment personnel for our future success.
We depend on the members of our investment team, particularly Vincent D. Foster, Todd A.
Reppert, Rodger A. Stout, Curtis L. Hartman, Dwayne L. Hyzak and David L. Magdol, for the
identification, review, final selection, structuring, closing and monitoring of our
investments. These employees have significant investment expertise and relationships that we
rely on to implement our business plan. Although we have entered into employment agreements
with Messrs, Reppert, Stout, Hartman, Hyzak and Magdol and a non-compete agreement with
Mr. Foster, we have no guarantee that they will remain employed with us. If we lose the
services of these individuals, we may not be able to operate our business as we expect, and
our ability to compete could be harmed, which could cause our operating results to suffer.
Our success depends on attracting and retaining qualified personnel in a competitive
environment.
Our growth will require that we retain new investment and administrative personnel in a
competitive market. Our ability to attract and retain personnel with the requisite
credentials, experience and skills depends on several factors including, but not limited to,
our ability to offer competitive wages, benefits and professional growth opportunities. Many
of the entities, including investment funds (such as private equity funds and mezzanine
funds) and traditional financial services companies, with which we compete for experienced
personnel have greater resources than we have.
The competitive environment for qualified personnel may require us to take certain
measures to ensure that we are able to attract and retain experienced personnel. Such
measures may include increasing the attractiveness of our overall compensation packages,
altering the structure of our compensation packages through the use of additional forms of
compensation, or other steps. The inability to attract and retain
experienced personnel would
have a material adverse effect on our business.
Our business model depends to a significant extent upon strong referral relationships, and
our inability to maintain or develop these relationships, as well as the failure of these
relationships to generate investment opportunities, could adversely affect our business.
We expect that members of our management team will maintain their relationships with
intermediaries, financial institutions, investment bankers, commercial bankers, attorneys,
accountants, consultants and other individuals within our network, and we
9
will rely to a significant extent upon these relationships to provide us with potential
investment opportunities. If our management team fails to maintain its existing relationships
or develop new relationships with sources of investment opportunities, we will not be able to
grow our investment portfolio. In addition, individuals with whom members of our management
team have relationships are not obligated to provide us with investment opportunities, and,
therefore, there is no assurance that such relationships will generate investment
opportunities for us.
We
have a limited operating history as a BDC and as a RIC.
The 1940 Act imposes numerous constraints on the operations of BDCs. Prior to the
completion of the IPO, we did not operate, and our management team had no experience
operating, as a BDC under the 1940 Act or as a RIC under Subchapter M of the Code. As a
result, we have limited operating results under these regulatory frameworks that can
demonstrate either their effect on our business or our ability to manage our business under
these frameworks. Our management teams limited experience in managing a portfolio of assets
under such constraints may hinder our ability to take advantage of attractive investment
opportunities and, as a result, achieve our investment objective. Furthermore, any failure to
comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an
enforcement action against us. If we do not remain a BDC, we might be regulated as a
registered closed-end investment company under the 1940 Act, which would further decrease our
operating flexibility.
Regulations governing our operation as a BDC will affect our ability to, and the way in
which we raise additional capital.
Our business will require capital to operate and grow. We may acquire such additional
capital from the following sources:
Senior Securities. We may issue debt securities or preferred stock and/or borrow money
from banks or other financial institutions, which we refer to collectively as senior
securities. As a result of issuing senior securities, we will be exposed to additional risks,
including the following:
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Under the provisions of the 1940 Act, we are permitted, as a
BDC, to issue senior securities only in amounts such that our
asset coverage, as defined in the 1940 Act, equals at least 200%
immediately after each issuance of senior securities. If the
value of our assets declines, we may be unable to satisfy this
test. If that happens, we will be prohibited from issuing debt
securities or preferred stock
and/or
borrowing money from banks or other financial institutions until
such time as we satisfy this test. |
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Any amounts that we use to service our debt or make payments on
preferred stock will not be available for dividends to our common
stockholders. |
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It is likely that any senior securities or other indebtedness we issue
will be governed by an indenture or other instrument containing
covenants restricting our operating flexibility. Additionally, some of
these securities or other indebtedness may be rated by rating
agencies, and in obtaining a rating for such securities and other
indebtedness, we may be required to abide by operating and investment
guidelines that further restrict operating and financial flexibility. |
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We and, indirectly, our stockholders will bear the cost of issuing and
servicing such securities and other indebtedness. |
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Preferred stock or any convertible or exchangeable securities that we
issue in the future may have rights, preferences and privileges more
favorable than those of our common stock, including separate voting
rights and could delay or prevent a transaction or a change in control
to the detriment of the holders of our common stock. |
Additional Common Stock. We are not generally able to issue and sell our common stock
at a price below net asset value per share. We may, however, sell our common stock, warrants,
options or rights to acquire our common stock, at a price below the current net asset value
of the common stock if our Board of Directors determines that such sale is in the best
interests of our stockholders, and our stockholders approve such sale. See
Stockholders may incur dilution if we sell shares of our common stock in one or more
offerings at prices below the then current net asset value per share of our common stock or
issue securities to subscribe to, convert to or purchase shares of our common stock for a
discussion of proposals approved by our stockholders that permit us to issue shares of our
common stock below net asset value. We may also make rights offerings to our stockholders
at prices per share less than the net asset
value per share, subject to applicable requirements of the 1940 Act. If we raise additional
funds by issuing more common stock or senior securities convertible into, or exchangeable
for, our common stock, the percentage ownership of our stockholders at that time would
decrease, and they may experience dilution. Moreover, we can offer no assurance that we will
be able to issue and sell additional equity securities in the future, on favorable terms or
at all.
10
Our
wholly-owned subsidiary, the Fund, is licensed by the SBA, and
therefore subject to SBIC regulations.
The Fund, our wholly-owned subsidiary, is licensed to act as a
small business investment company and is regulated by the SBA.
The SBA also places certain limitations on the financing terms
of investments by SBICs in portfolio companies and prohibits
SBICs from providing funds for certain purposes or to businesses
in a few prohibited industries. Compliance with SBIC
requirements may cause the Fund to forego attractive investment
opportunities that are not permitted under SBIC regulations.
Further, the SBIC regulations require that a licensed SBIC be
periodically examined and audited by the SBA to determine its
compliance with the relevant SBIC regulations. The SBA
prohibits, without prior SBA approval, a change of
control of an SBIC or transfers that would result in any
person (or a group of persons acting in concert) owning 10% or
more of a class of capital stock of a licensed SBIC. If the Fund
fails to comply with applicable SBIC regulations, the SBA could,
depending on the severity of the violation, limit or prohibit
its use of debentures, declare outstanding debentures
immediately due and payable,
and/or limit
it from making new investments. In addition, the SBA can revoke
or suspend a license for willful or repeated violation of, or
willful or repeated failure to observe, any provision of the
Small Business Investment Act of 1958 or any rule or regulation
promulgated thereunder. Such actions by the SBA would, in turn,
negatively affect us because the Fund is our wholly owned
subsidiary.
Because we borrow money, the potential for gain or loss on amounts invested in us is
magnified and may increase the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for
gain or loss on invested equity capital. As we use leverage to
partially finance our investments, you will experience increased
risks of investing in our common stock. We, through the Fund,
issue debt securities guaranteed by the SBA and sold in the
capital markets. As a result of its guarantee of the debt
securities, the SBA has fixed dollar claims on the assets of the
Fund that are superior to the claims of our common stockholders.
We may also borrow from banks and other lenders, including under
the $30 million, three-year investment credit facility we
entered into in October 2008. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources for a discussion
regarding the two credit facilities into which we have entered.
If the value of our assets increases, then leveraging would
cause the net asset value attributable to our common stock to
increase more sharply than it would have had we not leveraged.
Conversely, if the value of our assets decreases, leveraging
would cause net asset value to decline more sharply than it
otherwise would have had we not leveraged our business.
Similarly, any increase in our income in excess of interest
payable on the borrowed funds would cause our net investment
income to increase more than it would without the leverage,
while any decrease in our income would cause net investment
income to decline more sharply than it would have had we not
borrowed. Such a decline could negatively affect our ability to
pay common stock dividends. Leverage is generally considered a
speculative investment technique.
As of December 31, 2008, we, through the Fund, had
$55 million of outstanding indebtedness guaranteed by the
SBA, which had a weighted average annualized interest cost of
approximately 5.8% (exclusive of deferred financing costs). The
debentures guaranteed by the SBA have a maturity of ten years
and require semi-annual payments of interest. We will need to
generate sufficient cash flow to make required interest payments
on the debentures. If we are unable to meet the financial
obligations under the debentures, the SBA,
as a creditor, will have a superior claim to the assets of the
Fund over our stockholders in the event we liquidate or the SBA
exercises its remedies under such debentures as the result of a
default by us.
Illustration. The following table illustrates
the effect of leverage on returns from an investment in our
common stock assuming various annual returns, net of expenses.
The calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing below.
Assumed
Return on Our Portfolio(1)
(net of expenses)
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(10.0)%
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(5.0)%
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0.0%
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5.0%
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|
10.0%
|
|
Corresponding net return to common stockholder
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(18.0
|
)%
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(10.4
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)%
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(2.8
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)%
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4.8
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%
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12.3
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%
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(1) |
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Assumes $170.6 million in total assets, $55 million in
debt outstanding, $112.4 million in net assets, and an
average cost of funds of 5.8%. Actual interest payments may be
different. |
11
Our ability to achieve our investment objective may depend in part on our ability to
achieve additional leverage on favorable terms by issuing debentures guaranteed by the SBA, through the Fund, or by borrowing from banks or insurance companies, and there can be no assurance that such
additional leverage can in fact be achieved.
SBIC
regulations limit the outstanding dollar amount of
SBA-guaranteed debentures that may be issued by an SBIC or group
of SBICs under common control.
The SBIC regulations currently limit the dollar amount of
SBA-guaranteed debentures that can be issued by any one SBIC or
group of SBICs under common control to $225 million.
Moreover, an SBIC may not generally borrow an amount in excess
of two times its regulatory capital. Because of our investment
teams affiliations with MSC II, a privately owned SBIC
which commenced investment operations in January 2006, the Fund
and MSC II may be deemed to be a group of affiliated SBICs under
common control. Thus, the dollar amount of SBA-guaranteed
debentures that can be issued collectively by the Fund and MSC
II may be limited to $225 million, absent relief from the
SBA. While we cannot presently predict whether or not we,
through the Fund, will borrow the maximum permitted amount, if
we reach the maximum dollar amount of SBA guaranteed debentures
permitted, and thereafter require additional capital, our cost
of capital may increase, and there is no assurance that we will
be able to obtain additional financing on acceptable terms.
The Funds current status as an SBIC does not automatically
assure that it will continue to receive SBA-guaranteed debenture
funding. Receipt of SBA leverage funding is dependent upon the
Fund continuing to be in compliance with SBIC regulations and
policies. Moreover, the amount of SBA leverage funding available
to SBICs is dependent upon annual Congressional authorizations
and in the future may be subject to annual Congressional
appropriations. There can be no assurance that there will be
sufficient debenture funding available at the times desired by
the Fund.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of
factors, including our ability or inability to make investments in companies that meet our
investment criteria, the interest rate payable on the debt securities we acquire, the level
of portfolio dividend and fee income, the level of our expenses, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to which we
encounter competition in our markets and general economic conditions. As a result of these
factors, results for any period should not be relied upon as being indicative of performance
in future periods.
Our Board of Directors may change our operating policies and strategies without prior
notice or stockholder approval, the effects of which may be adverse.
Our Board of Directors has the authority to modify or waive our current operating
policies, investment criteria and strategies without prior notice and without stockholder
approval. We cannot predict the effect any changes to our current operating policies,
investment criteria and strategies would have on our business, net asset value, operating
results and value of our stock. However, the effects might be adverse, which could negatively
impact our ability to pay you dividends and cause you to lose all or part of your investment.
We will be subject to corporate-level income tax if we are unable to qualify as a RIC under
Subchapter M of the Code.
To maintain RIC tax treatment under the Code, we must meet the
following annual distribution, source income and asset
diversification requirements:
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The annual distribution requirement for a RIC will be satisfied
if we distribute to our stockholders on an annual basis at least
90% of our net ordinary income and realized net short-term
capital gains in excess of realized net long-term capital
losses, if any. Depending on the level of taxable income earned
in a tax year, we 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. Any such carryover taxable
income must be distributed through a dividend declared prior to
filing the final tax return related to the year which generated
such taxable income. For more information regarding tax
treatment, see Material U.S. Federal Income Tax Considerations
Taxation as a Regulated Investment Company. Because we use
debt financing, we are subject to certain asset coverage ratio
requirements under the 1940 Act and are (and may in the future
become) subject to certain financial covenants under loan and
credit agreements that could, under certain circumstances,
restrict us from making distributions necessary to satisfy the
distribution requirement. If we are unable to obtain cash from
other sources, we could fail to qualify for RIC tax treatment
and thus become subject to corporate-level income tax.
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The source income requirement will be satisfied if we obtain at
least 90% of our income for each year from distributions,
interest, gains from the sale of stock or securities or similar
sources.
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12
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The asset diversification requirement will be satisfied if we
meet certain asset diversification requirements at the end of
each quarter of our taxable year. To satisfy this requirement,
at least 50% of the value of our assets must consist of cash,
cash equivalents, U.S. Government securities, securities of
other RICs, and other acceptable securities; and no more than
25% of the value of our assets can be invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer, of two or more issuers
that are controlled, as determined under applicable Code rules,
by us and that are engaged in the same or similar or related
trades or businesses or of certain qualified publicly
traded partnerships. Failure to meet these requirements
may result in our having to dispose of certain investments
quickly in order to prevent the loss of RIC status. Because most
of our investments will be in private companies, and therefore
will be relatively illiquid, any such dispositions could be made
at disadvantageous prices and could result in substantial losses.
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If we fail to maintain RIC tax treatment for any reason and are
subject to corporate income tax, the resulting corporate taxes
could substantially reduce our net assets, the amount of income
available for distribution and the amount of our distributions.
We may not be able to pay you dividends, our dividends may not grow over time, and a
portion of dividends paid to you may be a return of capital.
We intend to pay monthly dividends to our stockholders out of assets legally available
for distribution. We cannot assure you that we will achieve investment results that will
allow us to pay a specified level of cash dividends, previously projected dividends for
future periods, or year-to-year increases in cash dividends. Our ability to pay dividends
might be adversely affected by, among other things, the impact of one or more of the risk
factors described herein. In addition, the inability
to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay
dividends. All dividends will be paid at the discretion of our Board of Directors and will
depend on our earnings, our financial condition, maintenance of our RIC status, compliance
with applicable BDC regulations, the Funds compliance with applicable SBIC regulations and
such other factors as our Board of Directors may deem relevant from time to time. We cannot
assure you that we will pay dividends to our stockholders in the future.
When we make monthly distributions, we will be required to determine the extent to which
such distributions are paid out of current or accumulated earnings, recognized capital gains
or capital. To the extent there is a return of capital, investors will be required to reduce
their basis in our stock for federal tax purposes. In the future, our distributions may
include a return of capital.
We may have difficulty paying our required distributions if we recognize income before or
without receiving cash representing such income.
For federal income tax purposes, we will include in income certain amounts that we have
not yet received in cash, such as original issue discount, which may arise if we receive
warrants in connection with the origination of a loan or possibly in other circumstances, or
contractual payment-in-kind, or PIK, interest, which represents contractual interest added to
the loan balance and due at the end of the loan term. Such original issue discounts or
increases in loan balances as a result of contractual PIK arrangements will be included in
income before we receive any corresponding cash payments. We also may be required to include
in income certain other amounts that we will not receive in cash.
Approximately 2.7% of our
total investment income for the year ended December 31,
2008 was attributable to paid in kind interest.
Since, in certain cases, we may recognize income before or without receiving cash
representing such income, we may have difficulty meeting the annual distribution requirement
necessary to maintain RIC tax treatment under the Code. Accordingly, we may have to sell some
of our investments at times and/or at prices we would not consider advantageous, raise
additional debt or equity capital or forgo new investment opportunities for this purpose. If
we are not able to obtain cash from other sources, we may fail to qualify for RIC tax
treatment and thus become subject to corporate-level income tax. For additional discussion
regarding the tax implications of a RIC, please see Material U.S. Federal Income Tax
Considerations Taxation as a Regulated Investment Company.
We may
in the future choose to pay dividends in our own stock, in which
case you may be required to pay tax in excess of the cash you
receive.
We may distribute taxable dividends that are payable in part in
our stock. Under a recently issued IRS revenue procedure, up to
90% of any such taxable dividend for 2009 could be payable in
our stock. Taxable stockholders receiving such dividends will be
required to include the full amount of the dividend as ordinary
income (or as long-term capital gain to the extent such
distribution is properly designated as a capital gain dividend)
to the extent of our current and accumulated earnings and
profits for United States federal income tax purposes. As a
result, a U.S. stockholder may be required to pay tax with
respect to such dividends in excess of any cash received. If a
U.S. stockholder sells the stock it receives as a dividend
in order to pay this tax, the sales proceeds may be less than
the amount included in income with respect to the dividend,
depending on the market price of our stock at the time of the
sale. Furthermore, with respect to
non-U.S. stockholders,
we may be required to withhold U.S. tax with respect to
such dividends, including in respect of all or a portion of such
dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our stock
in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our stock.
The Fund, as an SBIC, may be unable to make distributions to us that will enable us to meet
or maintain RIC status, which could result in the imposition of an entity-level tax.
In order for us to continue to qualify for RIC tax treatment and to minimize
corporate-level taxes, we will be required to distribute substantially all of our net
ordinary income and net capital gain income, including income from certain of our
subsidiaries, which includes the income from the Fund. We will be partially dependent on the
Fund for cash distributions to enable us to meet the RIC distribution requirements. The Fund
may be limited by the Small Business Investment Act of 1958, and SBIC regulations governing
SBICs, from making certain distributions to us that may be necessary to enable us to maintain
our status as a RIC. We may have to request a waiver of the SBAs restrictions for the Fund
to make certain distributions to maintain
13
our eligibility for RIC status. We cannot assure you that the SBA will grant such waiver
and if the Fund is unable to obtain a waiver, compliance with the
SBIC regulations may result
in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us.
Because we intend to distribute substantially all of our income to our stockholders to
maintain our status as a RIC, we will continue to need additional capital to finance our
growth, and regulations governing our operation as a BDC will affect our ability to, and
the way in which we, raise additional capital.
In
order to satisfy the requirements applicable to a RIC and to
minimize corporate-level taxes, we intend to distribute to our
stockholders substantially all of our net ordinary income and
net capital gain income. We may carry forward excess
undistributed taxable income into the next year, net of the 4%
excise tax. Any such carryover taxable income must be
distributed through a dividend declared prior to filing the
final tax return related to the year which generated such
taxable income. As a BDC, we generally are required to meet an
asset coverage ratio, as defined in the 1940 Act
, of at least
200% immediately after each issuance of senior securities. This
requirement limits the amount that we may borrow. Because we
will continue to need capital to grow our
investment portfolio,
this limitation may prevent us from incurring debt and require
us to raise additional equity at a time when it may be
disadvantageous to do so.
While we expect to be able to borrow and to issue additional debt and equity securities,
we cannot assure you that debt and equity financing will be available to us on favorable
terms, or at all. In addition, as a
BDC, we generally are not permitted to issue equity securities priced below net asset value
without stockholder approval. If additional funds are not available to us, we could be forced
to curtail or cease new investment activities, and our net asset value could decline.
Stockholders may incur dilution if we sell shares of our common stock in one or more
offerings at prices below the then current net asset value per share of our common stock or
issue securities to subscribe to, convert to or purchase shares of our common stock.
At
our 2008 annual meeting of stockholders, our stockholders
approved two proposals designed to allow us to access the
capital markets in ways that we were previously unable to as a
result of restrictions that, absent stockholder approval, apply
to BDCs under the 1940 Act. Specifically, our stockholders
approved proposals that (1) authorize us to sell shares of
our common stock below the then current net asset value per
share of our common stock in one or more offerings for a period
of one year ending on the earlier of June 16, 2009 or the
date of our 2009 annual meeting of stockholders and
(2) authorize us to issue securities to subscribe to,
convert to, or purchase shares of our common stock in one or
more offerings. Any decision to sell shares of our common stock
below the then current net asset value per share of our common
stock or securities to subscribe to, convert to, or purchase
shares of our common stock would be subject to the determination
by our Board of Directors that such issuance is in our and our
stockholders best interests.
If
we were to sell shares of our common stock below net asset value per share, such
sales would result in an immediate dilution to the net asset value per share. This dilution
would occur as a result of the sale of shares at a price below the then current net asset
value per share of our common stock and a proportionately greater decrease in a stockholders
interest in our earnings and assets and voting interest in us than the increase in our assets
resulting from such issuance. In addition, if we issue securities to subscribe to, convert to
or purchase shares of common stock, the exercise or conversion of such securities would
increase the number of outstanding shares of our common stock. Any such exercise would be
dilutive on the voting power of existing stockholders, and could be dilutive with regard to
dividends and our net asset value, and other economic aspects of the common stock.
Because the number of shares of common stock that could be so issued and the timing
of any issuance is not currently known, the actual dilutive effect cannot be predicted;
however, the example below illustrates the effect of dilution to existing stockholders
resulting from the sale of common stock at prices below the net asset value of such shares.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below Net Asset
Value. Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total
assets and $5,000,000 in total liabilities. The net asset value per share of the common stock
of Company XYZ is $10.00. The following table illustrates the reduction to net asset value,
or NAV, and the dilution experienced by Stockholder A following the sale of 40,000 shares of
the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.
14
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Prior to Sale |
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Following Sale |
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Percentage |
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Below NAV |
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Below NAV |
|
Change |
Reduction to NAV |
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Total Shares Outstanding |
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1,000,000 |
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1,040,000 |
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4.0 |
% |
NAV per share |
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$ |
10.00 |
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$ |
9.98 |
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(0.2 |
)% |
Dilution to Existing Stockholder |
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Shares Held by Stockholder A |
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10,000 |
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10,000 |
(1) |
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0.0 |
% |
Percentage Held by Stockholder A |
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1.00 |
% |
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0.96 |
% |
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(3.8 |
)% |
Total Interest of Stockholder A in NAV |
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$ |
100,000 |
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$ |
99,808 |
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(0.2 |
)% |
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(1) |
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Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV. |
Changes in laws or regulations governing our operations may adversely affect our business
or cause us to alter our business strategy.
We, the Fund, and our portfolio companies are subject to applicable local, state and
federal laws and regulations, including, without limitation, federal immigration laws and
regulations. New legislation may be enacted or new interpretations, rulings or regulations
could be adopted, including those governing the types of investments we are permitted to
make, any of which could harm us and our stockholders, potentially with retroactive effect.
In addition, any change to the SBAs current debenture SBIC program could have a significant
impact on our ability to obtain lower-cost leverage, through the Fund, and, therefore, our ability to compete
with other finance companies.
Additionally, any changes to the laws and regulations governing our operations relating
to permitted investments may cause us to alter our investment strategy in order to avail
ourselves of new or different opportunities. Such changes could result in material
differences to the strategies and plans set forth herein and may result in our investment
focus shifting from the areas of expertise of our investment team to other types of
investments in which our investment team may have less expertise or little or no experience.
Thus, any such changes, if they occur, could have a material adverse effect on our results of
operations and the value of your investment.
Terrorist attacks, acts of war or natural disasters may affect any market for our common
stock, impact the businesses in which we invest and harm our business, operating results
and financial condition.
Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as
the operations of the businesses in which we invest. Such acts have created, and continue to
create, economic and political uncertainties and have contributed to global economic
instability. Future terrorist activities, military or security operations, or natural
disasters could further weaken the domestic/global economies and create additional
uncertainties, which may negatively impact the businesses in which we invest directly or
indirectly and, in turn, could have a material adverse impact on our business, operating
results and financial condition. Losses from terrorist attacks and natural disasters are
generally uninsurable.
15
Risks Related to Our Investments
Our investments in portfolio companies involve higher levels of
risk, and we could lose all or part of our
investment.
Investing in lower middle-market companies involves a number of significant risks. Among
other things, these companies:
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may have limited financial resources and may be unable to meet their
obligations under their debt instruments that we hold, which may be
accompanied by a deterioration in the value of any collateral and a
reduction in the likelihood of us realizing any guarantees from
subsidiaries or affiliates of our portfolio companies that we may have
obtained in connection with our investment, as well as a corresponding
decrease in the value of the equity components of our investments; |
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may have shorter operating histories, narrower product lines, smaller
market shares and/or significant customer concentrations than larger
businesses, which tend to render them more vulnerable to competitors
actions and market conditions, as well as general economic downturns; |
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are more likely to depend on the management talents and efforts of a
small group of persons; therefore, the death, disability, resignation
or termination of one or more of these persons could have a material
adverse impact on our portfolio company and, in turn, on us; |
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generally have less predictable operating results, may from time to
time be parties to litigation, may be engaged in rapidly changing
businesses with products subject to a substantial risk of
obsolescence, and may require substantial additional capital to
support their operations, finance expansion or maintain their
competitive position; and |
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|
generally have less publicly available information about their
businesses, operations and financial condition. We are required to
rely on the ability of our management team and investment
professionals to obtain adequate information to evaluate the potential
returns from investing in these companies. If we are unable to uncover
all material information about these companies, we may not make a
fully informed investment decision, and may lose all or part of our
investment. |
In addition, in the course of providing significant managerial assistance to certain of
our portfolio companies, certain of our officers and directors may serve as directors on the
boards of such companies. To the extent that litigation arises out of our investments in
these companies, our officers and directors may be named as defendants in such litigation,
which could result in an expenditure of funds (through our indemnification of such officers
and directors) and the diversion of management time and resources.
The lack of liquidity in our investments may adversely affect our business.
We invest, and will continue to invest in companies whose securities are not publicly
traded, and whose securities will be subject to legal and other restrictions on resale or
will otherwise be less liquid than publicly traded securities. The illiquidity of these
investments may make it difficult for us to sell these investments when desired. In addition,
if we are required to liquidate all or a portion of our portfolio quickly, we may realize
significantly less than the value at which we had previously recorded these investments. As a
result, we do not expect to achieve liquidity in our investments in the near-term. Our
investments are usually subject to contractual or legal restrictions on resale or are
otherwise illiquid because there is usually no established trading market for such
investments. The illiquidity of most of our investments may make it difficult for us to
dispose of them at a favorable price, and, as a result, we may suffer losses.
We may not have the funds or ability to make additional investments in our portfolio
companies.
We may not have the funds or ability to make additional investments in our portfolio
companies. After our initial investment in a portfolio company, we may be called upon from
time to time to provide additional funds to such company or have the opportunity to increase
our investment through the exercise of a warrant to purchase common stock. There is no
assurance that we will make, or will have sufficient funds to make, follow-on investments.
Any decisions not to make a follow-on investment or any inability on our part to make such an
investment may have a negative impact on a portfolio company in need of such an investment,
may result in a missed opportunity for us to increase our participation in a successful
operation or may reduce the expected yield on the investment.
Our portfolio companies may incur debt that ranks equally with, or senior to, our
investments in such companies.
16
We invest primarily in secured term debt as well as equity issued by lower middle-market
companies. Our portfolio companies may have, or may be permitted to incur, other debt that
ranks equally with, or senior to, the debt in which we invest. By their terms, such debt
instruments may entitle the holders to receive payment of interest or principal on or before
the dates on which we are entitled to receive payments with respect to the debt instruments
in which we invest. Also, in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking
senior to our investment in that portfolio company would typically be entitled to receive
payment in full before we receive any distribution. After repaying such senior creditors,
such portfolio company may not have any remaining assets to use for repaying its obligation
to us. In the case of debt ranking equally with debt instruments in which we invest, we would
have to share on an equal basis any distributions with other creditors holding such debt in
the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
There may be circumstances where our debt investments could be subordinated to claims of
other creditors or we could be subject to lender liability claims.
Even though we may have structured certain of our investments as secured loans, if one
of our portfolio companies were to go bankrupt, depending on the facts and circumstances, and
based upon principles of equitable subordination as defined by existing case law, a
bankruptcy court could subordinate all or a portion of our claim to that of other creditors
and transfer any lien securing such subordinated claim to the bankruptcy estate. The
principles of equitable subordination defined by case law have generally indicated that a
claim may be subordinated only if its holder is guilty of misconduct or where the senior loan
is re-characterized as an equity investment and the senior lender has actually provided
significant managerial assistance to the bankrupt debtor. We may also be subject to lender
liability claims for actions taken by us with respect to a borrowers business or instances
where we exercise control over the borrower. It is possible that we could become subject to a
lenders liability claim, including as a result of actions taken in rendering significant
managerial assistance or actions to compel and collect payments from the borrower outside the
ordinary course of business.
Second priority liens on collateral securing loans that we make to our portfolio companies
may be subject to control by senior creditors with first priority liens. If there is a
default, the value of the collateral may not be sufficient to repay in full both the first
priority creditors and us.
Certain loans that we make are secured by a second priority security interest in the
same collateral pledged by a portfolio company to secure senior debt owed by the portfolio
company to commercial banks or other traditional lenders. Often the senior lender has
procured covenants from the portfolio company prohibiting the incurrence of additional
secured debt without the senior lenders consent. Prior to and as a condition of permitting
the portfolio company to borrow money from us secured by the same collateral pledged to the
senior lender, the senior lender will require assurances that it will control the disposition
of any collateral in the event of bankruptcy or other default. In many such cases, the senior
lender will require us to enter into an intercreditor agreement prior to permitting the
portfolio company to borrow from us. Typically the intercreditor agreements we are requested
to execute expressly subordinate our debt instruments to those held by the senior lender and
further provide that the senior lender shall control: (1) the commencement of foreclosure or
other proceedings to liquidate and collect on the collateral; (2) the nature, timing and
conduct of foreclosure or other collection proceedings; (3) the amendment of any collateral
document; (4) the release of the security interests in respect of any collateral; and (5) the
waiver of defaults under any security agreement. Because of the control we may cede to senior
lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds
of any collateral securing some of our loans.
Finally, the value of the collateral securing our debt investment will ultimately depend
on market and economic conditions, the availability of buyers and other factors. Therefore,
there can be no assurance that the proceeds, if any, from the sale or sales of all of the
collateral would be sufficient to satisfy the loan obligations secured by our first or second
priority liens. There is also a risk that such collateral securing
our investments will
decrease in value over time, will be difficult to sell in a timely
manner, will be difficult to
appraise and will fluctuate in value based upon the success of the portfolio company and
market conditions. If such proceeds are not sufficient to repay amounts outstanding under the
loan obligations secured by our second priority liens, then we, to the extent not repaid from
the proceeds of the sale of the collateral, will only have an unsecured claim against the
companys remaining assets, if any.
17
We are a non-diversified investment company within the meaning of the 1940 Act, and
therefore we are not limited with respect to the proportion of our assets that may be
invested in securities of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940
Act, which means that we are not limited by the 1940 Act with respect to the proportion of
our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume
large positions in the securities of a small number of issuers, our net asset value may
fluctuate to a greater extent than that of a diversified investment company as a result of
changes in the financial condition or the markets assessment of the issuer. We may also be
more susceptible to any single economic or regulatory occurrence than a diversified
investment company. Beyond our RIC asset diversification requirements, we do not have fixed
guidelines for diversification, and our investments could be concentrated in relatively few
portfolio companies.
We generally will not control our portfolio companies.
We do not, and do not expect to, control the decision making in many of our portfolio
companies, even though we may have board representation or board observation rights, and our
debt agreements may contain certain restrictive covenants. As a result, we are subject to the
risk that a portfolio company in which we invest will make business decisions with which we
disagree and the management of such company, as representatives of the holders of their
common equity, will take risks or otherwise act in ways that do not serve our interests as
debt investors. Due to the lack of liquidity for our investments in non-traded companies, we
may not be able to dispose of our interests in our portfolio companies as readily as we would
like or at an appropriate valuation. As a result, a portfolio company may make decisions that
would decrease the value of our portfolio holdings.
Defaults by our portfolio companies will harm our operating results.
A portfolio companys failure to satisfy financial or operating covenants imposed by us
or other lenders could lead to defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger cross-defaults under other agreements
and jeopardize a portfolio companys ability to meet its obligations under the debt or equity
securities that we hold. We may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.
Any unrealized losses we experience on our loan portfolio may be an indication of future
realized losses, which could reduce our income available for distribution.
As a BDC, we are required to carry our investments at market value or, if no market
value is ascertainable, at the fair value as determined in good faith by our Board of
Directors. Decreases in the market values or fair values of our investments will be recorded
as unrealized depreciation. Any unrealized losses in our loan portfolio could be an
indication of a portfolio companys inability to meet its repayment obligations to us with
respect to the affected loans. This could result in realized losses in the future and
ultimately in reductions of our income available for distribution in future periods.
Prepayments of our debt investments by our portfolio companies could adversely impact our
results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may
be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in
temporary investments, pending their future investment in new portfolio companies. These
temporary investments will typically have substantially lower yields than the debt being
prepaid and we could experience significant delays in reinvesting these amounts. Any future
investment in a new portfolio company may also be at lower yields than the debt that was
repaid. As a result, our results of operations could be materially adversely affected if one
or
18
more of our portfolio companies elect to prepay amounts owed to us. Additionally,
prepayments could negatively impact our return on equity, which could result in a decline in
the market price of our common stock.
Changes in interest rates may affect our cost of capital and net investment income.
Some of our debt investments will bear interest at variable rates and the interest
income from these investments could be negatively affected by decreases in market interest
rates. In addition, an increase in interest rates would make it more expensive to use debt to
finance our investments. As a result, a significant increase in market interest rates could
increase our cost of capital, which
would reduce our net investment income. Also, an increase in interest rates available to
investors could make an investment in our common stock less attractive if we are not able to
increase our dividend rate, a situation which could reduce the value of our common stock.
Conversely, a decrease in interest rates may have an adverse impact on our returns by
requiring us to seek lower yields on our debt investments and by increasing the risk that our
portfolio companies will prepay our debt investments, resulting in the need to redeploy
capital at potentially lower rates. A decrease in market interest rates may also adversely
impact our returns on idle funds, which would reduce our net investment income.
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include
warrants or other equity securities. Investments in equity securities involve a number of
significant risks, including the risk of further dilution as a result of additional
issuances, inability to access additional capital and failure to pay current distributions.
Investments in preferred securities involve special risks, such as the risk of deferred
distributions, credit risk, illiquidity and limited voting rights. In addition, we may from
time to time make non-control, equity investments in portfolio companies. Our goal is
ultimately to realize gains upon our disposition of such equity interests. However, the
equity interests we receive may not appreciate in value and, in fact, may decline in value.
Accordingly, we may not be able to realize gains from our equity interests, and any gains
that we do realize on the disposition of any equity interests may not be sufficient to offset
any other losses we experience. We also may be unable to realize any value if a portfolio
company does not have a liquidity event, such as a sale of the business, recapitalization or
public offering, which would allow us to sell the underlying equity interests. We often seek
puts or similar rights to give us the right to sell our equity securities back to the
portfolio company issuer. We may be unable to exercise these puts rights for the
consideration provided in our investment documents if the issuer is in financial distress.
Risks Relating to an Offering of Our Common Stock
Shares of closed-end investment companies, including BDCs, may trade at a discount to their
net asset value.
Shares of closed-end investment companies, including BDCs, may trade at a discount from
net asset value. This characteristic of closed-end investment companies and BDCs is separate
and distinct from the risk that our net asset value per share may decline. We cannot predict
whether our common stock will trade at, above or below net asset value. In addition, if our
common stock trades below net asset value, 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. See
Risks Relating to Our Business and Structure Stockholders may incur dilution
if we sell shares of our common stock in one or more offerings at prices below the then
current net asset value per share of our common stock or issue securities to subscribe to,
convert to or purchase shares of our common stock for a discussion of proposals approved by
our stockholders that permit us to issue shares of our common stock below net asset value.
We may be unable to invest a significant portion of the net proceeds from an offering on
acceptable terms, which could harm our financial condition and operating results.
Delays in investing the net proceeds raised in an offering may cause our performance to
be worse than that of other fully invested BDCs or other lenders or investors pursuing
comparable investment strategies. We cannot assure you that we will be able to identify any
investments that meet our investment objective or that any investment that we make will
produce a positive return. We may be unable to invest the net proceeds of any offering on
acceptable terms within the time period that we anticipate or at all, which could harm our
financial condition and operating results.
We anticipate that, depending on market conditions and the amount of any particular
offering, it may take us a substantial period of time to invest substantially all of the net
proceeds of any offering in securities meeting our investment objective. During this period,
we will invest the net proceeds of any offering primarily in cash, cash equivalents,
U.S. government securities and high-quality debt instruments, which may produce returns that are significantly lower than the
returns which we expect to achieve when our portfolio is fully invested in securities meeting
our investment objective. As a result, any distributions that we pay during such period may
be substantially lower than the distributions that we may be able to pay when our portfolio
is fully invested in securities meeting our investment objective. In addition, until such
time as the net proceeds of any offering are invested in securities meeting our investment
objective, the market
19
price for our common stock may decline. Thus, the initial return on your investment may
be lower than when, if ever, our portfolio is fully invested in securities meeting our
investment objective.
Investing in our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a
higher amount of risk than alternative investment options and a higher risk of volatility or
loss of principal. Our investments in portfolio companies involve
higher levels of risk, and
therefore, an investment in our shares may not be suitable for someone with lower risk
tolerance.
The market price of our common stock may be volatile and fluctuate significantly.
Fluctuations in the trading prices of our shares may adversely affect the liquidity of
the trading market for our shares and, if we seek to raise capital through future equity
financings, our ability to raise such equity capital. The market price and liquidity of the
market for our common stock may be significantly affected by numerous factors, some of which
are beyond our control and may not be directly related to our operating performance. These
factors include:
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significant volatility in the market price and trading volume of
securities of BDCs or other companies in our sector, which are not
necessarily related to the operating performance of these companies; |
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changes in regulatory policies, accounting pronouncements or tax
guidelines, particularly with respect to RICs, BDCs or SBICs; |
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inability to obtain any exemptive relief that may be required by us in the future from the SEC; |
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loss of our BDC or RIC status or the Funds status as an SBIC; |
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changes in our earnings or variations in our operating results; |
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changes in the value of our portfolio of investments; |
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any shortfall in our investment income or net investment income or any
increase in losses from levels expected by investors or securities
analysts; |
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loss of a major funding source; |
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fluctuations in interest rates; |
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the operating performance of companies comparable to us; |
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departure of our key personnel; |
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global or national credit market changes; and |
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general economic trends and other external factors. |
Provisions of the Maryland General Corporation Law and our articles of incorporation and
bylaws could deter takeover attempts and have an adverse impact on the price of our common
stock.
The Maryland General Corporation Law and our articles of incorporation and bylaws
contain provisions that may have the effect of discouraging, delaying or making difficult a
change in control of our company or the removal of our incumbent directors. The existence of
these provisions, among others, may have a negative impact on the price of our common stock
and may discourage third-party bids for ownership of our company. These provisions may
prevent any premiums being offered to you for our common stock.
20
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus and any accompanying prospectus supplement
constitute forward-looking statements because they relate to future events or our future
performance or financial condition. The forward-looking statements contained in this
prospectus and any accompanying prospectus supplement may include statements as to:
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our future operating results and dividend projections; |
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our business prospects and the prospects of our portfolio companies; |
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the impact of the investments that we expect to make; |
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the ability of our portfolio companies to achieve their objectives; |
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our expected financings and investments; |
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the adequacy of our cash resources and working capital; and |
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the timing of cash flows, if any, from the operations of our portfolio companies. |
In addition, words such as anticipate, believe, expect and intend indicate a
forward-looking statement, although not all forward-looking statements include these words.
The forward-looking statements contained in this prospectus and any accompanying prospectus
supplement involve risks and uncertainties. Our actual results could differ materially from
those implied or expressed in the forward-looking statements for any reason, including the
factors set forth in Risk Factors and elsewhere in this prospectus and any accompanying
prospectus supplement. Other factors that could cause actual results to differ materially
include:
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changes in the economy; |
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risks associated with possible disruption in our operations or the economy
generally due to terrorism or natural disasters; and |
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future changes in laws or regulations and conditions in our operating areas. |
We have based the forward-looking statements included in this prospectus and will base
the forward-looking statements included in any accompanying prospectus supplement on
information available to us on the date of this prospectus and any accompanying prospectus
supplement, as appropriate, and we assume no obligation to update any such forward-looking
statements, except as required by law. Although we undertake no obligation to revise or update any forward-looking
statements, whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make directly to you or through
reports that we in the future may file with the SEC, including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K.
21
FORMATION TRANSACTIONS
MSCC was formed on March 9, 2007, for the purpose of (i) acquiring 100% of
the equity interests of the Fund and its general partner, the General Partner, (ii)
acquiring 100% of the equity interests of the Investment Manager, (iii) raising
capital in the IPO, and (iv) thereafter operating as an internally
managed BDC
under the 1940 Act. The Fund is licensed as an SBIC by the SBA and
the
Investment Manager acts as the Funds manager and investment adviser. The Investment Manager
also acts as the manager and investment adviser to MSC II, a privately owned, affiliated SBIC which commenced investment operations in January 2006.
MSCC did not
acquire any interest in MSC II in connection with the Formation Transactions and
currently does not hold any equity interest in MSC II. The transactions discussed
above were consummated in October 2007 and are collectively termed the Formation
Transactions.
As part of the Formation Transactions, the Investment Manager,
which employs all of the executive officers and other employees
of MSCC, became a wholly owned subsidiary of MSCC. However, the
Investment Manager is accounted for as a portfolio investment of
Main Street, since the Investment Manager is not a registered
investment company and since it conducts a significant portion
of its investment management activities for MSC II, a separate
SBIC fund in which MSCC does not have an equity interest. The
Investment Manager receives recurring investment management fees
from MSC II pursuant to a separate investment advisory
agreement, paid quarterly, which currently total
$3.3 million per year. The portfolio investment in the
Investment Manager is accounted for using fair value accounting,
with the fair value determined by MSCC and approved, in good
faith, by MSCCs Board of Directors. MSCCs valuation
of the
Investment Manager is based upon the discounted net cash flows
from third party recurring investment managers fees. The net
cash flows utilized in the valuation of the Investment Manager
exclude any revenues and expenses from all related parties
(including MSCC) but include the management fees from MSC II and
an estimated allocation of costs related to providing services
to MSC II. For more information on the Investment Manager, see
Note D Wholly Owned Investment
Manager to our consolidated financial statements.
In connection with the Formation Transactions, MSCC entered into
a support services agreement with the Investment Manager. The
agreement requires the Investment Manager to manage the
day-to-day operational and investment activities of Main Street.
The Investment Manager generally incurs all normal operating and
administrative expenses, except those specifically required to
be borne by MSCC, which principally include costs that are
specific to MSCCs 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 Main Streets day-to-day
operations.
The Investment Manager is reimbursed for its expenses associated
with providing operational and investment management services to
MSCC and its subsidiaries. Each quarter, as part of the support
services agreement, MSCC makes payments to cover all expenses
incurred by the Investment Manager, less amounts the Investment
Manager receives from MSC II pursuant to a separate investment
advisory services agreement. Based on this separate investment
advisory services agreement, MSC II paid the Investment Manager
approximately $3.3 million in 2008 for these services.
The IPO involved the public offering and sale of
4,300,000 shares of our common stock, including shares sold
upon the underwriters exercise of the over-allotment
option, at a price to the public of $15.00 per share of our
common stock, resulting in net proceeds to us of approximately
$60.2 million, after deducting underwriters
commissions totaling approximately $4.3 million. As a
result of the IPO and the Formation Transactions described
above, we are a closed-end, non-diversified management
investment company that has elected to be treated as a BDC under
the 1940 Act. 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 net operating costs associated
with employing investment and portfolio management professionals
through the Investment Manager.
Immediately following the completion of the Formation
Transactions,
MSEI was created as a wholly-owned consolidated
subsidiary of MSCC to hold certain of our portfolio investments.
MSEI has elected for tax purposes to be treated as a taxable
entity and is taxed at normal corporate tax rates based on its
taxable income. The taxable income of MSEI may differ from its
book income due to deferred tax timing differences as well as
permanent differences.
We co-invested with MSC II in several existing portfolio
investments prior to the IPO, but did not
co-invest
with MSC II subsequent to the IPO and prior to June 2008. On
June 4, 2008, we received exemptive relief from the SEC to
allow us to resume co-investing with MSC II in accordance with
the terms of such exemptive relief.
22
USE OF PROCEEDS
We intend to use
all of the net proceeds from selling our common stock to make investments in lower middle-market companies
in accordance with our investment objective and strategies described in this prospectus or any prospectus supplement,
pay our operating expenses and dividends to our stockholders and for general corporate purposes.
Pending such use, we will invest the net proceeds of any offering primarily in
short-term securities consistent with our BDC election and our election to be taxed as a RIC.
See Regulation Regulation as a Business Development Company Idle Funds
Investments. Our ability to achieve our investment objective may be
limited to the extent that the net proceeds from an offering, pending full investment, are
held in interest-bearing deposits or other short-term instruments. The supplement to this
prospectus relating to an offering will more fully identify the use of proceeds from such an
offering.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the Nasdaq Global Select Market under the symbol MAIN. The
following table sets forth, for each fiscal quarter since our initial public offering, the range of
high and low sales prices of our common stock as reported on the Nasdaq Global Select Market, the
sales price as a percentage of our net asset value (NAV) and the dividends declared by us for each
fiscal quarter. The stock quotations are inter-dealer quotations and do not include mark-ups,
mark-downs or commissions and as such do not necessarily represent actual transactions.
23
During the fourth quarter of 2008, we began paying monthly instead of quarterly dividends to
our stockholders, determined by our Board of Directors on a quarterly basis.
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Percentage |
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Percentage |
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Cash |
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Price Range |
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of High Sales |
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of Low Sales Price |
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Dividend |
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NAV(1) |
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High |
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Low |
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Price to NAV(2) |
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to NAV(2) |
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Per Share(3) |
Year ended
December 31, 2007 |
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October 5, 2007 to
December 31,
2007(4) |
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$ |
12.85 |
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$ |
15.02 |
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$ |
13.60 |
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117 |
% |
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106 |
% |
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$ |
0.33 |
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Year ended
December 31, 2008 |
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First Quarter |
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$ |
12.87 |
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$ |
14.10 |
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$ |
12.75 |
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110 |
% |
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99 |
% |
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$ |
0.34 |
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Second Quarter |
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$ |
13.02 |
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$ |
14.40 |
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$ |
10.90 |
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111 |
% |
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84 |
% |
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$ |
0.35 |
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Third Quarter |
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$ |
12.49 |
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$ |
14.40 |
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$ |
11.38 |
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115 |
% |
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91 |
% |
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$ |
0.36 |
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Fourth Quarter |
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$ |
12.20 |
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$ |
11.95 |
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$ |
8.82 |
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98 |
% |
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72 |
% |
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$ |
0.375 |
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Year ended
December 31, 2009 |
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First Quarter |
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* |
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$ |
10.43 |
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$ |
9.07 |
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* |
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* |
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$ |
0.375 |
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Second Quarter
(through April 23,
2009) |
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* |
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$ |
12.99 |
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$ |
9.66 |
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* |
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* |
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$ |
0.375 |
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(1) |
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Net asset value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the date
of the high and low sales prices. The net asset values shown are based on
outstanding shares at the end of each period. Net asset value has not yet been
determined for the first and second quarters of 2009. |
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(2) |
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Calculated as the respective high or low sales price divided by net asset value. |
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(3) |
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Represents the dividend declared in the specified quarter. We have adopted an
opt out dividend reinvestment plan for our common stockholders. As a result,
if we declare a dividend, then stockholders cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically opt out of the dividend reinvestment plan so as to receive cash
dividends. See Dividend Reinvestment Plan. |
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24
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(4) |
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Our stock began trading on the Nasdaq Global Select Market on October 5, 2007. |
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The last reported price for our common stock on April 23, 2009 was
$11.70 per share. As of
April 22, 2009, we had 120 stockholders of record.
Shares of BDCs may trade at a market price that is less than the value of the net assets
attributable to those shares. The possibilities that our shares of common stock will trade at a
discount from net asset value or at premiums that are unsustainable over the long term are separate
and distinct from the risk that our net asset value will decrease. It is not possible to predict
whether the common stock offered hereby will trade at, above, or below net asset value. Since our
IPO in October 2007, our shares of common stock have traded at prices both less than and exceeding
our net asset value.
We have distributed quarterly, but, beginning in the fourth quarter of 2008, we began to
distribute monthly, dividends to our stockholders.
Our dividends, if any, are determined by our Board of Directors. MSCC has elected to be
treated for federal income tax purposes as a RIC under Subchapter M of the Code. As long as we
qualify as a RIC, we will not be taxed on our investment company taxable income or realized net
capital gains, to the extent that such taxable income or gains are distributed, or deemed to be
distributed, to stockholders on a timely basis.
To maintain RIC tax treatment, we must, among other things, distribute at least 90.0% of our
net ordinary income and realized net short-term capital gains in excess of realized net long-term
capital losses, if any. Depending on the level of taxable income earned in a tax year, we 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. Any such carryover taxable income must be distributed
through a dividend declared prior to filing the final tax return related to the year which
generated such taxable income. Please refer to Material U.S. Federal Income Tax Considerations
for further information regarding the consequences of our retention of net capital gains. We may,
in the future, make actual distributions to our stockholders of our net capital gains. We can offer
no assurance that we will achieve results that will permit the payment of any cash distributions
and, if we issue senior securities, we will be prohibited from making distributions if doing so
causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if
distributions are limited by the terms of any of our borrowings. See Regulation and Material
U.S. Federal Income Tax Considerations.
25
PURCHASES OF EQUITY SECURITIES
On November 13, 2008, we announced that our Board of
Directors authorized our officers, in their discretion and
subject to compliance with the 1940 Act and other applicable
laws, to purchase on the open market or in privately negotiated
transactions, an amount up to $5 million of the outstanding
shares of our common stock at prices per share not to exceed our
last reported net asset value per share. The share repurchase
program is authorized to be in effect through the earlier of
December 31, 2009 or such time as the approved
$5 million repurchase amount has been fully utilized. We
can not assure you the extent that we will conduct open market
purchases, and to the extent we do conduct open market
purchases, we may terminate them at any time. As of
December 31, 2008, we had purchased 34,700 shares of
our common stock for $331,006 in the open market pursuant to the
program. The following chart summarizes repurchases of our
common stock under the stock repurchase program through
December 31, 2008.
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Maximum Number
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(or Approximate
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Total Number of
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Dollar Value) of
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Shares Purchased
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Shares that May
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as Part of Publicly
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Yet be Purchased
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Total Number of
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Average Price Paid
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Announced Plans
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Under the Plans or
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Period
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Shares Purchased
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per Share
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or Programs
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Programs
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October 1, 2008 through October 31, 2008
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$
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November 1, 2008 through November 30, 2008
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8,500
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$
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9.29
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8,500
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December 1, 2008 through December 31, 2008
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26,200
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$
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9.62
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26,200
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Total
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34,700
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$
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9.54
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34,700
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$
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4,668,994
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26
SELECTED
FINANCIAL DATA
The selected financial and other data below reflects the
combined operations of the Fund and the General Partner for the
years ended December 31, 2004, 2005 and 2006 and the
consolidated operations of Main Street and its subsidiaries for
the years ended December 31, 2007 and 2008. The selected
financial data at December 31, 2005, 2006, 2007 and 2008
and for the years ended December 31, 2004, 2005, 2006, 2007
and 2008, have been derived from combined/consolidated financial
statements that have been audited by Grant Thornton LLP, an
independent registered public accounting firm. The selected
financial data at December 31, 2004 has been derived from
unaudited combined financial statements. You should read this
selected financial and other data in conjunction with our
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Senior
Securities and the financial
statements and related notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest, fee and dividend income |
|
$ |
4,452 |
|
|
$ |
7,338 |
|
|
$ |
9,013 |
|
|
$ |
11,312 |
|
|
$ |
15,967 |
|
Interest from idle funds and other |
|
|
9 |
|
|
|
222 |
|
|
|
749 |
|
|
|
1,163 |
|
|
|
1,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
4,461 |
|
|
|
7,560 |
|
|
|
9,762 |
|
|
|
12,475 |
|
|
|
17,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
(869 |
) |
|
|
(2,064 |
) |
|
|
(2,717 |
) |
|
|
(3,246 |
) |
|
|
(3,778 |
) |
General and administrative |
|
|
(184 |
) |
|
|
(197 |
) |
|
|
(198 |
) |
|
|
(512 |
) |
|
|
(1,684 |
) |
Expenses reimbursed to Investment Manager |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,007 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(511 |
) |
Management fees to affiliate |
|
|
(1,916 |
) |
|
|
(1,929 |
) |
|
|
(1,942 |
) |
|
|
(1,500 |
) |
|
|
|
|
Professional costs related to initial public offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
(2,969 |
) |
|
|
(4,190 |
) |
|
|
(4,857 |
) |
|
|
(5,953 |
) |
|
|
(6,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
1,492 |
|
|
|
3,370 |
|
|
|
4,905 |
|
|
|
6,522 |
|
|
|
10,315 |
|
Total net realized gain from investments |
|
|
1,171 |
|
|
|
1,488 |
|
|
|
2,430 |
|
|
|
4,692 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized income |
|
|
2,663 |
|
|
|
4,858 |
|
|
|
7,335 |
|
|
|
11,214 |
|
|
|
11,713 |
|
Total net change in unrealized appreciation (depreciation) from
investments |
|
|
1,764 |
|
|
|
3,032 |
|
|
|
8,488 |
|
|
|
(5,406 |
) |
|
|
(3,961 |
) |
Income tax benefit (provision) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,263 |
) |
|
|
3,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations |
|
$ |
4,427 |
|
|
$ |
7,890 |
|
|
$ |
15,823 |
|
|
$ |
2,545 |
|
|
$ |
10,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share basic and diluted |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
0.76 |
|
|
$ |
1.15 |
|
Net realized income per share basic and diluted |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
1.31 |
|
|
$ |
1.31 |
|
Net increase in net assets resulting from operations per
share basic and diluted |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
0.30 |
|
|
$ |
1.22 |
|
Weighted average shares outstanding basic |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8,587,701 |
|
|
|
8,967,383 |
|
Weighted average shares outstanding diluted |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8,587,701 |
|
|
|
8,971,064 |
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio investments at fair value |
|
$ |
37,972 |
|
|
$ |
51,192 |
|
|
$ |
73,711 |
|
|
$ |
105,650 |
|
|
$ |
127,007 |
|
Idle funds investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,063 |
|
|
|
4,390 |
|
Cash and cash equivalents |
|
|
796 |
|
|
|
26,261 |
|
|
|
13,769 |
|
|
|
41,889 |
|
|
|
35,375 |
|
Deferred tax asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,121 |
|
Other assets |
|
|
262 |
|
|
|
439 |
|
|
|
630 |
|
|
|
1,576 |
|
|
|
1,101 |
|
Deferred financing costs, net of accumulated amortization |
|
|
984 |
|
|
|
1,442 |
|
|
|
1,333 |
|
|
|
1,670 |
|
|
|
1,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
40,014 |
|
|
$ |
79,334 |
|
|
$ |
89,443 |
|
|
$ |
174,848 |
|
|
$ |
170,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBIC debentures |
|
$ |
22,000 |
|
|
$ |
45,100 |
|
|
$ |
45,100 |
|
|
$ |
55,000 |
|
|
$ |
55,000 |
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,026 |
|
|
|
|
|
Interest payable |
|
|
354 |
|
|
|
771 |
|
|
|
855 |
|
|
|
1,063 |
|
|
|
1,108 |
|
Accounts payable and other liabilities |
|
|
422 |
|
|
|
194 |
|
|
|
216 |
|
|
|
610 |
|
|
|
2,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
22,776 |
|
|
|
46,065 |
|
|
|
46,171 |
|
|
|
59,699 |
|
|
|
58,273 |
|
Total net assets |
|
|
17,238 |
|
|
|
33,269 |
|
|
|
43,272 |
|
|
|
115,149 |
|
|
|
112,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets |
|
$ |
40,014 |
|
|
$ |
79,334 |
|
|
$ |
89,443 |
|
|
$ |
174,848 |
|
|
$ |
170,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average effective yield on debt investments(1) |
|
|
15.3 |
% |
|
|
15.3 |
% |
|
|
15.0 |
% |
|
|
14.3 |
% |
|
|
14.0 |
% |
Number of portfolio companies(3) |
|
|
14 |
|
|
|
19 |
|
|
|
24 |
|
|
|
27 |
|
|
|
31 |
|
Expense ratios (as percentage of average net assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(2) |
|
|
13.7 |
% |
|
|
9.0 |
% |
|
|
5.5 |
% |
|
|
4.8 |
% |
|
|
2.8 |
% |
Interest expense |
|
|
5.7 |
% |
|
|
8.8 |
% |
|
|
7.0 |
% |
|
|
5.7 |
% |
|
|
3.3 |
% |
|
|
|
(1) |
|
Weighted-average effective yield is calculated based on our debt
investments at the end of each period and includes amortization
of deferred debt origination fees and accretion of original
issue discount, but excludes debt investments with non-accrual
status. |
|
(2) |
|
The ratio for the year ended December 31, 2007 reflects the
impact of professional costs related to the IPO. These
costs were 25.7% of operating expenses for the year. |
|
(3) |
|
Excludes the investment in affiliated Investment Manager, as
referenced in Formation Transactions and in the
notes to the financial statements elsewhere herein. |
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the notes thereto included elsewhere in this prospectus.
Statements we make in the following
discussion which express a belief, expectation or intention, as well as those that are not
historical fact, are forward-looking statements that are subject to risks, uncertainties
and
assumptions. Our actual results, performance or achievements, or industry results, could
differ materially from those we express in the following discussion as a result
of a variety of factors, including the risks and uncertainties we have referred to under
the headings Cautionary Statement Concerning Forward-Looking Statements and Risk
Factors in this prospectus.
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 (the
Fund) and its general partner, Main Street Mezzanine
Management, LLC (the General Partner),
(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). The
transactions discussed above were consummated in October 2007
and are collectively termed the Formation
Transactions. Immediately following the Formation
Transactions, Main Street Equity Interests, Inc.
(MSEI) was formed as a wholly owned consolidated
subsidiary of MSCC. MSEI has elected for tax purposes to be
treated as a taxable entity and is taxed at normal corporate tax
rates based on its taxable income. Unless otherwise noted or the
context otherwise indicates, the terms we,
us, our and Main Street
refer to the Fund and the General Partner prior to the IPO and
to MSCC and its subsidiaries, including the Fund and the General
Partner, subsequent to the IPO.
OVERVIEW
We are a principal investment firm focused on providing
customized debt and equity financing to lower middle-market
companies, which we generally define as companies with annual
revenues between $10 and $100 million that operate in
diverse industries. We invest primarily in secured debt
instruments, equity investments, warrants and other securities
of lower middle-market companies based in the United States. Our
principal investment objective is to maximize our
portfolios 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 investments generally range in size from
$2 million to $15 million.
Our investments are made through both MSCC and the Fund. Since
the IPO, MSCC and the Fund have co-invested in substantially
every investment we have made. MSCC and the Fund share the same
investment strategies and criteria in the lower middle-market,
although they are subject to different regulatory regimes. See
Regulation. An investors
return in MSCC will depend, in part, on the Funds
investment returns as the Fund is a wholly owned subsidiary of
MSCC.
We seek to fill the current financing gap for lower
middle-market businesses, which, historically, have had limited
access to financing from commercial banks and other traditional
sources. Given the current credit environment, we believe the
limited access to financing for lower middle market companies is
even more pronounced. The underserved nature of the lower middle
market creates the opportunity for us to meet the financing
needs of lower middle-market companies while also negotiating
favorable transaction terms and equity participations. Our
ability to invest across a companys capital structure,
from senior secured loans to equity securities, allows us to
offer portfolio companies a comprehensive suite of financing
solutions, or one stop financing. Providing
customized, one stop financing solutions has become
even more relevant to our portfolio companies in the current
credit environment. We generally seek to partner directly with
entrepreneurs, management teams and business owners in making
our investments. Main Street believes that its core investment
strategy has a lower correlation to the broader debt and equity
markets.
29
Due to the uncertainties in the current economic environment and
our desire to maintain adequate liquidity, we intend to be very
selective in our near term portfolio growth. However, we
anticipate that our net investment income will continue to grow
as we deploy our existing lower yield cash and cash equivalents
into higher yielding portfolio investments. During 2008, we paid
approximately $1.425 per share in dividends. In September 2008,
we declared monthly dividends for the fourth quarter of 2008
totaling $0.375 per share representing a 13.6% increase from the
dividends paid in the fourth quarter of 2007. In December 2008,
we declared monthly dividends for the first quarter of 2009
totaling $0.375 per share representing a 10.3% increase from the
dividends paid in the first quarter of 2008. For tax purposes,
the monthly dividend paid in January 2009 was applied against
the 2008 taxable income distribution requirements since it was
declared and accrued prior to December 31, 2008. Excluding
the impact for the tax treatment of the January 2009 dividend,
we estimate that we generated undistributed taxable income (or
spillover income) of approximately $4 million,
or $0.44 per share, during 2008 that will be carried forward
toward distributions paid in 2009. For the 2009 calendar year,
we estimate that we will pay dividends in the range of $1.50 to
$1.65 per share representing an increase of 5.3% to 15.8% over
the total dividends per share paid during calendar year 2008.
The estimated range for total 2009 dividends is based upon
projections of 2009 taxable income, anticipated 2009 portfolio
activity, and the $4 million of 2008 spillover
income which
will be utilized to pay dividends during 2009. We will continue
to pay dividends on a monthly basis during 2009 and will
continue to provide quarterly updates related to our 2009
dividend guidance.
At December 31, 2008, we had $39.8 million in cash
and
cash equivalents plus idle funds investments. During October
2008, we closed a $30 million multi-year investment line of
credit. Due to our existing and available cash and other
resources, we expect to have sufficient cash resources to
support our investment and operational activities throughout all
of 2009 and well into 2010. However, this projection will be
impacted by, among other things, the pace of new and follow on
investments, investment redemptions, the level of cash flow from
operations and cash flow from realized gains, and the level of
dividends paid in cash.
The recently enacted American Recovery and Reinvestment Act of
2009 (the 2009 Stimulus Bill) contains several
provisions applicable to Small Business Investment Company
(SBIC) funds, including the Fund, our wholly owned
subsidiary. One of the key SBIC-related provisions included in
the 2009 Stimulus Bill increases the maximum amount of combined
SBIC leverage (or SBIC leverage cap) to $225 million for
affiliated SBIC funds. The prior maximum amount of SBIC leverage
available to affiliated SBIC funds was approximately
$137 million, as adjusted annually based upon changes in
the Consumer Price Index. Due to the increase in the maximum
amount of SBIC leverage available, we will now have access to
incremental SBIC leverage to support our future investment
activities. Since the increase in the SBIC leverage cap applies
to affiliated SBIC funds, we will allocate such increased
borrowing capacity between our wholly owned SBIC subsidiary and
Main Street Capital II, LP (MSC II), an
independently owned SBIC that is managed by Main Street and
therefore deemed to be affiliated for SBIC regulatory purposes.
It is currently estimated that at least $55 million to
$60 million of additional SBIC leverage is now accessible
by Main Street for future investment activities, subject to the
required capitalization of our wholly owned SBIC subsidiary.
In our view, the SBIC leverage, including the increased
capacity, remains a strategic advantage due to its long-term,
flexible structure and a very low fixed cost. The SBIC leverage
also provides proper matching of duration and cost compared with
our portfolio debt investments. The weighted average duration of
our portfolio debt investments is 3.5 years compared to a
weighted average duration of over 6 years for our SBIC
leverage. This duration on our SBIC leverage does not consider
the opportunity to revolve or refinance our existing SBIC
leverage into new
10-year
tranches upon contractual maturity. Approximately 85% of
portfolio debt investments bear interest at fixed rates which is
also appropriately matched by the long-term, low cost fixed
rates available through our SBIC leverage. In addition, we
believe the embedded value of our SBIC leverage would be
significant if we had adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159) relating to
accounting for debt obligations at their fair value.
30
CRITICAL
ACCOUNTING POLICIES
Basis
of Presentation
The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP). For the years ended
December 31, 2008 and 2007, the consolidated financial
statements of Main Street include the accounts of MSCC, the
Fund, MSEI and the General Partner. The Investment Manager is
accounted for as a portfolio investment. The Formation
Transactions involved an exchange of equity interests between
companies under common control. In accordance with the guidance
on exchanges of equity interests between entities under common
control contained in SFAS No. 141, Business
Combinations (SFAS 141), Main Streets
results of operations and cash flows for the year ended
December 31, 2007 are presented as if the Formation
Transactions had occurred as of January 1, 2007. Main
Streets results of operations for the years ended
December 31, 2008 and 2007, cash flows for the years ended
December 31, 2008 and 2007 and financial positions as of
December 31, 2008 and 2007 are presented on a consolidated
basis. In addition, the results of Main Streets operations
and its cash flows for the year ended December 31, 2006
have been presented on a combined basis in order to provide
comparative information with respect to prior periods. The
effects of all intercompany transactions between Main Street and
its subsidiaries have been eliminated in consolidation. As a
result of adopting the provisions of SFAS No. 157,
Fair Value Measurements (SFAS 157), in
the first quarter of 2008, certain reclassifications have been
made to prior period balances to conform with the current
financial statement presentation.
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 own a
controlled operating company that provides all or substantially
all of its services directly to us, or to an investment company
of ours. None of the investments made by us qualify for this
exception. Therefore, our portfolio investments are carried on
the balance sheet at fair value, as discussed further in
Note B to our consolidated financial statements, with any
adjustments to fair value recognized as Net Change in
Unrealized Appreciation (Depreciation) from Investments on
our Statement of Operations until the investment is disposed of,
resulting in any gain or loss on exit being recognized as a
Net Realized Gain (Loss) from Investments.
Portfolio
Investment Valuation
The most significant estimate inherent in the preparation of our
financial statements is the valuation of our portfolio
investments and the related amounts of unrealized appreciation
and depreciation. As of December 31, 2008 and
December 31, 2007, approximately 74% and 60%, respectively,
of our total assets represented investments in portfolio
companies valued at fair value (including the investment in the
Investment Manager). We are required to report our investments
at fair value. We adopted the provisions of SFAS 157 in the
first quarter of 2008. SFAS 157 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. With the adoption of this statement, we
incorporated the income approach to estimate the fair value of
our debt investments principally using a yield-to-maturity
model, resulting in the recognition of $0.7 million in
unrealized appreciation from ten debt investments upon adoption.
Our business plan calls for us to invest primarily in illiquid
securities issued by private companies
and/or
thinly traded public companies. These investments may be subject
to restrictions on resale and will generally have no established
trading market. As a result, we determine in good faith the fair
value of our portfolio investments pursuant to a valuation
policy in accordance with SFAS 157 and a valuation process
approved by our Board of Directors and in accordance with the
1940 Act. We review external events, including private mergers,
sales and acquisitions involving comparable companies, and
include these events in the valuation process. Our valuation
policy is intended to provide a consistent basis for determining
the fair value of the portfolio.
31
For valuation purposes, control investments are composed of
equity and debt securities for which we have a controlling
interest in the portfolio company or have the ability to
nominate a majority of the portfolio companys board of
directors. Market quotations are generally not readily available
for our control investments. As a result, we determine the fair
value of these investments 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 companys
historical and projected financial results. We allocate the
enterprise value to investments in order of the legal priority
of the investments. 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. The
valuation approaches for our control investments estimate the
value of the investment if we were to sell, or exit, the
investment, assuming the highest and best use of the investment
by market participants. 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 investments are composed of
debt and equity securities for which we do not have a
controlling interest in the portfolio company, or the ability to
nominate a majority of the portfolio companys board of
directors. Market quotations for our non-control investments are
not readily available. For our non-control investments, we use
the market approach to value our equity investments and the
income approach to value our debt instruments. For non-control
debt investments, we determine the fair value primarily using a
yield 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 debt security
is generally the legal maturity date of the instrument, as we
generally intend to hold our loans to maturity. The yield
analysis considers changes in leverage levels, credit quality,
portfolio company performance and other factors. We will use the
value determined by the yield 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 debt security. A change in the assumptions that we
use to estimate the fair value of our debt securities using the
yield analysis could have a material impact on the determination
of fair value. If there is deterioration in credit quality or a
debt security is in workout status, we may consider other
factors in determining the fair value of a debt security,
including the value attributable to the debt security from the
enterprise value of the portfolio company or the proceeds that
would be received in a liquidation analysis.
Due to the inherent uncertainty in the valuation process, our
estimate of fair value 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 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
collectibility. 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
32
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 securitys status significantly
improves regarding ability to service the debt or other
obligations, or if a loan or debt security is fully impaired 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. 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, net of direct loan origination costs, and are
amortized, based on the effective interest method, as additional
interest income over the life of the related debt investment.
Payment-in-Kind
(PIK) Interest
While not significant to our total debt investment portfolio, we
currently hold several loans in our portfolio that contain PIK
interest provisions. The PIK interest, computed at the
contractual rate specified in each loan agreement, is added to
the principal balance of the loan and recorded as interest
income. To maintain regulated investment company
(RIC) tax treatment (as discussed below), this
non-cash source of income will need to be paid out to
stockholders in the form of distributions, even though we may
not have collected the cash. We will stop accruing PIK interest
and write off any accrued and uncollected interest when it is
determined that PIK interest is no longer collectible.
Share-Based
Compensation
We account for our share-based compensation plan using the fair
value method, as prescribed by SFAS No. 123R,
Share-Based Payment. 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
MSCC has elected and intends to qualify for the tax treatment
applicable to a RIC under Subchapter M of the Internal Revenue
Code of 1986, as amended (the Code), and, among
other things, intends to make the required distributions to our
stockholders as specified therein. As a RIC, we generally will
not pay corporate-level federal income taxes on any net ordinary
income or capital gains that we distribute to our stockholders
as dividends. Depending on the level of taxable income earned in
a tax year, we 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. Any such carryover taxable
income must be distributed through a dividend declared prior to
filing the final tax return related to the year which generated
such taxable income.
MSCCs wholly owned subsidiary, MSEI, is a taxable entity
which holds certain of our portfolio investments. MSEI is
consolidated with Main Street for U.S. GAAP reporting
purposes, and the portfolio investments held by MSEI are
included in our consolidated financial statements. The principal
purpose of MSEI is to permit us to hold equity investments in
portfolio companies which are pass through entities
for tax purposes in order to comply with the source
income requirements contained in the RIC tax provisions.
MSEI is not consolidated with Main Street for income tax
purposes and may generate income tax expense as a result of
MSEIs ownership of certain portfolio investments. This
income tax expense, if any, is reflected in our consolidated
statement of operations.
MSEI uses 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.
33
PORTFOLIO
COMPOSITION
Portfolio investments principally consist of secured debt,
equity warrants and direct equity investments in privately held
companies. The debt investments are 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. We also receive
nominally priced equity warrants and make direct equity
investments, usually in connection with a debt investment in a
portfolio company.
The Investment Manager is a wholly owned subsidiary of MSCC.
However, the Investment Manager is accounted for as a portfolio
investment of Main Street, since it is not an investment company
and since it conducts a significant portion of its investment
management activities outside of MSCC and its subsidiaries. To
allow for more relevant disclosure of our core
investment portfolio, our investment in the Investment Manager
has been excluded from the tables and amounts set forth below.
Summaries of the composition of our core investment portfolio at
cost and fair value as a percentage of total portfolio
investments are shown in the following table:
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
First lien debt
|
|
|
76.2
|
%
|
|
|
81.5
|
%
|
Equity
|
|
|
11.0
|
%
|
|
|
10.7
|
%
|
Second lien debt
|
|
|
7.4
|
%
|
|
|
6.1
|
%
|
Equity warrants
|
|
|
5.4
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
First lien debt
|
|
|
67.0
|
%
|
|
|
70.1
|
%
|
Equity
|
|
|
15.7
|
%
|
|
|
18.6
|
%
|
Equity warrants
|
|
|
10.2
|
%
|
|
|
8.0
|
%
|
Second lien debt
|
|
|
7.1
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the core investment portfolio
composition by geographic region of the United States at cost
and fair value as a percentage of total portfolio investments.
The geographic composition is determined by the location of the
corporate headquarters of the portfolio company:
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Southwest
|
|
|
50.2
|
%
|
|
|
31.9
|
%
|
West
|
|
|
36.3
|
%
|
|
|
37.1
|
%
|
Southeast
|
|
|
5.1
|
%
|
|
|
11.4
|
%
|
Midwest
|
|
|
4.7
|
%
|
|
|
5.8
|
%
|
Northeast
|
|
|
3.7
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Southwest
|
|
|
56.0
|
%
|
|
|
41.2
|
%
|
West
|
|
|
31.1
|
%
|
|
|
32.9
|
%
|
Midwest
|
|
|
5.1
|
%
|
|
|
6.5
|
%
|
Southeast
|
|
|
4.1
|
%
|
|
|
10.3
|
%
|
Northeast
|
|
|
3.7
|
%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
34
Main Streets portfolio investments are generally in lower
middle-market companies conducting business in a variety of
industries. Set forth below are tables showing the composition
of Main Streets core investment portfolio by industry at
cost and fair value as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Industrial equipment
|
|
|
12.0
|
%
|
|
|
6.6
|
%
|
Precast concrete manufacturing
|
|
|
11.3
|
%
|
|
|
|
|
Custom wood products
|
|
|
9.3
|
%
|
|
|
8.4
|
%
|
Agricultural services
|
|
|
8.3
|
%
|
|
|
11.6
|
%
|
Electronics manufacturing
|
|
|
7.6
|
%
|
|
|
9.5
|
%
|
Transportation/Logistics
|
|
|
6.6
|
%
|
|
|
6.7
|
%
|
Retail
|
|
|
6.5
|
%
|
|
|
3.3
|
%
|
Restaurant
|
|
|
6.1
|
%
|
|
|
3.4
|
%
|
Health care products
|
|
|
5.8
|
%
|
|
|
4.2
|
%
|
Mining and minerals
|
|
|
4.8
|
%
|
|
|
9.1
|
%
|
Manufacturing
|
|
|
4.7
|
%
|
|
|
12.0
|
%
|
Health care services
|
|
|
4.2
|
%
|
|
|
5.9
|
%
|
Professional services
|
|
|
4.1
|
%
|
|
|
3.3
|
%
|
Metal fabrication
|
|
|
3.4
|
%
|
|
|
4.6
|
%
|
Equipment rental
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
Infrastructure products
|
|
|
1.7
|
%
|
|
|
2.4
|
%
|
Information services
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
Industrial services
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
Distribution
|
|
|
0.1
|
%
|
|
|
2.2
|
%
|
Consumer products
|
|
|
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Precast concrete manufacturing
|
|
|
13.7
|
%
|
|
|
|
|
Industrial equipment
|
|
|
10.2
|
%
|
|
|
6.0
|
%
|
Agricultural services
|
|
|
8.1
|
%
|
|
|
10.5
|
%
|
Electronics manufacturing
|
|
|
7.7
|
%
|
|
|
9.6
|
%
|
Retail
|
|
|
7.0
|
%
|
|
|
3.4
|
%
|
Custom wood products
|
|
|
6.8
|
%
|
|
|
7.5
|
%
|
Restaurant
|
|
|
6.7
|
%
|
|
|
4.5
|
%
|
Transportation/Logistics
|
|
|
6.5
|
%
|
|
|
6.6
|
%
|
Health care services
|
|
|
6.1
|
%
|
|
|
6.0
|
%
|
Health care products
|
|
|
5.8
|
%
|
|
|
4.1
|
%
|
Professional services
|
|
|
5.4
|
%
|
|
|
4.1
|
%
|
Manufacturing
|
|
|
5.1
|
%
|
|
|
9.5
|
%
|
Metal fabrication
|
|
|
4.3
|
%
|
|
|
4.2
|
%
|
Industrial services
|
|
|
2.8
|
%
|
|
|
2.9
|
%
|
Equipment rental
|
|
|
2.0
|
%
|
|
|
2.4
|
%
|
Information services
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
Infrastructure products
|
|
|
0.5
|
%
|
|
|
2.2
|
%
|
Distribution
|
|
|
0.4
|
%
|
|
|
2.4
|
%
|
Mining and minerals
|
|
|
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
35
Our core investment portfolio carries a number of risks
including, but not limited to: (1) investing in lower
middle-market companies which have a limited operating history
and financial resources; (2) holding investments that 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 private, smaller companies.
PORTFOLIO
ASSET QUALITY
We utilize an internally developed investment rating system for
our entire portfolio of investments. Investment Rating 1
represents a portfolio company that is performing in a manner
which significantly exceeds our original expectations and
projections. Investment Rating 2 represents a portfolio company
that is performing above our original expectations. Investment
Rating 3 represents a portfolio company that is generally
performing in accordance with our original expectations.
Investment Rating 4 represents a portfolio company that is
underperforming our original expectations. Investments with such
a rating require increased Main Street monitoring and scrutiny.
Investment Rating 5 represents a portfolio company that is
significantly underperforming. Investments with such a rating
require heightened levels of Main Street monitoring and scrutiny
and involve the recognition of unrealized depreciation on such
investment.
The following table shows the distribution of our investments on
our 1 to 5 investment rating scale at fair value as of
December 31, 2008 and 2007 (excluding Main Streets
investment in the Investment Manager):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
|
(Dollars in thousands)
|
|
|
1
|
|
$
|
27,523
|
|
|
|
24.9
|
%
|
|
$
|
24,619
|
|
|
|
28.0
|
%
|
2
|
|
|
23,150
|
|
|
|
21.0
|
%
|
|
|
35,068
|
|
|
|
39.8
|
%
|
3
|
|
|
53,123
|
|
|
|
48.1
|
%
|
|
|
24,034
|
|
|
|
27.3
|
%
|
4
|
|
|
6,035
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
0.0
|
%
|
5
|
|
|
500
|
|
|
|
0.5
|
%
|
|
|
4,304
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
110,331
|
|
|
|
100.0
|
%
|
|
$
|
88,025
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon our investment rating system, the weighted average
rating of our portfolio as of December 31, 2008 and 2007
was approximately 2.4 and 2.2 respectively. As of
December 31, 2008 and 2007, we had one debt investment in
each period representing 0.5% and 3.1%, respectively, of total
portfolio fair value (excluding Main Streets investment in
the Investment Manager) which was on non-accrual status.
In the event that the United States economy remains in a
prolonged period of weakness, it is possible that the financial
results of small- to mid-sized companies, like those in which we
invest, could experience deterioration, which could ultimately
lead to difficulty in meeting their debt service requirements
and an increase in defaults. In addition, the end markets for
certain of our portfolio companies products and services
have experienced, and continue to experience, negative economic
trends. We are seeing somewhat reduced operating results at
several portfolio companies due to the general economic
difficulties. We expect the trend of reduced operating results
to continue throughout 2009. Consequently, we can provide no
assurance that the performance of certain of our portfolio
companies will not be negatively impacted by these economic or
other conditions which could have a negative impact on our
future results.
36
DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS
Comparison
of years ended December 31, 2008 and December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Net Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Total investment income
|
|
$
|
17.3
|
|
|
$
|
12.5
|
|
|
$
|
4.8
|
|
|
|
39
|
%
|
Total expenses
|
|
|
(7.0
|
)
|
|
|
(6.0
|
)
|
|
|
(1.0
|
)
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
10.3
|
|
|
|
6.5
|
|
|
|
3.8
|
|
|
|
58
|
%
|
Total net realized gain from investments
|
|
|
1.4
|
|
|
|
4.7
|
|
|
|
(3.3
|
)
|
|
|
(70
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized income
|
|
|
11.7
|
|
|
|
11.2
|
|
|
|
0.5
|
|
|
|
4
|
%
|
Net change in unrealized appreciation (depreciation) from
investments
|
|
|
(4.0
|
)
|
|
|
(5.4
|
)
|
|
|
1.4
|
|
|
|
N
|
A
|
Income tax benefit (provision)
|
|
|
3.2
|
|
|
|
(3.3
|
)
|
|
|
6.5
|
|
|
|
N
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
10.9
|
|
|
$
|
2.5
|
|
|
$
|
8.4
|
|
|
|
330
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Net Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
Net investment income
|
|
$
|
10.3
|
|
|
$
|
6.5
|
|
|
$
|
3.8
|
|
|
|
58
|
%
|
Share-based compensation expense
|
|
|
0.5
|
|
|
|
|
|
|
|
0.5
|
|
|
|
N
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable net investment income(a)
|
|
|
10.8
|
|
|
|
6.5
|
|
|
|
4.3
|
|
|
|
66
|
%
|
Total net realized gain (loss) from investments
|
|
|
1.4
|
|
|
|
4.7
|
|
|
|
(3.3
|
)
|
|
|
(70
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable net realized income(a)
|
|
$
|
12.2
|
|
|
$
|
11.2
|
|
|
$
|
1.0
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Main Street believes presenting
distributable net investment income, distributable net realized
income, and related per share measures are useful and
appropriate supplemental disclosures for analyzing its 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 replacements 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 Main Streets financial performance.
A reconciliation of net investment 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 year ended December 31, 2008, total investment
income was $17.3 million, a $4.8 million, or 39%,
increase over the $12.5 million of total investment income
for the year ended December 31, 2007. The increase was
attributable to a $4.6 million increase in interest, fee
and dividend income from investments and a $0.2 million
increase in interest income from idle funds, which was
principally earned on the remaining proceeds from our IPO. The
increase in interest, fee and dividend income was primarily
attributable to (i) higher average levels of outstanding
debt investments, which was principally due to the closing of
eight new debt investments since December 31, 2007,
partially offset by debt repayments received during the same
period and certain portfolio investments that were on
non-accrual status or written off in 2008,
(ii) significantly higher levels of cash dividend income
from portfolio equity investments, and (iii) higher levels
of fee income. For the year ended December 31, 2008, Main
Street received approximately $3 million in cash dividend
37
payments from portfolio company equity investments. These
dividend payments were paid to Main Street based upon the
accumulated earnings and available cash of certain portfolio
companies for the year ended December 31, 2008. Future
dividend payments will vary due to changes in portfolio company
accumulated earnings and available cash.
Expenses
For the year ended December 31, 2008, total expenses
increased by approximately $1.0 million, or 17%, to
approximately $7.0 million from $6.0 million for the
year ended December 31, 2007. Share-based compensation
expense recognized during 2008 related to non-cash amortization
expense for restricted share grants made in July 2008 totaled
$0.5 million. There were no similar expenses incurred
during 2007. In addition, 2007 operating expenses included
$0.7 million of costs related to Main Streets IPO
which was completed in October 2007. There were no similar
expenses incurred during 2008. Operating expenses, excluding the
non-cash, share-based compensation expense and the 2007
IPO-related expenses discussed above, increased
$1.2 million in 2008 compared with 2007 due to a
$0.7 million increase in general and administrative expense
associated with higher costs to operate as a public company and
a $0.5 million increase in interest expense as a result of
an additional $9.9 million of SBIC Debentures borrowed
through the Fund during 2007, and unused commitment fees on two
credit facilities totaling $80 million, one entered into in
December 2007 and the other in October
2008, by MSCC.
Distributable
Net Investment Income
Distributable net investment income for the year ended
December 31, 2008 was $10.8 million, or a 66%
increase, compared to distributable net investment income of
$6.5 million during the year ended December 31,
2007.
The increase in distributable net investment income was
attributable to the increase in total investment income
partially offset by the increase in total expenses discussed
above.
Net
Investment Income
Net investment income for the year ended December 31, 2008
was $10.3 million, or a 58% increase, compared to net
investment income of $6.5 million during the year ended
December 31, 2007. The increase in net investment income
was attributable to the increase in total investment income
partially offset by the increase in total expenses discussed
above.
Distributable
Net Realized Income
For the year ended December 31, 2008, the net realized
gains from investments was $1.4 million, representing a
$3.3 million, or 70%, decrease over the net realized gains
of $4.7 million during the year ended December 31,
2007. The net realized gains during the year ended
December 31, 2008 principally related to the realized gains
recognized on equity investments in four portfolio companies,
offset by realized losses on debt and equity investments in two
portfolio companies, compared to higher net realized gains
recognized on equity investments in four portfolio companies
during the year ended December 31, 2007.
The higher distributable net investment income in the year ended
December 31, 2008 offset by the lower net realized gains
during that period resulted in a $1.0 million, or 9%,
increase in the distributable net realized income for the year
ended December 31, 2008 compared with the year ended
December 31, 2007.
Net
Realized Income
The higher net investment income in the year ended
December 31, 2008 offset by the lower net realized gains
during that period resulted in a $0.5 million, or 4%,
increase in the net realized income for the year ended
December 31, 2008 compared with the corresponding period in
2007.
38
Net
Increase in Net Assets Resulting from Operations
For the year ended December 31, 2008,
the net increase in
net assets resulting from operations was $10.9 million in
2008 compared with $2.5 million for the year ended
December 31, 2007. The $4.0 million net change in
unrealized depreciation from investments for 2008 was
attributable to (i) $2.9 million from the accounting
reversal of net unrealized appreciation attributable to the
total net realized gain on the exit of six portfolio
investments, (ii) unrealized depreciation on nine
investments in portfolio companies totaling $8.9 million,
offset by unrealized appreciation on thirteen investments
in
portfolio companies totaling $8.7 million, and
(iii) $0.9 million in unrealized depreciation
attributable to Main Streets investment in its affiliated
investment manager. During 2008, Main Street also recognized a
cumulative income tax benefit of $3.2 million primarily
consisting of deferred tax benefits related to net unrealized
losses on certain portfolio investments and the difference
between taxable income and book income from equity investments
which are flow through entities owned by MSEI, our wholly owned
taxable subsidiary. We do not anticipate incurring this level of
tax benefit in future periods.
Comparison
of years ended December 31, 2007, and December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Net Change
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
(Dollars in millions)
|
|
Total investment income
|
|
$
|
12.5
|
|
|
$
|
9.8
|
|
|
$
|
2.7
|
|
|
|
28%
|
|
Total expenses
|
|
|
(6.0
|
)
|
|
|
(4.9
|
)
|
|
|
(1.1
|
)
|
|
|
23%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
6.5
|
|
|
|
4.9
|
|
|
|
1.6
|
|
|
|
33%
|
|
Total net realized gain (loss) from investments
|
|
|
4.7
|
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
93%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized income
|
|
|
11.2
|
|
|
|
7.3
|
|
|
|
3.9
|
|
|
|
53%
|
|
Net change in unrealized appreciation (depreciation) from
investments
|
|
|
(5.4
|
)
|
|
|
8.5
|
|
|
|
(13.9
|
)
|
|
|
NA
|
|
Income tax benefit (provision)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
2.5
|
|
|
$
|
15.8
|
|
|
$
|
(13.3
|
)
|
|
|
(84)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Income
For the year ended December 31, 2007, total investment
income was $12.5 million, a $2.7 million, or 28%,
increase over the $9.8 million of total investment income
for the year ended December 31, 2006. The increase was
primarily attributable to a $2.3 million increase in
interest, fee and dividend income from investments and a
$0.4 million increase in interest income from idle funds
principally related to funds received from the IPO. The increase
in interest, fee and dividend income from investments was
primarily attributable to (i) higher average levels of
outstanding debt investments, which was principally due to the
closing of six new debt investments in the year ended
December 31, 2007 and several new debt investments in the
last half of 2006, partially offset by debt repayments received
during the same periods, and (ii) higher levels of dividend
income from portfolio equity investments.
Expenses
For the year ended December 31, 2007, total expenses
increased by approximately $1.1 million, or 23%, to
approximately $6.0 million from $4.9 million for the
year ended December 31, 2006. The increase in total
expenses was primarily attributable to a $0.5 million
increase in interest expense as a result of the additional
$9.9 million of SBIC Debentures borrowed by the Fund during
the year ended December 31, 2007 and $0.7 million of
professional costs related to the IPO. The professional costs
related to the IPO principally consisted of audit and review
costs as well as other offering-related professional fees. In
addition, general and administrative expenses increased
$0.3 million primarily attributable to an increase in
administration costs associated with being a public company. The
increase in total expenses was partially offset by a decrease of
$0.4 million in management fees paid due to Main
Streets internally managed operating structure subsequent
to the IPO.
39
Net
Investment Income
As a result of the $2.7 million increase in total
investment income as compared to the $1.1 million increase
in total expenses, net investment income for the year ended
December 31, 2007, was $6.5 million, or a 33%
increase, compared to net investment income of $4.9 million
during the year ended December 31, 2006. Professional fees
related to the IPO represented $0.7 million of the
$1.1 million increase in total expenses, or 11.7% of total
expenses for the year ended December 31, 2007.
Net
Realized Income
For the year ended December 31, 2007, net realized gains
from investments were $4.7 million, representing a
$2.3 million increase over net realized gains during the
year ended December 31, 2006. The higher level of net
realized gains during the year ended December 31, 2007
principally related to the realized gains recognized on equity
investments in four portfolio companies compared to lower net
realized gains recognized on equity investments in five
portfolio companies during the year ended December 31, 2006.
The higher net realized gains in the year ended
December 31, 2007 combined with the higher net investment
income during 2007 resulted in a $3.9 million, or 53%,
increase, in the net realized income for the year ended
December 31, 2007 compared with 2006.
Net
Increase in Net Assets Resulting from Operations
During the year ended December 31, 2007, we recorded a net
change in unrealized depreciation in the amount of
$5.4 million, or a $13.9 million decrease over the
$8.5 million in net change in unrealized appreciation for
the year ended December 31, 2006. The net change in
unrealized depreciation for the year ended December 31,
2007 included unrealized appreciation on 13 equity investments
in portfolio companies, partially offset by unrealized
depreciation on 6 equity investments, the reclassification of
$3.8 million of previously recognized unrealized gains into
realized gains on 5 exited investments and $0.4 million in
unrealized depreciation attributable to Main Streets
investment in the affiliated Investment Manager.
Subsequent to the Formation Transactions and the IPO, we
recognized a cumulative income tax expense of $3.3 million
primarily consisting of non-cash deferred taxes related to net
unrealized gains from certain portfolio equity investments
transferred into MSEI, our wholly-owned taxable subsidiary.
These equity investments had historically been made in portfolio
companies which were pass through entities for tax
purposes. The transfer of the equity investments into MSEI was
required in order to comply with the RIC source
income requirements. We do not anticipate incurring this
level of deferred tax expense in future periods, given the
amount recognized in the fourth quarter of fiscal 2007
represents the cumulative impact of deferred taxes related to
net unrealized gains on the equity investments transferred.
As a result of these events, our net increase in net assets
resulting from operations during the year ended
December 31, 2007, was $2.5 million, or an 84%
decrease compared to a net increase in net assets resulting from
operations of $15.8 million during the year ended
December 31, 2006.
Liquidity
and Capital Resources
Cash
Flows
For the year ended December 31, 2008, we experienced a net
decrease in cash and cash equivalents of $6.5 million.
During that period, we generated $10.9 million of cash from
our operating activities, primarily from net investment income
partially offset by the semi-annual interest payments on our
SBIC debentures, through the Fund. We used $3.5 million in
net cash for investing activities, principally due to the
funding of new investments and several smaller follow-on
investments for a total of $47.7 million. We also made a
$4.2 million investment in idle funds investments,
and
received proceeds from the maturity of a $24.1
million
investment in idle funds investments. We received
$16.3 million in cash proceeds from repayment of debt
investments and $8.0 million of cash proceeds from the
redemption and sale of equity investments. For the year ended
December 31, 2008, we used $13.9 million in cash
for
financing activities, which principally
40
consisted of $13.2 million in cash dividends to
stockholders, $0.4 million in deferred loan origination
costs and $0.3 million used in the purchase of
treasury
stock pursuant to our open market share repurchase program.
For the year ended December 31, 2007, we experienced a net
increase in cash and equivalents in the amount of
$28.1 million. During 2007, we generated $5.4 million
of cash from our operating activities, primarily from net
investment income. We used $38.0 million in net cash for
investing activities, principally due to the funding of new
investments and several smaller follow-on investments for a
total of $29.5 million of invested capital and the purchase
of $24.1 million of investments in idle funds investments,
partially offset by $9.6 million in cash proceeds from
repayment of debt investments and $5.9 million of cash
proceeds from the redemption or sale of several equity
investments. We generated $60.7 million in cash from
financing activities, which principally consisted of the net
proceeds of $60.2 million from the IPO and
$9.9 million in additional SBIC debenture borrowings,
through the Fund, partially offset by $7.5 million of cash
distributions to partners and stockholders and $1.6 million
of payments related to IPO costs.
For the year ended December 31, 2006, we experienced a net
decrease in cash and cash equivalents in the amount of
$12.5 million. During 2006, we generated $4.2 million
of cash from our operating activities, primarily from net
investment income. During 2006, we used $10.9 million in
cash for investing activities. The 2006 net cash used for
investing activities included the funding of new or follow on
investments for a total of $28.1 million of invested
capital, partially offset by $12.2 million in cash proceeds
from repayments of debt investments and $5.0 million of
cash proceeds from the redemption or sale of several equity
investments. During 2006, we used $5.9 million in cash for
financing activities, which principally consisted of
$6.2 million of cash distributions to partners (including a
$0.5 million return of capital distribution), partially
offset by additional partner contributions.
Capital
Resources
As of December 31, 2008, we had $39.8 million in cash
and cash equivalents plus idle funds investments, and our net
assets totaled $112.4 million. On October 24, 2008,
Main Street entered into a $30 million, three-year
investment credit facility (the Investment Facility)
with Branch Banking and Trust Company
(BB&T) and Compass Bank, as lenders, and
BB&T, as administrative agent for the lenders. The purpose
of the Investment Facility is to provide additional liquidity in
support of future investment and operational activities. The
Investment Facility allows for an increase in the total size of
the facility up to $75 million, subject to certain
conditions, and has a maturity date of October 24, 2011.
Borrowings under the Investment Facility bear interest, subject
to Main Streets election, on a per annum basis equal to
(i) the applicable LIBOR rate plus 2.75% or (ii) the
applicable base rate plus 0.75%. Main Street will pay unused
commitment fees of 0.375% per annum on the average unused lender
commitments under the Investment Facility. The Investment
Facility is secured by certain assets of MSCC, MSEI and the
Investment Manager. The Investment Facility contains certain
affirmative and negative covenants, including but not limited
to: (i) maintaining a minimum liquidity of not less than
10% of the aggregate principal amount outstanding,
(ii) maintaining an interest coverage ratio of at least
2.00 to 1.00, and (iii) maintaining a minimum tangible net
worth. At December 31, 2008, Main Street had no borrowings
outstanding under the Investment Facility, and Main Street was
in compliance with all covenants of the Investment Facility.
Due to our existing cash and cash equivalents plus idle funds
investments and the additional borrowing capacity under the
Investment Facility, we project that we will have sufficient
liquidity to fund our investment and operational activities
throughout all of calendar year 2009 and well into 2010.
However, this projection will be impacted by, among other
things, the pace of new and follow on investments,
investment
redemptions, the level of cash flow from operations
and cash
flow from realized gains, and the
level of dividends paid in
cash.
We anticipate that we will continue to fund our investment
activities through existing cash and cash equivalents plus idle
funds investments and a combination of future debt and
additional equity capital. Due to the Funds status as a
licensed SBIC, we have the ability to issue, through the Fund,
debentures guaranteed by the Small Business Administration (the
SBA) at favorable interest rates. Under the
regulations applicable to
41
SBICs, an SBIC can have outstanding debentures guaranteed by the
SBA generally in an amount up to twice its regulatory capital,
which generally equates to the amount of its equity capital.
The 2009 Stimulus Bill contains several provisions applicable to
SBIC funds, including the Fund. One of the key
SBIC-related
provisions included in the 2009 Stimulus Bill increases the
maximum amount of combined SBIC leverage (or SBIC leverage cap)
to $225 million for affiliated SBIC funds. The prior
maximum amount of SBIC leverage available to affiliated SBIC
funds was approximately $137 million, as adjusted annually
based upon changes in the Consumer Price Index. Due to the
increase in the maximum amount of SBIC leverage available, we
will now have access to incremental SBIC leverage to support our
future investment activities. Since the increase in the SBIC
leverage cap applies to affiliated SBIC funds, we will allocate
such increased borrowing capacity between the Fund, our wholly
owned SBIC subsidiary, and MSC II, an independently owned SBIC
that is managed by Main Street and therefore deemed to
be
affiliated with the Fund for SBIC regulatory purposes. It is
currently estimated that at least $55 million to
$60 million of additional SBIC leverage is now accessible
by Main Street for future investment activities, subject to the
required capitalization of the Fund.
Debentures guaranteed by the SBA have fixed interest rates that
approximate prevailing
10-year
Treasury Note rates plus a 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. Debentures issued prior to
September 2006 were subject to pre-payment penalties during
their first five years. Those pre-payment penalties no longer
apply to debentures issued after September 1, 2006. On
December 31, 2008, we, through the Fund, had
$55 million of outstanding indebtedness guaranteed by the
SBA, which carried an average fixed interest rate of
approximately 5.8%. The first maturity related to the
Funds SBIC debentures does not occur until 2013.
On December 31, 2007, we entered into a Treasury Secured
Revolving Credit Agreement (the Treasury Facility)
among us, Wachovia Bank, National Association, and Branch
Banking and Trust Company (BB&T), as
administrative agent for the lenders. Under the Treasury
Facility, the lenders agreed to extend revolving loans to us in
an amount not to exceed $100 million; however, due to the
maturation of our investment portfolio and the additional
flexibility provided by the Investment Facility, we unilaterally
reduced the Treasury Facility from $100 million to
$50 million during October 2008. The reduction in the size
of the Treasury Facility resulted in a 50% reduction in the
amount of unused commitment fees paid by us. The purpose of the
Treasury Facility is to provide us flexibility in the sizing of
portfolio investments and to facilitate the growth of our
investment portfolio. The Treasury Facility has a two-year term
and bears interest, at our option, either (i) at the LIBOR
rate or (ii) at a published prime rate of interest, plus
0.25% in either case. The applicable interest rates under the
Treasury Facility would be increased by 0.15% if usage under the
Treasury Facility is in excess of 50% of the days within a given
calendar quarter. The Treasury Facility also requires payment of
0.15% per annum in unused commitment fees based on the average
daily unused balances under the facility. The Treasury Facility
is secured by certain securities accounts maintained by
BB&T and is also guaranteed by the Investment Manager. The
Treasury Facility contains certain affirmative and negative
covenants, including but not limited to: (i) maintaining a
cash collateral coverage ratio of at least 1.01 to 1.0,
(ii) maintaining an interest coverage ratio of at least 2.0
to 1.0, and (iii) maintaining a minimum tangible net worth.
At December 31, 2008, we had no borrowings
outstanding
under the Treasury Facility, and Main Street was in compliance
with all covenants of the Treasury Facility.
We intend to generate additional cash from future offerings of
securities, future borrowings, repayments or sales of
investments, and cash flow from operations, including income
earned from investments in our portfolio companies and, to a
lesser extent, from the temporary investments of cash in
U.S. government securities and other idle funds investments
that mature in one year or less with the exception of
diversified bond funds. Our primary uses of funds will be
investments in portfolio companies, operating expenses and cash
distributions to holders of our common stock.
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. See
Risk Factors Risks Relating to Our Business
and Structure
42
Stockholders may incur dilution if we sell shares of our common
stock in one or more offerings at prices below the then current
net asset value per share of our common stock or issue
securities to subscribe to, convert to or purchase shares of our
common stock for a discussion of the proposal approved by
our stockholders at our 2008 annual meeting of stockholders that
authorizes us to sell shares of our common stock below the then
current net asset value per share of our common stock in one or
more offerings for a period of one year ending on the earlier of
June 16, 2009 or the date of our 2009 annual meeting of
stockholders. We will need approval of similar proposals by our
stockholders to issue shares below the then current net asset
value per share after the earlier of June 16, 2009 and the
date of our 2009 annual meeting of stockholders.
In order to satisfy the Code requirements applicable to a RIC,
we intend to distribute to our stockholders substantially all of
our taxable income, but we may also elect to periodically
spillover certain excess undistributed taxable income from one
tax year into the next tax year. In addition, as a BDC, we
generally are required to meet a coverage ratio of total assets
to total senior securities, which include all of our 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 exemptive relief from the SEC that
permits us to exclude SBA-guaranteed debt issued by the Fund
from our asset coverage ratio, which, in turn, enables us to
fund more investments with debt capital.
Current
Market Conditions
Beginning in late 2007, the United States entered a recession.
Throughout 2008, the economy continued to deteriorate and many
believe that the current recession could continue for an
extended period. During 2008, banks and others in the financial
services industry reported significant write-downs in the fair
value of their assets, which has led to the failure of a number
of banks and investment companies, a number of distressed
mergers and acquisitions, the government take-over of the
nations two largest government-sponsored mortgage
companies, and the passage of the $700 billion Emergency
Economic Stabilization Act of 2008 in October 2008 and the
$787 billion 2009 Stimulus Bill. In addition, the stock
market has declined significantly, with both the S&P 500
and the NASDAQ Global Select Market (on which our stock trades),
declining by nearly 40% between December 31, 2007 and
December 31, 2008. As the recession deepened during 2008,
unemployment rose and consumer confidence declined, which led
to
significant reductions in spending by both consumers and
businesses.
Although we have been able to secure access to additional
liquidity, including the recently obtained $30 million
investment credit facility and the increase in available
leverage through the SBIC program as part of the 2009 Stimulus
Bill, the current turmoil in the debt markets and uncertainty in
the equity capital markets provides no assurance that debt or
equity capital will be available to us in the future on
favorable terms, or at all.
The deterioration in consumer confidence and a general reduction
in spending by both consumers and businesses has had an adverse
effect on a number of the industries in which some of our
portfolio companies operate. In the event that the United States
economy remains in a protracted period of weakness, the results
of some of the lower middle-market companies like those in which
we invest, will continue to experience deterioration, which
could ultimately lead to difficulty in meeting their debt
service requirements and an increase in their defaults. In
addition, the end markets for certain of our portfolio
companies products and services have experienced, and
continue to experience, negative economic trends. We can provide
no assurance that the performance of certain of our portfolio
companies will not be negatively impacted by economic or other
conditions which could have a negative impact on our future
results.
Recently
Issued Accounting Standards
In June 2008, the Financial Accounting Standards Board
(FASB) issued
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This FASB
Staff Position (FSP) addresses whether instruments
granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share
(EPS). This FSP will be effective for financial
statements issued for fiscal
43
years beginning after December 15, 2008, and interim
periods within those years. All prior-period EPS data presented
will be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data)
to conform to the provisions of this FSP. Early application is
not permitted. We are currently analyzing the effect, if any,
this statement may have on our consolidated results of
operations.
In October 2008, the FASB issued Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active
(FSP 157-3).
FSP 157-3
provides an illustrative example of how to determine the fair
value of a financial asset in an inactive market. The FSP does
not change the fair value measurement principles set forth in
SFAS 157. Since adopting SFAS 157 in January 2008, our
practices for determining the fair value of our investment
portfolio have been, and continue to be, consistent with the
guidance provided in the example in
FSP 157-3.
Therefore, our adoption of
FSP 157-3
did not affect our practices for determining the fair value of
our investment portfolio and does not have a material effect on
our financial position or results of operations.
Inflation
Inflation has not had a significant effect on our results of
operations in any of the reporting periods presented in this
report. However, our portfolio companies have and may continue
to 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 December 31,
2008, we had two outstanding commitments to fund unused
revolving loans for up to $900,000.
Contractual
Obligations
As of December 31, 2008, our future fixed commitments for
cash payments on contractual obligations for each of the next
five years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
thereafter
|
|
|
|
(Dollars in thousands)
|
|
|
|
(Unaudited)
|
|
|
SBIC debentures payable
|
|
$
|
55,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,000
|
|
|
$
|
51,000
|
|
Interest due on SBIC debentures
|
|
|
21,495
|
|
|
|
3,179
|
|
|
|
3,179
|
|
|
|
3,179
|
|
|
|
3,188
|
|
|
|
3,179
|
|
|
|
5,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,495
|
|
|
$
|
3,179
|
|
|
$
|
3,179
|
|
|
$
|
3,179
|
|
|
$
|
3,188
|
|
|
$
|
7,179
|
|
|
$
|
56,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSCC is obligated to make payments under a support services
agreement with the Investment Manager. Subsequent to the
completion of the Formation Transactions and the IPO, the
Investment Manager is reimbursed for its excess expenses
associated with providing investment management and other
services to MSCC and its subsidiaries, as well as MSC II. Each
quarter, as part of the support services agreement, MSCC makes
payments to cover all expenses incurred by the Investment
Manager, less the recurring management fees that the Investment
Manager receives from MSC II pursuant to a long-term investment
advisory services agreement and any other fees received for
providing external services.
Related
Party Transactions
We co-invested with MSC II in several existing portfolio
investments prior to the IPO, but did not
co-invest
with MSC II subsequent to the IPO and prior to June 2008. In
June 2008, we received exemptive relief from the SEC to allow us
to resume co-investing with MSC II in accordance with the terms
of such exemptive relief. MSC II is managed by the Investment
Manager, and the Investment Manager is wholly
44
owned by MSCC. MSC II is an SBIC fund with similar investment
objectives to Main Street and which began its investment
operations in January 2006. The co-investments among Main Street
and MSC II had all been made at the same time and on the same
terms and conditions. The co-investments were also made in
accordance with the Investment Managers conflicts policy
and in accordance with the applicable SBIC conflict of interest
regulations.
As discussed further in Note D to the accompanying
consolidated financials statements, Main Street paid certain
management fees to the Investment Manager during the year ended
December 31, 2007. Subsequent to the completion of the
Formation Transactions, the Investment Manager is a wholly owned
portfolio company of Main Street. At December 31, 2008 and
2007, the Investment Manager had a receivable of $302,633 and a
payable of $207,783, respectively, with MSCC related to
recurring expenses required to support MSCCs business.
RECENT
DEVELOPMENTS
The recently enacted 2009 Stimulus Bill contains several
provisions applicable to SBIC funds, including the Fund,
our
wholly owned subsidiary. One of the key SBIC-
related provisions
included in the 2009 Stimulus Bill increases the maximum
amount
of combined SBIC leverage (or SBIC leverage cap) to
$225 million for affiliated SBIC funds. The prior
maximum
amount of SBIC leverage available to affiliated SBIC funds was
approximately $137 million, as adjusted annually based upon
changes in the Consumer Price Index. Due to the
increase in the
maximum amount of SBIC leverage available, we will
now have
access to incremental SBIC leverage to support our future
investment activities. Since the increase in the SBIC leverage
cap applies to affiliated SBIC funds, we will allocate such
increased borrowing capacity between our wholly owned SBIC
subsidiary and MSC II, an independently owned SBIC that is
managed by Main Street and therefore deemed to be affiliated
with the Fund for SBIC regulatory purposes. It is currently
estimated that at least $55 million to $60 million of
additional SBIC leverage is now accessible by Main Street for
future investment activities, subject to the required
capitalization of our wholly owned SBIC subsidiary.
45
SENIOR SECURITIES
Information about our senior securities is shown in the following table as of
December 31 for the years indicated in the table, unless otherwise noted. Grant Thornton
LLPs report on the senior securities table as of
December 31, 2008, is attached as an
exhibit to the registration statement of which this prospectus is a part.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount |
|
|
|
|
|
|
|
|
Outstanding |
|
Asset |
|
Involuntary |
|
|
|
|
Exclusive of |
|
Coverage |
|
Liquidating |
|
Average |
|
|
Treasury |
|
per Unit |
|
Preference |
|
Market Value |
Class and Year |
|
Securities (1) |
|
(2) |
|
per Unit (3) |
|
per Unit (4) |
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
SBIC debentures payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
22,000 |
|
|
|
1,784 |
|
|
|
|
|
|
|
N/A |
|
2005 |
|
|
45,100 |
|
|
|
1,738 |
|
|
|
|
|
|
|
N/A |
|
2006 |
|
|
45,100 |
|
|
|
1,959 |
|
|
|
|
|
|
|
N/A |
|
2007 |
|
|
55,000 |
|
|
|
3,094 |
|
|
|
|
|
|
|
N/A |
|
2008 |
|
|
55,000 |
|
|
|
3,043 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
(1) |
|
Total amount of each class of senior securities outstanding at the end of the period presented. |
|
(2) |
|
Asset coverage per unit is the ratio of the carrying value of our total consolidated assets,
less all liabilities and indebtedness not represented by senior securities, to the aggregate
amount of senior securities representing indebtedness. Asset coverage per unit is expressed in
terms of dollar amounts per $1,000 of indebtedness. |
|
(3) |
|
The amount to which such class of senior security would be entitled upon the involuntary
liquidation of the issuer in preference to any security junior to it. The indicates
information which the Securities and Exchange Commission expressly does not require to be
disclosed for certain types of senior securities. |
|
(4) |
|
Not applicable because senior securities are not registered for public trading. |
BUSINESS
We are a principal investment firm focused on providing
customized financing solutions to lower middle-market companies,
which we generally define as companies with annual revenues
between $10 million and $100 million. Our investment
objective is to maximize our portfolios total return by
generating current income from our debt investments and
realizing 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 investments generally range in size from
$2 million to $15 million. Our ability to invest
across a companys capital structure, from senior secured
loans to subordinated debt to equity securities, allows us to
offer portfolio companies a comprehensive suite of financing
solutions, or one-stop financing.
Our investments are made through both MSCC and the Fund. Since
the IPO, MSCC and the Fund have co-invested in substantially
every investment we have made. MSCC and the Fund share the same
investment strategies and criteria in the lower middle-market,
although they are subject to different regulatory regimes. See
Regulation. An investors return in
MSCC will depend, in part, on the Funds investment returns
as the Fund is a wholly owned subsidiary of MSCC.
We typically seek to work with entrepreneurs, business owners
and management teams to provide customized financing for
strategic acquisitions, business expansion and other growth
initiatives, ownership transitions and recapitalizations. In
structuring transactions, we seek to protect our rights, manage
our risk and create value by: (i) providing financing at
lower leverage ratios; (ii) generally taking first priority
liens on assets; and (iii) providing significant equity
incentives for management teams of our portfolio companies. We
seek to avoid competing with other capital providers for
transactions because we believe competitive transactions often
have execution risks and can result in potential conflicts among
creditors and lower returns due to more aggressive valuation
multiples and higher leverage ratios.
46
As of December 31, 2008, Main Street had debt and equity
investments in 31 portfolio companies. Approximately 84% of our
total portfolio investments at cost, excluding our 100% equity
interest in the Investment Manager, were in the form of debt
investments and 91% of such debt investments at cost were
secured by first priority liens on the assets of our portfolio
companies. As of December 31, 2008, Main Street had a
weighted average effective yield on its debt investments of 14%.
Weighted average yields are computed using the effective
interest rates for all debt investments at December 31,
2008, including amortization of deferred debt origination fees
and accretion of original issue discount. At December 31,
2008, we had equity ownership in approximately 94% of our
portfolio companies and the average fully diluted equity
ownership in those portfolio companies was approximately 25%.
Business Strategies
Our investment objective is to maximize our portfolios total return by generating
current income from our debt investments and realizing capital
appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. We have adopted the following business strategies to achieve our
investment objective:
|
|
|
Delivering Customized Financing Solutions. We believe our ability to
provide a broad range of customized financing solutions to lower
middle-market companies sets us apart from other capital providers
that focus on providing a limited number of financing solutions. We
offer to our portfolio companies customized debt financing solutions
with equity components that are tailored to the facts and
circumstances of each situation. Our ability to invest across a
companys capital structure, from senior secured loans to subordinated
debt to equity securities, allows us to offer our portfolio companies
a comprehensive suite of financing solutions, or one-stop financing. |
|
|
|
|
Focusing on Established Companies in the Lower Middle-Market. We
generally invest in companies with established market positions,
experienced management teams and proven revenue streams. Those
companies generally possess better risk-adjusted return profiles than
newer companies that are building management or are in the early
stages of building a revenue base. In addition, established lower
middle-market companies generally provide opportunities for capital
appreciation. |
|
|
|
|
|
Leveraging the Skills and Experience of Our Investment Team. Our
investment team has significant experience in lending to and investing
in lower middle-market companies. The members of our investment team
have broad investment backgrounds, with prior experience at private
investment funds, investment banks and other financial services
companies, and currently include seven certified public accountants and
one chartered financial analyst. The expertise of our investment team
in analyzing, valuing, structuring, negotiating and closing
transactions should provide us with competitive advantages by allowing
us to consider customized financing solutions and non-traditional and
complex structures. |
|
|
|
|
|
Investing Across Multiple Industries. We seek to maintain a portfolio
of investments that is appropriately balanced among various companies,
industries, geographic regions and end markets. This portfolio balance
is intended to mitigate the potential effects of negative economic
events for particular companies, regions and industries. |
|
|
|
|
Capitalizing on Strong Transaction Sourcing Network. Our investment
team seeks to leverage its extensive network of referral sources for
investments in lower middle-market companies. We have developed a
reputation in our marketplace as a responsive, efficient and reliable
source of financing, which has created a growing stream of proprietary
deal flow for us. |
|
|
|
|
|
Benefiting from Lower Cost of Capital. The Funds SBIC license has
allowed it to issue SBA-guaranteed debentures. SBA-guaranteed
debentures carry long-term fixed rates that are generally lower than
rates on comparable bank and other debt. Because lower cost SBA
leverage is, and will continue to be, a significant part of our
capital base through the Fund, our relative cost of debt capital should be lower than
many of our competitors. In addition, the SBIC leverage that we
receive through the Fund represents a
stable, long-term component of our capital structure. |
|
Investment Criteria
Our investment team has identified the following investment criteria that it believes
are important in evaluating prospective portfolio companies. Our investment team uses these
criteria in evaluating investment opportunities. However, not all of these criteria have
been, or will be, met in connection with each of our investments.
47
|
|
|
Proven Management Team with Meaningful Financial Commitment. We look
for operationally-oriented management with direct industry experience
and a successful track record. In addition, we expect the management
team of each portfolio company to have meaningful equity ownership in
the portfolio company to better align our respective economic
interests. We believe management teams with these attributes are more
likely to manage the companies in a manner that protects our debt
investment and enhances the value of our equity investment. |
|
|
|
|
Established Companies with Positive Cash Flow. We seek to invest in
established companies in the lower middle-market with sound historical
financial performance. We typically focus on companies that have
historically generated EBITDA of $1.0 million to $10.0 million and
commensurate levels of free cash flow. We generally do not intend to
invest in start-up companies or companies with speculative business
plans. |
|
|
|
|
Defensible Competitive Advantages/Favorable Industry Position. We
primarily focus on companies having competitive advantages in their
respective markets and/or operating in industries with barriers to
entry, which may help to protect their market position and
profitability. |
|
|
|
|
Exit Alternatives. We expect that the primary means by which we exit
our debt investments will be through the repayment of our investment
from internally generated cash flow and/or refinancing. In addition,
we seek to invest in companies whose business models and expected
future cash flows may provide alternate methods of repaying our
investment, such as through a strategic acquisition by other industry
participants or a recapitalization. |
Portfolio Investments
Debt Investments
Historically,
we have made debt investments principally in the form of single
tranche debt. Single tranche debt financing involves issuing one debt security that blends
the risk and return profiles of both secured and subordinated debt. We believe that single
tranche debt is more appropriate for many lower middle-market companies given their size in
order to reduce structural complexity and potential conflicts among creditors.
Our debt investments generally have terms of three to seven years, with limited required
amortization prior to maturity, and provide for monthly or quarterly payment of interest at
fixed interest rates generally between 12% and 14% per annum, payable currently in cash. In
some
instances, we have provided floating interest rates for a portion of a single tranche debt
security. In addition, certain debt investments may have a form of interest that is not paid
currently but is accrued and added to the loan balance and paid at maturity. We refer to this
as payment-in-kind or PIK interest. We typically structure our debt investments with the
maximum seniority and collateral that we can reasonably obtain while seeking to achieve our
total return target. In most cases, our debt investment will be collateralized by a first
priority lien on substantially all the assets of the portfolio
company. As of December 31, 2008, 91% of our debt investments
at
cost were secured by first priority liens on the assets of
portfolio companies.
In addition to seeking a senior lien position in the capital structure of our portfolio
companies, we seek to limit the downside potential of our investments by negotiating
covenants that are designed to protect our investments while affording our portfolio
companies as much flexibility in managing their businesses as possible. Such restrictions may
include affirmative and negative covenants, default penalties, lien protection, change of
control or change of management provisions, key-man life insurance, guarantees, equity
pledges, personal guaranties, where appropriate, and put rights. In addition, we typically
seek board representation or observation rights in all of our portfolio companies.
While we will continue to focus on single tranche debt investments, we also anticipate
structuring some of our debt investments as mezzanine loans. We anticipate that these
mezzanine loans will be primarily junior secured or unsecured, subordinated loans that
provide for relatively high fixed interest rates that will provide us with significant
current interest income. These loans typically will have interest-only payments in the early
years, with amortization of principal deferred to the later years of the mezzanine loan term.
Also, in some cases, our mezzanine loans may be collateralized by a subordinated lien on some
or all of the assets of the borrower. Typically, our mezzanine loans will have maturities of
three to five years. We will generally target fixed interest rates of 12% to 14%, payable
currently in cash for our mezzanine loan investments with higher targeted total returns from
equity warrants, direct equity investments or PIK interest.
Warrants
In connection with our debt investments, we have historically received equity warrants
to establish or increase our equity interest in the portfolio company. Warrants we receive in
connection with a debt investment typically require only a nominal cost
48
to exercise, and
thus, as a portfolio company appreciates in value, we may achieve additional investment
return from this equity interest. We typically structure the warrants to provide provisions
protecting our rights as a minority-interest holder, as well as secured or unsecured put
rights, or rights to sell such securities back to the portfolio company, upon the occurrence
of specified events. In certain cases, we also may obtain registration rights in connection
with these equity interests, which may include demand and piggyback registration rights.
Direct Equity Investments
We also will seek to make direct equity investments in situations where
it is appropriate to
align our interests with key management and stockholders, and to allow for some participation
in the appreciation in enterprise values of our portfolio companies. We usually make our
direct equity investments in connection with debt investments. In addition, we may have both
equity warrants and direct equity positions in some of our portfolio companies. We seek
to maintain fully diluted equity positions in our portfolio companies of 5% to 50%, and
may have controlling interests in some instances. We have a value orientation toward our
direct equity investments and have traditionally been able to purchase our equity investments
at reasonable valuations.
Investment Process
Our
investment committee is responsible for all aspects of our
investment process. The current members of our investment
committee are Vincent D. Foster, our Chairman and Chief
Executive Officer, Todd A. Reppert, our President and Chief
Financial Officer, and Dwayne L. Hyzak, Senior Vice President.
Mr. Hyzak replaced David L. Magdol, Senior Vice President,
in this revolving seat on the investment committee effective
January 1, 2009 and will serve through 2009. Our investment
strategy involves a team approach, whereby potential
transactions are screened by members of our investment team
before being presented to the investment committee. Our
investment committee meets on an as needed basis depending on
transaction volume. Our investment committee generally
categorizes our investment process into seven distinct stages:
Deal Generation/Origination
Deal
generation and origination is maximized through long-standing and extensive
relationships with industry contacts, brokers, commercial and investment bankers,
entrepreneurs, services providers such as lawyers and accountants, as well as current and
former portfolio companies and investors. Our investment team has focused its deal generation
and origination efforts on lower middle-market companies. We have developed a reputation as a
knowledgeable, reliable and active source of capital and assistance in this market.
Screening
During the screening process, if a transaction initially meets our investment criteria,
we will perform preliminary due diligence, taking into consideration some or all of the
following information:
|
|
|
a comprehensive financial model based on quantitative analysis of historical financial
performance, projections and pro forma adjustments to determine the estimated internal
rate of return; |
|
|
|
|
a brief industry and market analysis; importing direct industry expertise from other
portfolio companies or investors; |
|
|
|
|
preliminary qualitative analysis of the management teams competencies and backgrounds; |
|
|
|
|
potential investment structures and pricing terms; and |
|
|
|
|
regulatory compliance. |
Upon successful screening of the proposed transaction, the investment team makes a
recommendation to our investment committee. If our investment committee concurs with moving
forward on the proposed transaction, we issue a non-binding term sheet to the company.
Term Sheet
The non-binding term sheet will include the key economic terms based upon our analysis
performed during the screening process as well as a proposed timeline and our qualitative
expectation for the transaction. While the term sheet is non-binding, it generally does
require an expense deposit to be paid in order to move the transaction to the due diligence
phase. Upon execution of a term sheet and payment of the expense deposit, we begin our formal
due diligence process.
49
Due Diligence
Due diligence on a proposed investment is performed by a minimum of two members of our
investment team, whom we refer to collectively as the deal team, and certain external
resources, who together conduct due diligence to understand the relationships among the
prospective portfolio companys business plan, operations and financial performance. Our due
diligence review includes some or all of the following:
|
|
|
initial or additional site visits with management and key personnel; |
|
|
|
|
detailed review of historical and projected financial statements; |
|
|
|
|
operational reviews and analysis; |
|
|
|
|
interviews with customers and suppliers; |
|
|
|
|
detailed evaluation of company management, including background checks; |
|
|
|
|
review of material contracts; |
|
|
|
|
in-depth industry, market, and strategy analysis; and |
|
|
|
|
review by legal, environmental or other consultants, if applicable. |
During the due diligence process, significant attention is given to sensitivity analyses
and how the company might be expected to perform given downside, base-case and upside
scenarios. In certain cases, we may decide not
to make an investment based on the results of the diligence process.
Document and Close
Upon completion of a satisfactory due diligence review, the deal team presents the
findings and a recommendation to our investment committee. The presentation contains
information including, but not limited to, the following:
|
|
|
company history and overview; |
|
|
|
|
transaction overview, history and rationale, including an analysis of transaction strengths and risks; |
|
|
|
|
analysis of key customers and suppliers and key contracts; |
|
|
|
|
a working capital analysis; |
|
|
|
|
an analysis of the companys business strategy; |
|
|
|
|
a management background check and assessment; |
|
|
|
|
third-party accounting, legal, environmental or other due diligence findings; |
|
|
|
|
investment structure and expected returns; |
|
|
|
|
anticipated sources of repayment and potential exit strategies; |
|
|
|
|
pro forma capitalization and ownership; |
|
|
|
|
an analysis of historical financial results and key financial ratios; |
|
|
|
|
sensitivities to managements financial projections; and |
|
|
|
|
detailed reconciliations of historical to pro forma results. |
50
If any adjustments to the transaction terms or structures are proposed by the investment
committee, such changes are made and applicable analyses updated. Approval for the
transaction must be made by the affirmative vote from a majority of the members of the
investment committee. Upon receipt of transaction approval, we will re-confirm regulatory
company compliance, process and finalize all required legal documents, and fund the
investment.
Post-Investment
We continuously monitor the status and progress of the portfolio companies. We offer
managerial assistance to our portfolio companies, giving them access to our investment
experience, direct industry expertise and contacts. The same deal team that was involved in
the investment process will continue its involvement in the portfolio company
post-investment. This provides for continuity of knowledge and allows the deal team to
maintain a strong business relationship with key management of our portfolio companies for
post-investment assistance and monitoring purposes. As part of the monitoring process, the
deal team will analyze monthly/quarterly financial statements versus the previous periods and
year, review financial projections, meet with management, attend board meetings and review
all compliance certificates and covenants. While we maintain limited involvement in the
ordinary course operations of our portfolio companies, we maintain a higher level of
involvement in non-ordinary course financing or strategic activities and any non-performing
scenarios.
We also use an internally developed investment rating system to characterize and monitor
our expected level of returns on each of our investments.
|
|
|
Investment Rating 1 represents a portfolio company that is performing
in a manner which significantly exceeds our original expectations and
projections; |
|
|
|
|
Investment Rating 2 represents a portfolio company that, in general,
is performing above our original expectations; |
|
|
|
|
Investment Rating 3 represents a portfolio company that is generally
performing in accordance with our original expectations; |
|
|
|
|
Investment Rating 4 represents a portfolio company that is
underperforming our original expectations. Investments with such a
rating require increased Main Street monitoring and scrutiny; and |
|
|
|
|
Investment Rating 5 represents a portfolio company that is
significantly underperforming. Investments with such a rating require
heightened levels of Main Street monitoring and scrutiny and involve
the recognition of unrealized depreciation on such investment. |
The following table shows the distribution of our portfolio investments (excluding the
investment in our affiliated Investment Manager) on the 1 to 5 investment rating scale at
fair value as of December 31, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
1
|
|
$
|
27,523
|
|
|
|
24.9
|
%
|
|
$
|
24,619
|
|
|
|
28.0
|
%
|
2
|
|
|
23,150
|
|
|
|
21.0
|
%
|
|
|
35,068
|
|
|
|
39.8
|
%
|
3
|
|
|
53,123
|
|
|
|
48.1
|
%
|
|
|
24,034
|
|
|
|
27.3
|
%
|
4
|
|
|
6,035
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
0.0
|
%
|
5
|
|
|
500
|
|
|
|
0.5
|
%
|
|
|
4,304
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
110,331
|
|
|
|
100.0
|
%
|
|
$
|
88,025
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
upon our investment rating system, the weighted average
rating of our portfolio as of December 31, 2008 and 2007
was approximately 2.4 and 2.2, respectively. As of
December 31, 2008 and 2007, we had one debt investment in
each period representing 0.5% and 3.1%, respectively, of total
portfolio fair value (excluding Main Streets investment in
the Investment Manager) which was on non-accrual status.
51
Exit Strategies/Refinancing
While
we generally exit most investments through the refinancing or repayment of
our debt and redemption of our equity positions, we typically assist our portfolio companies
in developing and planning exit opportunities, including any sale or merger of our portfolio
companies. We may also assist in the structure, timing, execution and transition of the exit
strategy.
Determination of Net Asset Value and Valuation Process
We
determine the net asset value per share of our common stock on a quarterly
basis. The net asset value per share is equal to our total assets minus liabilities and any
preferred stock outstanding divided by the total number of shares of common stock
outstanding.
Our business plan calls for us to invest primarily in illiquid securities issued by
private companies and/or thinly traded public companies. These investments may be subject to
restrictions on resale and will generally have no established trading market. As a result, we
determine in good faith the fair value of our portfolio investments pursuant to a valuation
policy in accordance with
Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value
Measurements (SFAS 157)
and a valuation process approved by our Board of Directors
and in accordance with the 1940 Act. We review external events, including private mergers,
sales and acquisitions involving comparable companies, and include these events in the
valuation process. Our valuation policy is intended to provide a consistent basis for
determining the fair value of the portfolio.
For valuation purposes, control investments are composed of equity and debt securities
for which we have a controlling interest in the portfolio company or have the ability to nominate a majority of the
portfolio companys board of directors. Market quotations are generally not readily available
for our control investments. As a result, we determine the fair value of these investments
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
companys historical and projected financial results. We allocate the enterprise value to
investments in order of the legal priority of the investments. 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. The valuation approaches for our control investments estimate the value of the
investment if we were to sell, or exit, the investment, assuming the highest and best use of
the investment by market participants. 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 investments are composed of debt and equity
securities for which we do not have a controlling interest in the portfolio company, or the ability to nominate a
majority of the portfolio companys board of directors. Market quotations for our non-control investments are not
readily available. For our non-control investments, we use the market approach to value our
equity investments and the income approach to value our debt instruments. For non-control
debt investments, we determine the fair value primarily using a yield 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 debt security
is generally the legal maturity date of the instrument, as we generally intend to hold our
loans to maturity. The yield analysis considers changes in leverage levels, credit quality,
portfolio company performance and other factors. We will use the value determined by the
yield 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 debt security. A
change in the assumptions that we use to estimate the fair value of our debt securities using
the yield analysis could have a material impact on the determination of fair value. If there
is deterioration in credit quality or a debt security is in workout status, we may consider
other factors in determining the fair value of a debt security, including the value
attributable to the debt security from the enterprise value of the portfolio company or the
proceeds that would be received in a liquidation analysis.
Due to the inherent uncertainty in the valuation process, our estimate of fair value 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 could cause the
gains or losses ultimately realized on these investments to be 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.
52
As described below, we undertake a multi-step valuation
process
each quarter in connection with determining the fair value of
our investments, with our Board of Directors ultimately and
solely responsible for overseeing, reviewing and approving, in
good faith, our estimate of the fair value of each individual
investment.
|
|
|
Our quarterly valuation process will begin with each portfolio
company or investment being initially valued by the deal team
responsible for the portfolio investment; |
|
|
|
|
Preliminary valuation conclusions will then be reviewed and
discussed with senior management;
|
|
|
|
|
The Audit Committee of our Board of Directors will review the
preliminary valuations, and the deal team will consider and
assess, as appropriate, any changes that may be required to the
preliminary valuation to address any comments provided by the
Audit Committee; |
|
|
|
|
The Board of Directors will assess the valuations and will
ultimately approve the fair value of each investment in our
portfolio in good faith; and
|
|
|
|
|
An independent valuation firm engaged by the Board of Directors
will perform certain mutually agreed limited procedures that we
have identified and asked them to perform on a selection of our
final portfolio company valuation conclusions. |
Prior to the IPO, the valuations of the Funds investments
were determined by the General Partner through a multi-step
process consistent with the process discussed above except that
the review and determination of fair value was made by the
General Partner and not by the Audit Committee or the Board of
Directors.
Duff & Phelps, LLC, an independent valuation firm
(Duff & Phelps), has provided third-party
valuation consulting services to Main Street, which consisted of
certain mutually agreed limited procedures that Main Street
identified and requested Duff & Phelps to perform
(hereinafter referred to as the Procedures). During
2008, the Procedures were performed on investments in 24
portfolio companies and on the investment in the Investment
Manager comprising approximately 84% of the total portfolio
investments at fair value as of December 31, 2008, with the
Procedures performed on investments in 5 portfolio companies for
the quarter ended March 31, 2008, investments in 8
portfolio companies for the quarter ended June 30, 2008, 5
portfolio companies for the quarter ended September 30,
2008 and 6 portfolio companies and the Investment Manager for
the quarter ended December 31, 2008. Duff &
Phelps had also reviewed a total of 24 portfolio companies
comprising approximately 77% of the total portfolio investments
at fair value as of December 31, 2007. Upon completion of
the Procedures in each case, Duff & Phelps concluded
that the fair value, as determined by Main Street, of those
investments subjected to the Procedures did not appear to be
unreasonable.
Determination of fair value involves subjective judgments and
estimates. The notes to our financial statements will refer to
the uncertainty with respect to the possible effect of such
valuations, and any change in such valuations, on our financial
statements.
Competition
We compete for investments with a number of BDCs and investment funds (including private
equity funds, mezzanine funds and other SBICs), as well as traditional financial services
companies such as commercial banks and other sources of financing. Many of the entities that
compete with us have greater financial and managerial resources. We believe we are able to be
competitive with these entities primarily on the basis of our focus on the underserved lower middle-market the experience and contacts of our management team, our responsive and efficient
investment analysis and decision-making processes, our comprehensive suite of customized
financing solutions and the investment terms we offer.
53
We believe that some of our competitors make senior secured loans, junior secured loans
and subordinated debt investments with interest rates and returns that are comparable to or
lower than the rates and returns that we target. Therefore, we do not seek to compete
primarily on the interest rates and returns that we offer to potential portfolio companies.
For additional information concerning the competitive risks we face, see Risk Factors
Risks Relating to Our Business and Structure We
may face increasing competition for investment opportunities.
Employees
As
of December 31, 2008, we had 17 employees, each of whom was employed by the
Investment Manager. These employees include investment and portfolio management
professionals, operations professionals and administrative staff. In 2008, we hired several
investment professionals, as well as our Chief Accounting Officer and General Counsel. We
will hire additional investment professionals and additional administrative personnel,
as necessary. All of our employees are located in our Houston office.
Properties
We do not own any real estate or other physical properties materially important to our
operations. Currently, we lease office space in Houston, Texas for our corporate
headquarters.
Legal Proceedings
Although we may, from time to time, be involved in litigation arising out of our
operations in the normal course of business or otherwise, we are currently not a party to any
pending material legal proceedings.
PORTFOLIO COMPANIES
The following table sets forth certain unaudited information as of December 31, 2008,
for each portfolio company in which we had a debt or equity investment. Other than these
investments, our only formal relationships with our portfolio companies are the managerial
assistance ancillary to our investments and the board observer or participation rights we may
receive.
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address |
|
Nature of |
|
Title of Securities |
|
Percentage of
Fully Diluted |
|
Cost of |
|
|
Fair Value |
|
of Portfolio Company |
|
Principal Business |
|
Held by Us |
|
Equity Held |
|
Investment |
|
|
of Investment |
|
Advantage Millwork Company, Inc. |
|
Manufacturer/Distributor |
|
12% Secured Debt |
|
|
|
|
|
|
2,955,442 |
|
|
|
2,955,442 |
|
10510 Okanella Street, Suite 200 |
|
of Wood Doors |
|
Warrants |
|
|
12.2 |
% |
|
|
97,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX 77041 |
|
|
|
|
|
|
|
|
|
|
3,053,250 |
|
|
|
2,955,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Sensor Technologies, Inc. |
|
Manufacturer of Commercial/ |
|
Prime plus 0.5% Secured Debt |
|
|
|
|
|
|
3,800,000 |
|
|
|
3,800,000 |
|
450 Clark Drive |
|
Industrial Sensors |
|
Warrants |
|
|
20.0 |
% |
|
|
50,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mt. Olive, NJ 07828 |
|
|
|
|
|
|
|
|
|
|
3,850,000 |
|
|
|
4,050,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Café Brazil, LLC |
|
Casual Restaurant |
|
12% Secured Debt |
|
|
|
|
|
|
2,728,113 |
|
|
|
2,750,000 |
|
202 West Main Street Suite 100 |
|
Group |
|
LLC Interests |
|
|
42.3 |
% |
|
|
41,837 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen, TX 75002 |
|
|
|
|
|
|
|
|
|
|
2,769,950 |
|
|
|
3,750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlton Global Resources, LLC |
|
Processor of |
|
13% PIK Secured Debt |
|
|
|
|
|
|
4,655,836 |
|
|
|
|
|
20021 Valley Blvd, Suite B |
|
Industrial Minerals |
|
LLC Interests |
|
|
8.5 |
% |
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tehachapi, CA 93561 |
|
|
|
|
|
|
|
|
|
|
5,055,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBT Nuggets, LLC |
|
Produces and Sells |
|
14% Secured Debt |
|
|
|
|
|
|
1,642,518 |
|
|
|
1,680,000 |
|
44 Club Road Suite 150 |
|
IT Certification |
|
10% Secured Debt |
|
|
|
|
|
|
150,000 |
|
|
|
150,000 |
|
Eugene, OR 97401 |
|
Training Videos |
|
LLC Interests |
|
|
29.1 |
% |
|
|
432,000 |
|
|
|
1,625,000 |
|
|
|
|
|
Warrants |
|
|
10.5 |
% |
|
|
72,000 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,296,518 |
|
|
|
3,955,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceres Management, LLC (Lambs) |
|
Aftermarket Automotive |
|
14% Secured Debt |
|
|
|
|
|
|
2,372,601 |
|
|
|
2,372,601 |
|
11675 Jollyville Road, Suite 300 |
|
Services Chain |
|
LLC Interests |
|
|
42.0 |
% |
|
|
1,200,000 |
|
|
|
1,300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin, TX 78759 |
|
|
|
|
|
|
|
|
|
|
3,572,601 |
|
|
|
3,672,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California Healthcare Medical Billing, Inc. |
|
Healthcare Services |
|
12% Secured Debt |
|
|
|
|
|
|
1,141,706 |
|
|
|
1,141,706 |
|
1121 E. Washington Ave. |
|
|
|
Common Stock |
|
|
6.0 |
% |
|
|
390,000 |
|
|
|
390,000 |
|
Escondido, CA 92025 |
|
|
|
Warrants |
|
|
12.0 |
% |
|
|
240,000 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,771,706 |
|
|
|
1,771,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condit Exhibits, LLC |
|
Tradeshow Exhibits/ |
|
13% current / 5% PIK Secured Debt |
|
|
|
|
|
|
2,273,194 |
|
|
|
2,273,194 |
|
500 West Tennessee |
|
Custom Displays |
|
LLC Interests |
|
|
28.1 |
% |
|
|
300,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver, CO 80223 |
|
|
|
|
|
|
|
|
|
|
2,573,194 |
|
|
|
2,573,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Teak Fine Hardwoods, Inc. |
|
Hardwood Products |
|
Common Stock |
|
|
3.3 |
% |
|
|
130,000 |
|
|
|
490,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1106 Drake Road
Donalds, SC 29638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Manufacturing, LLC |
|
Industrial Metal |
|
Prime plus 1% Secured Debt |
|
|
|
|
|
|
1,190,764 |
|
|
|
1,200,000 |
|
1221 Indiana St. |
|
Fabrication |
|
13% Secured Debt |
|
|
|
|
|
|
1,747,777 |
|
|
|
1,880,000 |
|
Humble, TX 77396 |
|
|
|
LLC Interests |
|
|
18.6 |
% |
|
|
472,000 |
|
|
|
1,100,000 |
|
|
|
|
|
Warrants |
|
|
8.4 |
% |
|
|
160,000 |
|
|
|
550,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,570,541 |
|
|
|
4,730,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawthorne Customs & Dispatch Services, LLC |
|
Transportation/ |
|
13% Secured Debt |
|
|
|
|
|
|
1,171,988 |
|
|
|
1,171,988 |
|
9370 Wallisville Road |
|
Logistics |
|
LLC Interests |
|
|
27.8 |
% |
|
|
375,000 |
|
|
|
435,000 |
|
Houston, TX 77013 |
|
|
|
Warrants |
|
|
16.5 |
% |
|
|
37,500 |
|
|
|
230,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584,488 |
|
|
|
1,836,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hayden Acquisition, LLC |
|
Manufacturer of |
|
8% Secured Debt |
|
|
|
|
|
|
1,781,303 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7801 West Tangerine Rd. |
|
Utility Structures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rillito, AZ 85654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston Plating & Coatings, LLC |
|
Plating & Industrial |
|
Prime plus 2% Secured Debt |
|
|
|
|
|
|
300,000 |
|
|
|
300,000 |
|
1315 Georgia St. |
|
Coating Services |
|
LLC Interests |
|
|
11.1 |
% |
|
|
210,000 |
|
|
|
2,750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Houston, TX 77587 |
|
|
|
|
|
|
|
|
|
|
510,000 |
|
|
|
3,050,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydratec Holdings, LLC |
|
Agricultural Services |
|
12.5% Secured Debt |
|
|
|
|
|
|
5,311,329 |
|
|
|
5,311,329 |
|
325 Road 192 |
|
|
|
Prime plus 1% Secured Debt |
|
|
|
|
|
|
1,579,911 |
|
|
|
1,579,911 |
|
Delano, CA 93215 |
|
|
|
LLC Interests |
|
|
60.0 |
% |
|
|
1,800,000 |
|
|
|
2,050,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,691,240 |
|
|
|
8,941,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jensen Jewelers of Idaho, LLC |
|
Retail Jewelry |
|
Prime Plus 2% Secured Debt |
|
|
|
|
|
|
1,030,957 |
|
|
|
1,044,000 |
|
130 2nd Avenue North |
|
|
|
13% current / 6% PIK Secured Debt |
|
|
|
|
|
|
986,980 |
|
|
|
1,004,591 |
|
Twin Falls, ID 83301 |
|
|
|
LLC Interests |
|
|
24.3 |
% |
|
|
376,000 |
|
|
|
380,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,393,937 |
|
|
|
2,428,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBK Industries, LLC |
|
Specialty Manufacturer |
|
14% Secured Debt |
|
|
|
|
|
|
3,787,758 |
|
|
|
3,937,500 |
|
East Highway 96 |
|
of Oilfield and |
|
8% Secured Debt |
|
|
|
|
|
|
468,750 |
|
|
|
468,750 |
|
Rush Center, KS 67575 |
|
Industrial Products |
|
8% Secured Debt |
|
|
|
|
|
|
450,000 |
|
|
|
450,000 |
|
|
|
|
|
LLC Interests |
|
|
14.5 |
% |
|
|
187,500 |
|
|
|
775,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,894,008 |
|
|
|
5,631,250 |
|
|
Laurus Healthcare, LP |
|
Healthcare Facilities |
|
13% Secured Debt |
|
|
|
|
|
|
2,259,664 |
|
|
|
2,275,000 |
|
10000 Memorial Drive, Suite 540 |
|
|
|
Warrants |
|
|
17.5 |
% |
|
|
105,000 |
|
|
|
2,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX 77056 |
|
|
|
|
|
|
|
|
|
|
2,364,664 |
|
|
|
4,775,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAPCO Precast, LLC |
|
Precast Concrete |
|
18% Secured Debt |
|
|
|
|
|
|
6,348,011 |
|
|
|
6,461,538 |
|
6949 Low Bid Lane |
|
Manufacturing |
|
Prime Plus 2% Secured Debt |
|
|
|
|
|
|
3,660,945 |
|
|
|
3,692,308 |
|
San Antonio, TX 78250 |
|
|
|
LLC Interests |
|
|
36.1 |
% |
|
|
2,000,000 |
|
|
|
5,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,008,956 |
|
|
|
15,253,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Trench Safety, LLC |
|
Trench & Traffic |
|
10% PIK Debt |
|
|
|
|
|
|
404,256 |
|
|
|
404,256 |
|
15955 West Hardy Road, Suite 100 |
|
Safety Equipment |
|
LLC Interests |
|
|
11.7 |
% |
|
|
1,792,308 |
|
|
|
1,792,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX 77060 |
|
|
|
|
|
|
|
|
|
|
2,196,564 |
|
|
|
2,196,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OMi Holdings, Inc. |
|
Manufacturer of |
|
12% Secured Debt |
|
|
|
|
|
|
6,603,400 |
|
|
|
6,603,400 |
|
1515 E. I-30 Service Road |
|
Overhead Cranes |
|
Common Stock |
|
|
28.8 |
% |
|
|
900,000 |
|
|
|
570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royse City, TX 75189 |
|
|
|
|
|
|
|
|
|
|
7,503,400 |
|
|
|
7,173,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulse Systems, LLC |
|
Manufacturer of |
|
14% Secured Debt |
|
|
|
|
|
|
1,819,464 |
|
|
|
1,831,274 |
|
4070 G Nelson Avenue |
|
Components for |
|
Warrants |
|
|
7.4 |
% |
|
|
132,856 |
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concord, CA 94520 |
|
Medical Devices |
|
|
|
|
|
|
|
|
1,952,320 |
|
|
|
2,281,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quest Design & Production, LLC |
|
Design and Fabrication |
|
10% Secured Debt |
|
|
|
|
|
|
465,060 |
|
|
|
600,000 |
|
10323 Greenland Ct. |
|
of Custom Display |
|
0% Secured Debt |
|
|
|
|
|
|
2,000,000 |
|
|
|
1,400,000 |
|
Stafford, TX 77477 |
|
Systems |
|
Warrants |
|
|
40.0 |
% |
|
|
1,595,858 |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
20.0 |
% |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100,918 |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schneider Sales Management, LLC |
|
Sales Consulting |
|
13% Secured Debt |
|
|
|
|
|
|
1,909,972 |
|
|
|
1,909,972 |
|
1925 Winchester Blvd. #204 |
|
and Training |
|
Warrants |
|
|
12.0 |
% |
|
|
45,000 |
|
|
|
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greenwood Village, CO 80111 |
|
|
|
|
|
|
|
|
|
|
1,954,972 |
|
|
|
1,954,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support Systems Homes, Inc. |
|
Manages Substance |
|
15% Secured Debt |
|
|
|
|
|
|
226,589 |
|
|
|
226,589 |
|
1925 Winchester Blvd. #204 |
|
Abuse Treatment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Campbell, CA 95008 |
|
Centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Innovations, LLC |
|
Manufacturer of Specialty |
|
7% Secured Debt |
|
|
|
|
|
|
409,297 |
|
|
|
409,297 |
|
20714 Highway 36 |
|
Cutting Tools and Punches |
|
13.5% Secured Debt |
|
|
|
|
|
|
3,698,216 |
|
|
|
3,750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazoria, TX 77422 |
|
|
|
|
|
|
|
|
|
|
4,107,513 |
|
|
|
4,159,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal Scaffolding & Equipment, LLC |
|
Manufacturer of Scaffolding |
|
Prime plus 1% Secured Debt |
|
|
|
|
|
|
875,072 |
|
|
|
875,072 |
|
973 S. Third St. |
|
and Shoring Equipment |
|
13% current / 5% PIK Secured Debt |
|
|
|
|
|
|
3,311,508 |
|
|
|
3,160,000 |
|
Memphis, TN 38106 |
|
|
|
LLC Interests |
|
|
18.4 |
% |
|
|
992,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,178,643 |
|
|
|
4,035,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uvalco Supply, LLC |
|
Farm and Ranch Supply |
|
LLC Interests |
|
|
39.6 |
% |
|
|
905,743 |
|
|
|
1,575,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2521 E Main St.
Uvalde, TX 78801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vision Interests, Inc. |
|
Manufacturer/ |
|
13% Secured Debt |
|
|
|
|
|
|
3,579,117 |
|
|
|
3,579,117 |
|
6630 Arroyo Springs St. Suite 600 |
|
Installer of Commercial |
|
Common Stock |
|
|
8.9 |
% |
|
|
372,000 |
|
|
|
420,000 |
|
Las Vegas, NV 89113 |
|
Signage |
|
Warrants |
|
|
11.2 |
% |
|
|
160,000 |
|
|
|
420,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,111,117 |
|
|
|
4,419,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walden Smokey Point, Inc. |
|
Specialty Transportation/ |
|
14% current / 4% PIK Secured Debt |
|
|
|
|
|
|
4,704,533 |
|
|
|
4,704,533 |
|
7615 Bryonwood Dr. |
|
Logistics |
|
Common Stock |
|
|
7.6 |
% |
|
|
600,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arlington, WA 98223 |
|
|
|
|
|
|
|
|
|
|
5,304,533 |
|
|
|
5,304,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WorldCall, Inc. |
|
Telecommunication/ |
|
13% Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
1250 Capital of Texas Hwy., Bldg. 2, Suite 235 |
|
Information Services |
|
Common Stock |
|
|
9.9 |
% |
|
|
631,199 |
|
|
|
640,000 |
|
Austin, TX 78746 |
|
|
|
|
|
|
|
|
|
|
296,631 |
|
|
|
382,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
927,830 |
|
|
|
1,022,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zieglers NYPD, LLC |
|
Restaurant |
|
Prime Plus 2% Secured Debt |
|
|
|
|
|
|
594,239 |
|
|
|
594,239 |
|
13901 North 73rd St., #219 |
|
|
|
13% current / 5% PIK Secured Debt |
|
|
|
|
|
|
2,663,437 |
|
|
|
2,663,437 |
|
Scottsdale, AZ 85260 |
|
|
|
Warrants |
|
|
28.6 |
% |
|
|
360,000 |
|
|
|
360,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,617,676 |
|
|
|
3,617,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
104,960,011 |
|
|
|
110,331,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Description of Portfolio Companies
Set forth below is a brief description of each of our current portfolio companies as of
December 31, 2008.
|
|
|
Advantage Millwork Company, Inc. is a premier designer and manufacturer of high quality wood, decorative
metal and wrought iron entry doors. |
|
|
|
|
American Sensor Technologies, Inc. designs, develops, manufactures and markets state-of-the-art, high
performance commercial and industrial sensors. |
|
|
|
|
Café Brazil, LLC owns and operates nine full service restaurant/coffee houses in the Dallas/Fort Worth
Metroplex. |
|
|
|
|
Carlton Global Resources, LLC is a producer and processor of various industrial minerals for use in the
manufacturing, construction and building materials industry. |
|
|
|
|
CBT Nuggets, LLC produces and sells original content IT certification training videos. CBT Nuggets, LLCs
training videos provide comprehensive training for certification exams from Microsoft ®, CompTIA ®, Cisco
®, Citrix ® and many other professional certification vendors. |
|
|
|
|
Ceres Management, LLC (d/b/a Lambs Tire and Automotive Centers) is a leading operator of Goodyear tire
retail and automotive repair centers in and around Austin, Texas, with fifteen operating locations. |
|
|
|
|
|
California Healthcare Medical Billing, Inc. provides outsourced billing, revenue cycle management, business services,
IT and Electronic Health Record (EHR) technology to physician practices and clinics. |
|
|
|
|
|
Condit Exhibits, LLC is a Denver, Colorado based designer, manufacturer and manager of trade show exhibits
and permanent displays. |
|
|
|
|
East Teak Fine Hardwoods, Inc. is a leading provider of teak lumber, exotic hardwoods and hardwood products. |
|
|
|
|
Gulf Manufacturing, LLC manufactures, modifies, and distributes specialty flanges, fittings, rings, plates,
spacers, and other fabricated metal products utilized primarily in piping applications. |
56
|
|
|
Hawthorne Customs & Dispatch Services, LLC provides one stop logistics services to its customers in order
to facilitate the import and export of various products to and from the United States. |
|
|
|
|
Hayden Acquisition, LLC is a manufacturer and supplier of precast concrete underground utility structures
to the construction industry. |
|
|
|
|
Houston Plating & Coatings, LLC is a provider of nickel plating and industrial coating services primarily
serving the oil field services industry. |
|
|
|
|
Hydratec Holdings, LLC is engaged in the design, sale and installation of agricultural micro-irrigation
products/systems to farmers in the San Joaquin valley in central California. |
|
|
|
|
Jensen Jewelers of Idaho, LLC is the largest privately owned jewelry chain in the Rocky Mountains with 14
stores in 5 states, including Idaho, Montana, Nevada, South Dakota and Wyoming. |
|
|
|
|
KBK Industries, LLC is a manufacturer of standard and customized fiberglass tanks and related products
primarily for use in oil and gas production, chemical production and agriculture applications. |
|
|
|
|
Laurus Healthcare, LP develops and manages single or multi-specialty health care centers through physician
partnerships that provide various surgical, diagnostic and interventional services. |
|
|
|
|
NAPCO Precast, LLC designs, manufactures, transports and erects precast and pre-stressed concrete products
primarily for the non-residential/commercial construction industry. |
|
|
|
|
National Trench Safety, LLC engages in the rental and sale of underground equipment and trench safety
products, including trench shielding, trench shoring, road plates, pipe lasers, pipe plugs and confined
space equipment. |
|
|
|
|
OMi Holdings, Inc. designs, manufactures, and installs overhead material handling equipment including
bridge cranes, runway systems, monorails, jib cranes and hoists. |
|
|
|
|
Pulse Systems, LLC manufactures a wide variety of components used in medical devices for minimally-invasive
surgery, primarily in the endovascular field. |
|
|
|
|
Quest Design & Production, LLC is engaged in the design, fabrication and installation of graphic
presentation materials and associated custom display fixtures used in sales and information center
environments. |
|
|
|
|
|
Schneider Sales Management, LLC is a leading publisher of proprietary sales training materials
and provider of sales-management consulting services for financial institutions. |
|
|
|
|
|
Support Systems Homes, Inc. operates drug and alcohol rehabilitation centers offering a wide range of
substance abuse treatment programs for recovery from addictions. |
|
|
|
|
Technical Innovations, LLC designs and manufactures manual, semiautomatic, pneumatic and computer
numerically controlled machines and tools used primarily by medical device manufacturers to place access
holes in catheters. |
|
|
|
|
|
|
Universal Scaffolding & Equipment, LLC is in the business of manufacturing, sourcing and selling
scaffolding, forming and shoring products, and related custom fabricated products for the commercial and
industrial construction industry. |
|
|
|
|
Uvalco Supply, LLC is a leading provider of farm and ranch supplies to ranch owners and farmers, as well as
a leading provider of design, fabrication and erection services for metal buildings throughout South Texas. |
|
|
|
|
Vision Interests, Inc. is a full service sign company that designs, manufactures, installs and services
interior and exterior signage for a wide range of customers. |
|
|
|
|
|
Walden Smokey Point, Inc. is an established leader in a niche sector of
the trucking and logistics industry.
|
|
|
|
|
|
|
|
WorldCall, Inc. is a holding company which owns both regulated and unregulated communications and
information service providers. |
|
|
|
|
|
Zieglers NYPD, LLC is a New York-
themed Pizzeria and Italian restaurant with locations across the Phoenix metro area. |
|
57
MANAGEMENT
Our business and affairs are managed under the direction of our Board of Directors. Our
Board of Directors appoints our officers, who serve at the discretion of the Board of
Directors. The responsibilities of the Board of Directors include, among other things, the
oversight of our investment activities, the quarterly valuation of our assets, oversight of
our financing arrangements and corporate governance activities. The Board of Directors has an
Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee,
and may establish additional committees from time to time as necessary.
Board of Directors and Executive Officers
Our Board of Directors consist of six members, four of whom are classified under
applicable Nasdaq listing standards as independent directors and under Section 2(a)(19) of
the 1940 Act as non-interested persons. Pursuant to our articles of incorporation, each
member of our Board of Directors serves a one year term, with each current director serving
until the 2009 annual meeting of stockholders and until his respective successor is duly
qualified and elected. Our articles of incorporation give our Board of Directors sole
authority to appoint directors to fill vacancies that are created either through an increase
in the number of directors or due to the resignation, removal or death of any director.
Directors
Information
regarding our current Board of Directors is set forth below as of
April 30, 2009. We have divided
the directors into two groups independent directors and interested directors. Interested
directors are interested persons of MSCC as defined in Section 2(a)(19) of the 1940 Act.
The address for each director is c/o Main Street Capital Corporation, 1300 Post Oak
Boulevard, Suite 800, Houston, Texas 77056.
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director |
|
Expiration |
Name |
|
Age |
|
Since |
|
of Term |
Michael Appling Jr. |
|
|
42 |
|
|
|
2007 |
|
|
|
2009 |
|
Joseph E. Canon |
|
|
67 |
|
|
|
2007 |
|
|
|
2009 |
|
Arthur L. French |
|
|
68 |
|
|
|
2007 |
|
|
|
2009 |
|
William D. Gutermuth |
|
|
57 |
|
|
|
2007 |
|
|
|
2009 |
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director |
|
Expiration |
Name |
|
Age |
|
Since |
|
of Term |
Vincent D. Foster |
|
|
52 |
|
|
|
2007 |
|
|
|
2009 |
|
Todd A. Reppert |
|
|
39 |
|
|
|
2007 |
|
|
|
2009 |
|
Executive Officers
The following persons serve as our executive officers in the following
capacities (ages as of April 30, 2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held |
|
|
|
|
|
|
with the |
Name |
|
Age |
|
Company |
Vincent D. Foster |
|
|
52 |
|
|
Chairman of the Board and Chief Executive Officer |
Todd A. Reppert |
|
|
39 |
|
|
Director, President and Chief Financial Officer |
Rodger A. Stout |
|
|
57 |
|
|
Senior Vice President-Finance and Administration,
Chief Compliance Officer and Treasurer |
Jason B. Beauvais |
|
|
34 |
|
|
Vice President, General Counsel and Secretary |
Michael S. Galvan |
|
|
40 |
|
|
Vice President and Chief Accounting Officer |
Curtis L. Hartman |
|
|
36 |
|
|
Senior Vice President |
Dwayne L. Hyzak |
|
|
36 |
|
|
Senior Vice President |
David L. Magdol |
|
|
38 |
|
|
Senior Vice President |
58
The address for each executive officer is c/o Main Street Capital Corporation, 1300 Post
Oak Boulevard, Suite 800, Houston, Texas 77056.
Biographical Information
Independent Directors
Michael Appling Jr. has been a member of our Board of Directors since July 2007. Mr.
Appling is also the President and Chief Executive Officer of TNT Crane & Rigging Inc., a
privately held full service crane and rigging operator. From July 2002 through August 2007,
he was the Executive Vice President and Chief Financial Officer of XServ, Inc., a large
private equity-funded, international industrial services and rental company. Mr. Appling has
also held the position of CEO and President for United Scaffolding, Inc., an XServ, Inc.
operating subsidiary. In February 2007, XServ, Inc. was sold to The Brock Group, a private
industrial services company headquartered in Texas. From March 2000 to June 2002, Mr. Appling
served as the Chief Financial Officer of CheMatch.com, an online commodities trading forum.
ChemConnect, Inc., a venture-backed independent trading exchange, acquired CheMatch.com in
January 2002. From June 1999 to March 2000, Mr. Appling was Vice President and Chief
Financial Officer of American Eco Corporation, a publicly traded, international fabrication,
construction and maintenance provider to the energy, pulp and paper
and power industries. Mr. Appling
worked for ITEQ, Inc., a publicly traded, international fabrication and services company from
September 1997 to May 1999, first as a Director of Corporate Development and then as Vice
President, Finance and Accounting. From July 1991 to September 1997, Mr. Appling worked at
Arthur Andersen LLP, where he practiced as a certified public accountant.
Joseph E. Canon has been a member of our Board of Directors since July 2007. Since 1982,
Mr. Canon has been the Executive Vice President and Executive Director, and a member of the
Board of Directors, of Dodge Jones Foundation, a private charitable foundation located in
Abilene, Texas. Prior to 1982, Mr. Canon was an Executive Vice President of the First
National Bank of Abilene. From 1974 to 1982, he was the Vice President and Trust Officer with
the First National Bank of Abilene. Mr. Canon currently serves on the Board of Directors of
First Financial Bankshares, Inc. (NASDAQ-GM:FFIN), a financial holding company headquartered
in Abilene, Texas. Mr. Canon also serves on the Board of Directors for several bank and
trust/asset management subsidiaries of First Financial Bankshares, Inc. He has also served on
the Board of Directors of various other organizations including the Abilene Convention and
Visitors Bureau, Abilene Chamber of Commerce, Conference of Southwest Foundations, City of
Abilene Tax Increment District, West Central Texas Municipal Water District and the John G.
and Marie Stella Kenedy Memorial Foundation.
Arthur L. French has been a member of our Board of Directors since July 2007. From
September 2003 through March 2007, Mr. French was a member of the Advisory Board of the
Investment Manager and limited partner of the Fund (both of which are now subsidiaries of
Main Street). Mr. French began his private investment activities in January 2000; he has
served as a director of FabTech Industries, a steel fabricator, since November 2000, and as a
director of Rawson, Inc., a distributor of industrial instrumentation products, since May
2003. Mr. French served as Chairman and Chief Executive Officer of Metals USA Inc. from
1996-1999, where he managed the process of founders acquisition, assembled the management
team and took the company through a successful IPO in July 1997. From 1989-1996, he served as
Executive Vice President and Director of Keystone International, Inc. After serving as a
helicopter pilot in the United States Army, Captain-Corps of Engineers from 1963-1966, Mr.
French began his career as a Sales Engineer for Fisher Controls International, Inc., in 1966.
During his 23-year career at Fisher Controls, from 1966-1989, Mr. French held various titles,
and ended his career at Fisher Controls as President and Chief Operating Officer.
William D. Gutermuth has been a member of our Board of Directors since July 2007.
Since 1986, Mr. Gutermuth has been a partner
in the law firm of Bracewell & Giuliani LLP,
specializing in the practice of corporate and
securities law. From 1999 until 2005, Mr.
Gutermuth was the Chair of Bracewell &
Giulianis Corporate and Securities Section.
Mr. Gutermuth is a published author and
frequent lecturer on topics relating to
corporate governance and enterprise risk
management. He has been recognized by
independent evaluation organizations as One
of the Best Lawyers in America-Corporate M&A
and Securities Law and as a Texas Super
Lawyer. In addition, Mr. Gutermuth serves as
a director of the Texas TriCities Chapter of
the National Association of Corporate
Directors.
Interested Directors
Vincent D. Foster has been Chairman of our Board of Directors since April 2007. He is
our Chief Executive Officer and a member of our investment committee. Since 2002, Mr. Foster
has been a senior managing director of the General Partner and the Investment Manager (both
of which are now subsidiaries of Main Street). He has also been the senior managing
director of the general partner for MSC II, an SBIC he co-founded, since January 2006. From
2000 to 2002, Mr. Foster was the senior managing director of the predecessor entity of the
Fund. Prior to that, Mr. Foster co-founded Main Street Merchant Partners, a merchant-banking
firm. He has served as director of U.S. Concrete, Inc.
(NASDAQ-GM: RMIX) since 1999. He also serves as a director of Quanta Services, Inc. (NYSE:
PWR), an electrical and telecommunications contracting
59
company, Carriage Services, Inc. (NYSE: CSV), a death-care company, and Team, Inc.
(NASDAQ-GS: TISI), a provider of specialty industrial services. In addition, Mr. Foster
serves as a director, officer and founder of the Texas TriCities Chapter of the
National Association of Corporate Directors. Prior to his private investment activities,
Mr. Foster was a partner of Andersen Worldwide and Arthur Andersen LLP from 1988-1997.
Mr. Foster was the director of Andersens Corporate Finance and Mergers and Acquisitions
practice for the Southwest United States and specialized in working with companies involved
in consolidating industries.
Todd A. Reppert has been a member of our Board of Directors since April 2007. He is our
President and Chief Financial Officer and is a member of our investment committee. Since
2002, he has been a senior managing director of the General Partner and the Investment
Manager (both of which are now subsidiaries of Main Street). Mr. Reppert has been a senior
managing director of the general partner for MSC II, an SBIC he co-founded, since January
2006. From 2000 to 2002, Mr. Reppert was a senior managing director of the predecessor entity
of the Fund. Prior to that, he was a principal of Sterling City Capital, LLC, a private
investment group focused on small to middle-market companies. Prior to joining Sterling City
Capital in 1997, Mr. Reppert was with Arthur Andersen LLP. At Arthur Andersen LLP, he
assisted in several industry consolidation initiatives, as well as numerous corporate finance
and merger/acquisition initiatives.
Non-Director Executive Officers
Rodger A. Stout serves as our Chief
Compliance Officer, Senior Vice President-Finance and Administration and Treasurer. Mr. Stout has been the chief financial officer of the
General Partner, the Investment Manager and the general partner of MSC II, an SBIC, since
2006. From 2000 to 2006, Mr. Stout was senior vice president and chief financial officer for
FabTech Industries, Inc., a consolidation of nine steel fabricators. From 1985 to 2000, he was a senior financial executive for
Jerold B. Katz Interests. He held numerous positions over his 15-year tenure with this
national scope financial services conglomerate. Those positions included director, executive
vice president, senior financial officer and investment officer. Prior to 1985, Mr. Stout was
an international tax executive in the oil and gas service industry.
Jason B. Beauvais serves as our Vice President, General Counsel and Secretary. Prior to
joining us in June 2008, Mr. Beauvais was an attorney with Occidental Petroleum Corporation,
an international oil and gas exploration and production company, since August 2006. From
October 2002 to August 2006, he was an associate in the Corporate and Securities section of
Baker Botts L.L.P., where he primarily counseled companies in public issuances and private
placements of debt and equity and handled a wide range of general corporate and securities
matters as well as mergers and acquisitions. Mr. Beauvais has been licensed to practice law
in Texas since 2002.
Michael S. Galvan serves as our Vice President and Chief Accounting Officer. Prior to
joining us in February 2008, Mr. Galvan was senior manager of financial operations with
Direct Energy, a retail gas and electricity service provider since October 2006. From
September 2005 to October 2006, he was a senior audit manager with Malone & Bailey, PC, where
he managed and coordinated audits of publicly traded companies and other companies. From
March 2003 to September 2005, Mr. Galvan was Director of Bankruptcy Coordination at Enron
Corporation. Prior to March 2003, he served in other executive positions at various Enron
affiliates.
Curtis L. Hartman serves as one of our Senior Vice Presidents. Mr. Hartman has been a
managing director of the General Partner and the Investment Manager since 2002 and a managing
director of the general partner for MSC II since January 2006. From 2000 to 2002,
he was a director of the predecessor entity of the Fund. From 1999 to 2000, Mr. Hartman was
an investment adviser for Sterling City Capital, LLC. Concurrently with joining Sterling City
Capital, he joined United Glass Corporation, a Sterling City Capital portfolio company, as
director of corporate development. Prior to joining Sterling City Capital, Mr. Hartman was a
manager with PricewaterhouseCoopers LLP, in its M&A/Transaction Services group. Prior to
that, he was employed as a senior auditor by Deloitte & Touche
LLP.
Dwayne
L. Hyzak serves as one of our Senior Vice Presidents and is a member of our
investment committee. Mr. Hyzak has been a
managing director of the General Partner and the Investment Manager since 2002. He has
also been a managing director of the general partner for MSC II since January 2006.
From 2000 to 2002, Mr. Hyzak was a director of integration with Quanta Services,
Inc. (NYSE: PWR), an electrical and telecommunications contracting company, where he was
principally focused on the companys mergers and acquisitions and corporate finance
activities. Prior to joining Quanta Services, Inc., he was a manager with Arthur Andersen LLP
in its Transaction Advisory Services group.
David L. Magdol serves as one of our Senior Vice Presidents. Mr. Magdol has been a managing director of the General Partner and the
Investment Manager since 2002 and a managing director of the general partner for MSC II
since January 2006. From 2000 to 2002, Mr. Magdol was a vice president in the
Investment Banking Group of Lazard Freres & Co. LLC. From 1996 to 2000, Mr. Magdol served as
a vice president of McMullen Group, a private equity investment firm capitalized by Dr. John
J. McMullen. From 1993 to 1995, Mr. Magdol worked in the Structured Finance Services Group of
Chemical Bank as a management associate.
60
Meetings of the Board of Directors and Committees
Our
Board of Directors met six times and acted by unanimous written
consent eight
times during 2008. Our Board of Directors has established an audit committee, a compensation
committee and a nominating and corporate governance committee. Each of the audit committee,
compensation committee and nominating and corporate governance committee operates pursuant to
a charter, each of which is available under Governance on the Investor Relations section of
our website at www.mainstcapital.com, and is also available in print to any stockholder who
requests a copy in writing to Main Street Capital Corporation, Corporate Secretarys Office,
1300 Post Oak Blvd., Suite 800, Houston, Texas 77056.
Our Board of Directors approved the designation of Arthur L. French as lead director to
preside at all executive sessions of non-management directors. In the lead directors
absence, the remaining non-management directors may appoint a presiding director by majority
vote. The non-management directors meet in executive session without management on a regular
basis. Stockholders or other interested persons may send written communications to Arthur L.
French, addressed to Lead Director, c/o Main Street Capital Corporation, Corporate
Secretarys Office, 1300 Post Oak Blvd., Suite 800, Houston, Texas 77056.
Audit Committee
The Audit Committee is responsible for selecting, engaging and discharging our
independent accountants, reviewing the plans, scope and results of the audit engagement with
our independent accountants, approving professional services provided by our independent
accountants (as well as the compensation for those services), reviewing the independence of
our independent accountants and reviewing the adequacy of our internal control over financial
reporting. In addition, the Audit Committee is responsible for assisting our Board of
Directors, in connection with its review and approval of the determination of, the fair value
of our debt and equity securities that are not publicly traded or for which current market
values are not readily available. Our Board of Directors has determined that Mr. Appling is
an Audit Committee financial expert as defined by the SEC and an independent director.
Messrs. Canon and French are the other members of the Audit Committee. During the year ended
December 31, 2008, the Audit Committee met five times and acted by unanimous written consent once.
Compensation Committee
The Compensation Committee
determines the compensation for our executive officers and
the amount of salary, bonus and stock-based compensation to be included in the compensation
package for each of our executive officers. The actions of the Compensation Committee are
generally reviewed and ratified by the entire Board of Directors, excluding the employee
directors. The members of the Compensation Committee are Messrs. Canon, French and Gutermuth.
During the year ended December 31, 2008, the Compensation
Committee met five times and acted by unanimous written consent once.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for determining
criteria for service on our Board of Directors, identifying, researching and recommending to
the Board of Directors director nominees for election by our stockholders, selecting nominees
to fill vacancies on our Board of Directors or a committee of the Board, developing and
recommending to our Board of Directors any amendments to our corporate governance principles
and overseeing the self-evaluation of our Board of Directors and its committees and
evaluations of our management. The members of the Nominating and Corporate Governance
Committee are Messrs. Appling, Canon and Gutermuth. During the
year ended December 31, 2008,
the Nominating and Corporate Governance Committee met five times.
Investment Committee
Our investment committee is responsible for all aspects of our investment process,
including, origination, due diligence and underwriting, approval, documentation and closing,
and portfolio management and investment monitoring. The current members of our investment
committee are Messrs. Foster, Reppert and Hyzak. Our investment strategy involves a team
approach, whereby potential transactions are screened by members of our investment team
before being presented to the investment committee. Our investment committee meets on an as
needed basis depending on transaction volume.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to our directors,
officers and employees. Our code of business conduct and ethics is available on the Investor
Relations section of our Web site at www.mainstcapital.com under Governance. We intend to
disclose any future amendments to, or waivers from, this code of conduct within four business
days of the waiver or amendment through a Web site posting.
61
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR COMPENSATION
The following table sets forth the compensation that we paid during the year ended December
31, 2008 to our directors. Directors who are also employees of Main Street or of its subsidiaries
do not receive compensation for their services as directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
Stock Awards |
|
All Other |
|
|
Name |
|
Paid in Cash |
|
(1)(2) |
|
Compensation (3) |
|
Total |
Michael Appling Jr. |
|
$ |
40,000 |
|
|
$ |
45,000 |
|
|
$ |
1,838 |
|
|
$ |
86,838 |
|
Joseph E. Canon |
|
|
35,000 |
|
|
|
45,000 |
|
|
|
1,838 |
|
|
|
81,838 |
|
Arthur L. French |
|
|
35,000 |
|
|
|
45,000 |
|
|
|
1,838 |
|
|
|
81,838 |
|
William D. Gutermuth |
|
|
30,000 |
|
|
|
45,000 |
|
|
|
1,838 |
|
|
|
76,838 |
|
|
|
|
(1) |
|
These amounts represent the dollar amount recognized for financial statement reporting purposes with
respect to the 2008 fiscal year for the fair value
of awards granted in 2008 as well as prior fiscal
years, if any, as determined in accordance with FAS 123R. Pursuant to SEC rules, the amounts shown
exclude the impact of estimated forfeitures related to service-based vesting conditions. Please see
the discussion of the assumptions made in the valuation of these awards in Note M to the audited
consolidated financial statements included herein.
These amounts reflect our accounting expense for these awards, and do not correspond to the actual
value that will be recognized by our directors.
|
|
(2) |
|
Each of our non-employee directors received an award of 5,000 restricted shares under the Main
Street Capital Corporation 2008 Non-Employee Director Restricted
Stock Plan on July 1, 2008. 2,500 restricted shares of each grant vested 100% immediately on the grant date for service on the Board
over the past year, and 2,500 restricted shares of each grant will vest 100% on June 10, 2009,
provided that the grantee has been in continuous service as a member of the Board of Directors
through such date. The grant date fair value of each non-employee directors award
of restricted
stock granted in 2008 was $60,000 based on the $12.00 closing price of our common stock on the
Nasdaq Global Select Market on July 1, 2008. Each non-employee director had 2,500 unvested shares
of restricted stock outstanding as of December 31, 2008. |
|
(3) |
|
These amounts reflect the dollar value of dividends paid on unvested restricted stock awards in 2008. |
The compensation for non-employee directors for 2008 was comprised of cash compensation
paid
to or earned by directors in connection with their service as a director. That cash compensation
consisted of an annual retainer of $30,000. Non-employee directors will not receive fees based on
meetings attended absent circumstances that require an exceptionally high number of meetings within
an annual period. We also reimburse our non-employee directors for all reasonable expenses incurred
in connection with their service on our Board. The chairs of our Board committees receive
additional annual retainers as follows:
|
|
|
the chair of the Audit Committee: $10,000; and |
|
|
|
|
the chair of each of the Compensation and Nominating and Corporate Governance
committees: $5,000. |
Our 2008 Non-Employee Director Restricted Stock Plan provides a means through which we
may
attract and retain qualified non-employee directors to enter into and remain in service on our
Board of Directors. Under our 2008 Non-Employee Director Restricted Stock Plan, at the
beginning
of each one-year term of service on our Board of Directors,
each non-employee director will receive
a number of shares equivalent to $30,000 worth of shares based on the market value
at the close of
the exchange on the date of grant. Forfeiture provisions will lapse as
to an entire award at the
end of the one-year term.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following Compensation Discussion and Analysis, or CD&A, provides information relating to
the 2008 compensation of Main Streets Chief Executive Officer, President and Chief
Financial
Officer and four other most highly compensated executive officers during 2008. Those six
individuals are referred to in this CD&A as the Named Executive Officers, or NEOs.
Compensation Philosophy and Objectives
The Main Street compensation system was developed by the Compensation Committee and approved
by all Independent Directors. The system is designed to attract and retain key executives, motivate
them to achieve the companys short-term and long-term objectives, reward them for superior
performance and align their interests with those of the companys stockholders. Significant
elements of the compensation arrangements with the NEOs (other than the Chief Executive Officer)
are set forth in separate employment agreements Main Street entered into with them in connection
with the companys initial public offering. Main Streets Chief Executive Officer, who has signed a
non-compete agreement, serves at the discretion of the Board of Directors. The structure of those
employment agreements and Main Streets incentive compensation programs are designed to encourage
and reward the following, among other things:
|
|
|
superior risk-adjusted returns on the companys investment portfolio; |
|
|
|
|
management team development; |
|
|
|
|
maintenance of liquidity and capital flexibility to accomplish the companys
business objectives; and |
|
|
|
|
strength in income and capital gains to support and grow the companys dividend
payments. |
62
Subject to the provisions of the employment agreements with the NEOs described below, the
Compensation Committee has the primary authority to establish compensation for the NEOs and other
key employees and administers all executive compensation arrangements and policies. Main Streets
Chief Executive Officer assists the Compensation Committee by providing annual recommendations
regarding the compensation of NEOs and other key employees, excluding himself. The Compensation
Committee can exercise its discretion in modifying or accepting those recommendations. The Chief
Executive Officer routinely attends Compensation Committee meetings. However, the Compensation
Committee also meets in executive session without the Chief Executive Officer or other members of
management present when discussing the Chief Executive Officers compensation and on certain other
occasions.
The Compensation Committee takes into account competitive market practices with respect to the
salaries and total direct compensation of the NEOs. Members of the Compensation Committee consider
market practices by reviewing proxy statements or similar information made available by other
internally managed business development companies, or BDCs, under the 1940 Act. The Compensation
Committee also has the authority to utilize compensation consultants to better understand
competitive pay practices. In this regard, the Compensation Committee engaged a compensation
consultant in late 2008 to study the level and structure of compensation paid to
our NEOs as compared to other internally managed business development companies, private
equity firms and specialty finance companies (both public and private). The Compensation Committee
is considering the findings of the compensation consultant but does not currently expect any
material changes to the compensation program for our NEOs.
Assessment of Market Data
To assess the competitiveness of executive compensation levels, the Compensation Committee
analyzes a comparative group of BDCs and reviews their competitive performance and compensation
levels. This analysis centers around key elements of compensation practices within the BDC industry
in general and, more specifically, compensation practices at internally managed BDCs reasonably
comparable in asset size, typical investment size and type, market capitalization and general
business scope to the company. Since there are relatively few internally managed BDCs, and because
of Main Streets relatively small asset size and market capitalization in comparison to many BDCs,
the Compensation Committee includes certain internally managed BDCs in Main Streets peer group
that are substantially larger than the company. The peer group consists
of the following companies:
American Capital Strategies, Ltd., Allied Capital Corporation, Hercules Technology Growth Capital,
Inc., Kohlberg Capital Corporation, MCG Capital Corporation, Patriot Capital Funding, Inc., Harris
& Harris Group, Inc. and Triangle Capital Corporation.
Items reviewed include, but are not necessarily limited to,
base compensation, bonus
compensation, equity option awards, restricted stock awards, and other compensation as detailed in
the respective proxies, research analysts reports and other publicly available information. In
addition to actual levels of compensation, the Compensation Committee also analyzes the approach
other BDCs are taking with regard to their compensation practices. Such items include, but are
not
necessarily limited to, the use of employment agreements for certain employees, a mix of cash and
equity compensation, the use of third party compensation consultants and certain corporate and
executive performance measures established to achieve long-term total return for stockholders.
Although each of the peer companies is not precisely comparable in size, scope and operations to
the company, the Compensation Committee believes that they are the most relevant comparable
companies available with disclosed executive compensation data, and provide a good representation
of competitive compensation levels for the companys executives.
Assessment of Company Performance
The Compensation Committee believes that consistent financial performance coupled with
reasonable, long-term stockholders returns and
proportional employee compensation are essential
components for Main Streets long-term business success. Main Street typically makes three to seven
year investments in lower middle-market companies. The companys business plan involves taking on
investment risk over an extended period of time, and a premium is placed on the ability to maintain
stability of net asset values and continuity of earnings to pass through to stockholders in the
form of recurring dividends. Main Streets strategy is to generate current income from debt
investments and to realize capital gains from equity-related investments. This income supports the
payment of dividends to stockholders. The recurring payment of dividends requires a methodical
investment acquisition approach and active monitoring and management of the investment portfolio
over time. A meaningful part of the companys employee base is dedicated to the maintenance of
asset values and expansion of this recurring income to support and grow dividends. The
Compensation Committee believes that stability with regard to the management
team is important in
achieving successful implementation of the companys strategy.
Executive Compensation Components
For 2008, the components of Main Streets
direct compensation program for NEOs include:
|
|
|
base salary; |
|
|
|
|
annual cash bonuses; |
|
|
|
|
long-term compensation pursuant to the 2008 Equity Incentive Plan; and |
63
The Compensation Committee designs each NEOs direct compensation package to appropriately
reward the NEO for his contribution to the company. The judgment and experience of the Compensation
Committee are weighed with performance metrics and consultation with the Chief Executive Officer to
determine the appropriate mix of compensation for each individual. Cash compensation consisting of
base salary and discretionary bonuses tied to achievement of individual performance goals reviewed
and approved by the Compensation Committee is intended to motivate NEOs
to remain with the company
and work to achieve its business objectives. Stock-based compensation is
awarded based on
performance expectations reviewed and approved by the Compensation Committee for each NEO. The
blend of short-term and long-term compensation may be adjusted from time to time to balance the
Compensation Committees views regarding an NEOs individual preference for current cash
compensation with appropriate retention incentives.
Base Salary
Base salary is used to recognize particularly the experience, skills, knowledge and
responsibilities required of the NEOs in their roles. In connection with establishing the base
salary of each NEO, the Compensation Committee and management considered a number of factors,
including the seniority and experience level of the individual, the functional role of his
position, the level of the individuals responsibility, the companys ability to replace the
individual, the past base salary of the individual and the number of well-qualified candidates
available in the area. In addition, the Compensation Committee considers publicly available
information regarding the base salaries paid to similarly situated executive officers and other
competitive market practices.
The salaries of the NEOs are reviewed on an annual basis, as well as at the time of promotion
or any substantial change in responsibilities. Each of the NEO employment agreements establishes a
target for annual increase in base salary at 5%, but provides that any increase is at the sole
discretion of the Compensation Committee. Each such employment agreement also provides that the
base salary is not subject to reduction. The key factors in determining increases in salary level
are relative performance and competitive pressures.
Annual Cash Bonuses
Annual cash bonuses are intended to reward individual performance during the year and can
therefore be highly variable from year to year. Bonus opportunities for the NEOs are determined by
the Compensation Committee on a discretionary basis and are based on performance criteria,
including corporate and individual performance goals and measures, set by the Compensation
Committee with the Chief Executive Officers input. As more fully described below in Employment
Agreements, the employment agreements of the NEOs provide for target annual cash bonus amounts
as
a percentage of base salary.
Long-Term Incentive Awards
Main Streets Board and stockholders have approved the 2008 Equity Incentive Plan to provide
stock-based awards as long-term incentive compensation to employees, including the NEOs. The
company uses stock-based awards to (i) attract and retain key employees, (ii) motivate employees by
means of performance-related incentives to achieve long-range performance goals, (iii) enable
employees to participate in the companys long-term growth and (iv) link employees compensation to
the long-term interests of stockholders. At the time of each award, the Compensation Committee will
determine the terms of the award, including any performance period (or periods) and any performance
objectives relating to vesting of the award.
Options. The Compensation Committee may grant equity options to purchase Main Streets common
stock (including incentive stock options and nonqualified stock options). The Compensation
Committee expects that any options granted by it will represent a fixed number of shares of common
stock, will have an exercise price equal to the fair market value of common stock on the date of
grant, and will be exercisable, or vested, at some later time after grant. Some stock options may
provide for vesting simply by the grantee remaining employed by Main Street for a period of time,
and some may provide for vesting based on the grantee and/or the company attaining specified
performance levels. To date the Compensation Committee has not granted any stock options to any
NEO.
Restricted Stock. Main Street has received exemptive relief from the SEC that permits the
company to grant restricted stock in exchange for
or in recognition of services by its executive
officers and employees. Pursuant to the 2008 Equity Incentive Plan, the Compensation Committee may
award shares of restricted stock to plan participants in such amounts and on such terms as the
Compensation Committee determines in its sole discretion, provided that such awards are consistent
with the conditions set forth in the SECs exemptive order. Each restricted stock grant will be for
a fixed number of shares as set forth in an award agreement between the grantee and Main Street.
Award agreements will set forth time and/or performance vesting schedules and other appropriate
terms and/or restrictions with respect to awards, including rights to dividends and voting rights.
As more fully described below, each of the NEO employment agreements provides for a target annual
restricted stock award or an equitable substitute.
Other Benefits
Main Streets NEOs participate in the same benefit plans and programs as the companys other
employees, including comprehensive medical insurance, comprehensive dental insurance, business
travel accident insurance, short term disability coverage, long term disability insurance, and
vision care.
Main Street maintains a 401(k) plan for all full-time employees who are at least 21 years of
age through which the company makes non-discretionary matching contributions to each participants
plan account on the participants behalf. For each participating employee, the companys
contribution is generally a match of the employees contributions up to a 4.5% contribution level
with a maximum annual matching contribution of $10,350 during 2008. All contributions to the plan,
including the companys, vest immediately. The Board of Directors may also, at its sole discretion,
make additional contributions to employee 401(k) plan accounts, which would vest on the same basis
as other employer contributions.
64
Perquisites
The company provides no other material benefits, perquisites or retirement benefits to the
NEOs.
Employment Agreements
In connection with Main Streets initial public offering, the company
entered into employment
agreements with each of its NEOs, other than Mr. Foster, its Chief
Executive Officer. Initial terms
of the employment agreements extend to December 31, 2010. As the Chairman of the Board of Directors
and Chief Executive Officer, Mr. Foster does not have an employment agreement and will serve as an
executive officer at the direction and discretion of the Board of Directors. However, Mr. Foster
has executed a confidentiality and non-compete agreement with the company. The NEO employment
agreements specify an initial base salary which was paid in 2007 and contemplate a 5% target annual
increase in base salary (provided that any increase is in the sole discretion of the Compensation
Committee).
Each NEO employment agreement specifies a target discretionary annual bonus as a percentage of
his then current base salary based upon achieving the performance objectives established by the
Compensation Committee. Under the NEO employment agreements, the applicable NEOs have referenced
target bonus amounts for each of the years ending December 31, 2008, 2009 and 2010. The target
bonus amounts for Mr. Reppert are 50%, 60% and 70% of his base salary, respectively, for each of
those three calendar years. The target bonus amounts for Messrs. Stout, Hartman, Hyzak and Magdol
are 40%, 50% and 60% of their base salaries for each of those three calendar years, respectively.
The Compensation Committee has established applicable individual performance objectives, and will
approve the actual bonus awarded to each NEO annually.
Each NEO employment agreement also provides for the initial
grant of restricted stock in an
amount equal to 40,000 shares for Mr. Reppert and 30,000 shares for each of Messrs. Stout, Hartman,
Hyzak and Magdol in respect of such executives service performed in 2007, including in connection
with the successful completion of the companys initial public offering, and in 2008. As discussed
below, initial grants of restricted stock related to this provision were made to the NEOs on July
1, 2008. In addition, the NEO employment agreements provide for targeted annual restricted stock
awards for each of calendar years 2009 and 2010 with date of grant
valuation of 75% of base salary for Mr. Reppert and date of grant valuation of 50% of base salaries for each of
Messrs. Stout, Hartman, Hyzak and Magdol, in each case subject to the Compensation Committees
discretion based on the satisfaction of objective, reasonable and attainable performance criteria
established by the Compensation Committee. Restricted stock awards will generally vest in equal
annual portions over the four years subsequent to the date of grant.
The NEO employment agreements also provide for certain severance and other benefits upon
termination after a change of control or certain other specified termination events. The severance
and other benefits in these circumstances are discussed below and reflected in the Potential
Payments upon Termination or Change of Control Table.
Mr. Repperts employment
agreement generally provides for a non-competition period after his
voluntary termination or a termination without cause by the company. However, Messrs. Stout,
Hartman, Hyzak and Magdol would generally only be subject to the non-competition provisions of
their employment agreements in the event they are terminated without cause. The NEO employment
agreements also provide for a non-solicitation period after any termination of employment and
provide for the protection of Main Streets confidential information.
Change in Control and Severance
Upon a change in control, equity-based awards under the 2008 Equity Incentive Plan may vest
and/or become immediately exercisable or salable. In addition, upon termination of employment
following a change in control, the NEOs who are parties to the NEO employment agreements may be
entitled to severance payments.
2008 Equity Incentive Plan. Upon specified transactions involving a change in control (as
defined in the 2008 Equity Incentive Plan), all outstanding awards under the 2008 Equity Incentive
Plan may either be assumed or substituted for by the surviving entity. If the surviving entity does
not assume or substitute similar awards, the awards held by the plan participants will be subject
to accelerated vesting in full and, in the case of options, then terminated to the extent not
exercised within a designated time period.
Transactions involving a change in control under the 2008 Equity Incentive Plan include:
|
|
|
a consolidation, merger, stock sale or similar transaction or series of related
transactions in which Main Street is not the surviving corporation or which results in
the acquisition of all or substantially all of the companys then outstanding common
stock by a single person or entity or by a group of persons and/or entities acting in
concert; |
|
|
|
|
a sale or transfer of all or substantially all of the companys assets; |
|
|
|
|
Main Streets dissolution or liquidation; or |
|
|
|
|
a change in the membership of the companys Board of Directors such that the
individuals who, as of the effective date of the plan, constitute the Board of
Directors, whom are referred to as the Continuing Directors, and any new director whose
election or nomination by the Board of Directors was approved by a vote of at least a
majority of the Continuing Directors, cease to constitute at least a majority of the
Board. |
Severance. Under specified transactions involving a change in control (as defined in each NEO
employment agreement), if an NEO who is a party to an NEO employment agreement terminates his
employment with Main Street for good reason within one year following such change in control, or if
the company terminates or fails to renew the NEOs employment agreement within the one year
commencing with a change in control, he will receive a severance package beginning on the date of
termination. The severance package will include a lump-sum payment equal to two or three times,
depending upon the NEOs position, the NEOs annual salary at that time, plus the NEOs target
bonus compensation as described in the employment agreement, and the company will continue to
provide the NEO with certain benefits provided to him immediately prior to the termination as
described in the employment agreement for a designated time period.
Under the employment agreements, a Change in Control occurs if:
|
|
|
A person or a group acquires ownership of Main Streets capital stock that, together
with stock held by such person or group, constitutes more than 50 percent of the total
fair market value or total voting power of the companys capital stock; |
|
|
|
|
a person or a group acquires (or has acquired during the 12-month period ending on
the date of the most recent acquisition by such person or persons) ownership of capital
stock possessing 30 percent or more of the total voting power of the companys capital
stock; |
|
|
|
|
a majority of members of the Board is replaced during any 12-month period by
directors whose appointment or election is not endorsed by a majority of the members of
the Board prior to the date of such appointment or election; or |
65
|
|
|
a person or a group acquires (or has acquired during the 12-month period ending on
the date of the most recent acquisition by such person or persons) company assets that
have a total gross fair market value equal to or more than 40 percent of the total
gross fair market value of all of the companys assets immediately prior to such
acquisition or acquisitions. Certain transfers of assets are not considered a change in
control if transferred to specified parties. |
The rationale behind providing a severance package in certain events is (1) to attract and
retain dedicated and talented executives and to provide such executives with reasonable financial
remuneration and restitution in the event of dislocation and disruption
of employment as a result
of involuntary severance, and (2) to maintain and maximize shareholder value through the management
teams commitment and fidelity to the integrity of a change-in-control transaction. For further
discussion regarding executive compensation in the event of a termination or change in control,
please see the table entitled Potential Payments upon Termination or Change in Control Table
included herein.
Tax Deductibility of Compensation
Section 162(m) of the Internal Revenue Code generally disallows a deduction to public
companies to the extent of excess annual compensation over $1 million paid to certain executive
officers, except for qualified performance-based compensation. Main Streets general policy, where
consistent with business objectives, is to preserve the deductibility of executive officer
compensation. The Compensation Committee may authorize forms of compensation that might not be
deductible if the Compensation Committee deems such to be in the best interests of Main Street and
its stockholders. The company had no nondeductible compensation paid to executive officers in 2008.
2008 Compensation Determination
The Compensation Committee analyzed the competitiveness of the components of compensation
described above on both an individual and aggregate basis. The Compensation Committee believes
that the total compensation paid to the NEOs for the fiscal year ended December 31, 2008 achieves
the overall objectives of Main Streets executive compensation program.
Determination of Annual Base Salary
The Compensation Committee annually reviews the base salary of each executive officer,
including each NEO, and determines whether or not to increase it in its sole discretion. Increases
to base salary can be awarded to recognize, among other things, relative performance, relative cost
of living and competitive pressures. Increases in the 2008 annual base salary of each NEO over his
2007 annualized base salary are based exclusively on the loss by such NEO of certain benefits that
were received prior to the companys initial public offering. Without the adjustments described in
the previous sentence, the 2008 base salary of each NEO would have been equal to such NEOs 2007
annualized base salary.
Mr. Foster was paid an annual base salary of $353,910 for 2008, an increase of 1.5% over his
2007 annualized base salary.
Mr. Reppert was paid an annual base salary of $316,410 for 2008, an increase of 1.7% over his
2007 annualized base salary.
Mr. Stout was paid an annual base salary of $215,160 for 2008, an increase of 2.5% over his
2007 annualized base salary.
Mr. Hartman was paid an annual base salary of $215,160 for 2008, an increase of 2.5% over his
2007 annualized base salary.
Mr. Hyzak was paid an annual base salary of $215,160 for 2008, an increase of 2.5% over his
2007 annualized base salary.
Mr. Magdol was paid an annual base salary of $215,160 for 2008, an increase of 2.5% over his
2007 annualized base salary.
Determination of Annual Cash Incentive Bonus
Cash bonuses are determined annually by the Compensation Committee on a discretionary basis.
Cash bonuses for 2008 were accrued in 2008 but were determined by the Compensation Committee and
paid to NEOs in the first quarter of 2009. The 2008 target cash bonus percentage of base salary
for each NEO is presented below as well as the actual cash bonus percentage of base salary for each
NEO in 2008. The Compensation Committee, in its sole discretion, may award cash bonuses that exceed
cash bonus targets if it believes that the performance of the NEO during the given year merits such
a bonus. The company did not pay a cash bonus to any NEO in 2007.
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|
|
|
|
Actual % of |
|
|
Target % of |
|
2008 Salary |
Named Executive Officer |
|
2008 Salary |
|
Awarded |
Vincent D. Foster |
|
|
n/a |
|
|
|
0 |
% |
Todd A. Reppert |
|
|
50 |
% |
|
|
36 |
% |
Rodger A. Stout |
|
|
40 |
% |
|
|
35 |
% |
Curtis L. Hartman |
|
|
40 |
% |
|
|
35 |
% |
Dwayne L. Hyzak |
|
|
40 |
% |
|
|
35 |
% |
David L. Magdol |
|
|
40 |
% |
|
|
35 |
% |
The Compensation Committee considered performance achievements in the determination of cash
bonuses for 2008, including company performance and the personal performance of each individual.
The performance goals used for determining the cash bonuses for NEOs included, among other things,
the following:
|
|
|
Maintaining liquidity and capital flexibility to accomplish the companys business
objectives; |
|
|
|
|
Maintaining appropriate dividend payouts to stockholders; |
|
|
|
|
Maintaining the highest ethical standards, internal controls and adherence to
regulatory requirements; and |
|
|
|
|
Maintaining reasonable relative overall portfolio performance. |
Based on a recommendation by Mr. Foster in light of the current economic environment, the
Compensation Committee did not award Mr. Foster a 2008 cash bonus but will however consider
awarding Mr. Foster additional restricted stock in 2009 in lieu thereof. Cash bonuses were paid as
shown below to other NEOs for 2008 performance. These bonuses are
less than specified in the individual employment contracts of the NEOs but do not
reflect negatively on any individual executives performance. Instead, these bonus amounts
reflect the Compensation Committees and the executives desire to maintain an appropriate
operating cost level in a difficult economic environment.
Mr. Reppert was paid an annual cash bonus of $115,000 for 2008. This cash bonus recognizes Mr.
Repperts performance as President and CFO during very turbulent market conditions and
particularly his leadership in strengthening the companys liquidity and capital flexibility.
Mr. Stout was paid an annual cash bonus of $75,000 for 2008. This cash bonus recognizes Mr.
Stouts management of internal control, financial and accounting responsibilities while
transitioning to treasury and compliance accountability.
Mr. Hartman was paid an annual cash bonus of $75,000 for 2008. This cash bonus recognizes Mr.
Hartmans performance in managing current portfolio investments, executing new investment
opportunities and developing and training Main Street personnel.
Mr. Hyzak was paid an annual cash bonus of $75,000 for 2008. This cash bonus recognizes Mr.
Hyzaks performance in managing current portfolio investments, executing new investment
opportunities and developing and training Main Street personnel.
Mr. Magdol was paid an annual cash bonus of $75,000 for 2008. This cash bonus recognizes Mr.
Magdols performance in managing current portfolio investments, executing new investment
opportunities and developing and training Main Street personnel.
66
Determination of Long-Term Incentive Awards
As contemplated by each NEOs employment agreement, after approval of the 2008 Equity
Incentive Plan by the stockholders, each NEO was granted shares of restricted stock under the plan,
effective July 1, 2008. The 2008 target grant amount of restricted shares for each NEO is
presented below as well as the actual 2008 grant amount of restricted shares awarded to each NEO.
All restricted stock grants to NEOs under the 2008 Equity Incentive Plan vest ratably over four
years from the grant date. Messrs. Foster and Reppert recommended that the Compensation Committee
reallocate a portion of their individual grants of restricted shares to other company employees,
including Messrs. Stout, Hartman, Hyzak and Magdol, for their diligence and dedication in
connection with the successful initial public offering of the company in October 2007 and in the
implementation of the companys strategies in 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Target Number of |
|
Actual Number of |
Named Executive Officer |
|
Restricted Shares |
|
Restricted Shares Granted |
Vincent D. Foster |
|
|
n/a |
|
|
|
30,000 |
|
Todd A. Reppert |
|
|
40,000 |
|
|
|
30,000 |
|
Rodger A. Stout |
|
|
30,000 |
|
|
|
35,000 |
|
Curtis L. Hartman |
|
|
30,000 |
|
|
|
32,500 |
|
Dwayne L. Hyzak |
|
|
30,000 |
|
|
|
35,000 |
|
David L. Magdol |
|
|
30,000 |
|
|
|
32,500 |
|
Executive Officer Compensation
The following table summarizes compensation of our Chief Executive Officer, our President and
Chief Financial Officer and our four highest paid executive officers who did not serve as our Chief
Executive Officer or Chief Financial Officer during 2008, all of whom we refer to as our NEOs, for
the fiscal year ended December 31, 2008.
Summary Compensation Table
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
All Other |
|
|
Principal Position |
|
Year |
|
Salary(1) |
|
Bonus(2) |
|
Awards(3) |
|
Compensation(4) |
|
Total |
Vincent D. Foster |
|
|
2008 |
|
|
$ |
353,910 |
|
|
|
n/a |
|
|
$ |
45,000 |
|
|
$ |
32,400 |
(5) |
|
$ |
431,310 |
|
Chairman & Chief Executive Officer |
|
|
2007 |
|
|
|
87,188 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,531 |
|
|
|
89,719 |
|
|
Todd A. Reppert |
|
|
2008 |
|
|
$ |
316,410 |
|
|
$ |
115,000 |
|
|
$ |
45,000 |
|
|
$ |
32,400 |
(6) |
|
$ |
508,810 |
|
President & Chief Financial Officer |
|
|
2007 |
|
|
|
77,813 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,531 |
|
|
|
80,344 |
|
|
Rodger A. Stout |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Compliance Officer, Senior
Vice President Finance and |
|
|
2008 |
|
|
$ |
215,160 |
|
|
$ |
75,000 |
|
|
$ |
52,500 |
|
|
$ |
35,072 |
(7) |
|
$ |
377,732 |
|
Administration and Treasurer |
|
|
2007 |
|
|
|
52,500 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,363 |
|
|
|
54,863 |
|
|
Curtis L. Hartman |
|
|
2008 |
|
|
$ |
215,160 |
|
|
$ |
75,000 |
|
|
$ |
48,750 |
|
|
$ |
33,570 |
(8) |
|
$ |
372,480 |
|
Senior Vice President |
|
|
2007 |
|
|
|
52,500 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,531 |
|
|
|
55,031 |
|
|
Dwayne L. Hyzak |
|
|
2008 |
|
|
$ |
215,160 |
|
|
$ |
75,000 |
|
|
$ |
52,500 |
|
|
$ |
35,407 |
(9) |
|
$ |
378,067 |
|
Senior Vice President |
|
|
2007 |
|
|
|
52,500 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,531 |
|
|
|
55,031 |
|
|
David L. Magdol |
|
|
2008 |
|
|
$ |
215,160 |
|
|
$ |
75,000 |
|
|
$ |
48,750 |
|
|
$ |
33,570 |
(10) |
|
$ |
372,480 |
|
Senior Vice President |
|
|
2007 |
|
|
|
52,500 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2,531 |
|
|
|
55,031 |
|
|
|
|
(1) |
|
The 2007 salary amounts reflect the actual salaries of the NEOs that were in
effect during the period from October 4, 2007, the completion of our initial
public offering, through December 31, 2007. All executive compensation is paid
by one of our wholly owned subsidiaries, Main Street Capital Partners, LLC. |
|
(2) |
|
These amounts reflect annual cash bonuses earned during 2008 by
the NEOs and were determined based on individual performance goals adopted by
the Compensation Committee. No cash bonuses were paid to NEOs in 2007. All
annual cash bonuses are paid by one of our wholly owned
subsidiaries, Main Street Capital Partners, LLC. |
|
(3) |
|
These amounts represent the dollar amount recognized for financial statement
reporting purposes with respect to the 2008 fiscal year for the fair value of
awards granted in 2008 as well as prior fiscal years, if any, as determined in
accordance with FAS 123R. Pursuant to SEC rules, the amounts shown exclude the
impact of estimated forfeitures related to service-based vesting conditions.
Please see the discussion of the assumptions made in the valuation of these
awards in Note M to the audited consolidated financial statements included herein.
These amounts reflect our
accounting expense for these awards, and do not correspond to the actual value
that will be recognized by our NEOs. |
|
(4) |
|
For 2008, these amounts reflect (i) employer matching contributions we made to
our 401(k) Plan and (ii) the dollar value of dividends paid on unvested restricted
stock awards. For 2007, these amounts reflect employer matching contributions
we made to our 401(k) Plan during the period from October 4, 2007, the completion
of our initial public offering, through December 31, 2007. We make matching
contributions for each semi-monthly payroll period. |
|
(5) |
|
Includes $10,350 employer matching contributions to our 401(k) Plan and $22,050
dollar value of dividends on unvested restricted stock awards. |
|
(6) |
|
Includes $10,350 employer matching contributions to our 401(k) Plan and $22,050
dollar value of dividends on unvested restricted stock awards. |
|
|
|
|
(7) |
|
Includes $25,725 dollar value of dividends on unvested restricted stock awards. |
|
(8) |
|
Includes $23,888 dollar value of dividends on unvested restricted stock awards. |
|
(9) |
|
Includes $25,725 dollar value of dividends on unvested restricted stock awards. |
|
(10) |
|
Includes $23,888 dollar value of dividends on unvested restricted stock awards. |
67
Grants of Plan-Based Awards
The following table sets forth information regarding restricted stock awards granted to our
NEOs in fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
Awards; |
|
Grant Date |
|
|
|
|
|
|
Number of |
|
Fair Value |
|
|
|
|
|
|
Shares of |
|
of Stock |
Name |
|
Grant Date |
|
Stock |
|
Awards |
Vincent D. Foster |
|
|
7/1/08 |
|
|
|
30,000 |
|
|
$ |
360,000 |
|
Todd A. Reppert |
|
|
7/1/08 |
|
|
|
30,000 |
|
|
$ |
360,000 |
|
Rodger A. Stout |
|
|
7/1/08 |
|
|
|
35,000 |
|
|
$ |
420,000 |
|
Curtis L. Hartman |
|
|
7/1/08 |
|
|
|
32,500 |
|
|
$ |
390,000 |
|
Dwayne L. Hyzak |
|
|
7/1/08 |
|
|
|
35,000 |
|
|
$ |
420,000 |
|
David L. Magdol |
|
|
7/1/08 |
|
|
|
32,500 |
|
|
$ |
390,000 |
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth the awards of restricted stock for which forfeiture provisions
were outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
|
|
|
|
Market Value of |
|
|
Number of Shares |
|
Shares of |
|
|
of Stock that |
|
Stock that have not |
Name |
|
have not Vested (1) |
|
Vested (2) |
Vincent D. Foster |
|
|
30,000 |
|
|
$ |
293,100 |
|
Todd A. Reppert |
|
|
30,000 |
|
|
$ |
293,100 |
|
Rodger A. Stout |
|
|
35,000 |
|
|
$ |
341,950 |
|
Curtis L. Hartman |
|
|
32,500 |
|
|
$ |
317,525 |
|
Dwayne L. Hyzak |
|
|
35,000 |
|
|
$ |
341,950 |
|
David L. Magdol |
|
|
32,500 |
|
|
$ |
317,525 |
|
|
|
|
(1) |
|
No restricted stock awards have been transferred. |
|
(2) |
|
The market value of shares of stock that have not vested was
determined based on the closing price of our common stock on the
Nasdaq Global Select Market on December 31, 2008, which was $9.77. |
Potential Payments upon Termination or Change in Control
Each NEO, other than our Chief Executive Officer (who has signed a non-compete agreement and
serves at the discretion of our Board of Directors), is entitled under his employment agreement to
certain payments upon termination of employment or in the event of a change in control. The
following table sets forth those potential payments as of December 31, 2008 with respect to each
applicable NEO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within One Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
After Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause |
|
Control; Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
or Good |
|
Without Cause or |
|
|
Benefit |
|
Death(3) |
|
Disability(3) |
|
with Cause(4) |
|
Reason(3)(4) |
|
Good Reason(3)(4) |
Todd A. Reppert |
|
Severance(1)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
632,820 |
|
|
$ |
949,230 |
|
|
|
Bonus(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379,692 |
|
|
|
569,538 |
|
Rodger A. Stout |
|
Severance(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,740 |
|
|
|
430,320 |
|
|
|
Bonus(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,370 |
|
|
|
215,160 |
|
Curtis L. Hartman |
|
Severance(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,740 |
|
|
|
430,320 |
|
|
|
Bonus(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,370 |
|
|
|
215,160 |
|
Dwayne L. Hyzak |
|
Severance(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,740 |
|
|
|
430,320 |
|
|
|
Bonus(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,370 |
|
|
|
215,160 |
|
David L. Magdol |
|
Severance(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,740 |
|
|
|
430,320 |
|
|
|
Bonus(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,370 |
|
|
|
215,160 |
|
|
|
|
(1) |
|
Severance pay includes an NEOs annual base salary and applicable
multiple thereof paid monthly beginning at the time of termination or
paid in lump-sum if termination is within one year of a change in
control. |
|
(2) |
|
Bonus compensation includes an NEOs current target annual bonus and
applicable multiple thereof paid monthly beginning at the time of
termination or paid lump-sum if termination is within one year of a
change in control. |
|
(3) |
|
Upon these termination events, the NEO will become fully vested in any
previously unvested stock-based compensation. |
|
(4) |
|
For a discussion of how the employment agreements define the term
Change of Control, see Compensation Discussion and AnalysisChange
in Control and Severance. The employment agreements define Cause as
conviction of a felony or other crime of moral turpitude; failure or
refusal to perform all duties and obligations; gross negligence or
willful misconduct to our material detriment; or the material breach
of the employment agreement or any provision of a uniformly applied
policy such as our Code of Business Conduct and Ethics. The employment
agreements define Good Reason as the existence, without the
executives consent, of any of the following conditions at any time
during the two years prior to the executives termination: a material
diminution in an executives base salary, target bonus or authority
and duties (not including any position on our Board of Directors);
implementation of a requirement that the executive report to an
employee or corporate officer rather than directly to the Chairman of
the Board and the Chief Executive Officer or a material diminution in
the authority and responsibilities of the executives supervisor; a
material change in the location where the executives duties are to be
performed; or the material breach by us of the employment agreement,
including the failure of any successor to us to assume the terms of
the agreement. |
68
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Transactions with Related Persons
We co-invested with Main Street Capital II
, LP in several existing portfolio investments prior
to our initial public offering (the IPO), but did not co-invest with Main Street
Capital II, LP
subsequent to the IPO and prior to June 2008. In June 2008, we received exemptive relief from the
SEC to allow us to resume co-investing with Main Street Capital II, LP in accordance with the terms
of such exemptive relief. Main Street Capital II, LP is managed by Main Street Capital Partners,
LLC, and Main Street Capital Partners, LLC is wholly owned by us.
Main Street Capital II, LP is
a privately owned SBIC fund with similar investment objectives to us and which began its investment operations in
January 2006. The co-investments among us and Main Street Capital II, LP have all been made at
the
same time and on the same terms and conditions. The co-investments were also made in accordance
with Main Street Capital Partners, LLCs conflicts policy and in accordance with the applicable
SBIC conflict of interest regulations.
In addition, during the year ended December 31,
2008, one of our wholly owned subsidiaries,
Main Street Capital Partners, LLC, received $3.3 million from Main Street Capital II
, L.P. for
providing investment advisory services to Main Street Capital II, L.P
.. Messrs. Foster and Reppert
control the general partner of Main Street Capital II,
L.P.
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial ownership of our
common stock by:
|
|
|
each person known to us to beneficially own more than five percent of the outstanding
shares of our common stock; |
|
|
|
|
each of our directors and executive officers; and |
|
|
|
|
all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting
or investment power with respect to the securities. There is no common stock subject to options
that are currently exercisable or exercisable within 60 days of March 20, 2009. Percentage of
beneficial ownership is based on 9,076,139 shares of common stock outstanding as of March 20, 2009.
Unless otherwise indicated, to our knowledge, each stockholder listed below has sole voting
and investment power with respect to the shares beneficially owned by the stockholder, and
maintains an address c/o Main Street Capital Corporation. Our address is 1300 Post Oak Boulevard,
Suite 800, Houston, Texas 77056.
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Owned Beneficially |
Name |
|
Number |
|
Percentage |
Independent Directors: |
|
|
|
|
|
|
|
|
Michael Appling Jr. |
|
|
19,239 |
|
|
|
* |
|
Joseph E. Canon |
|
|
292,620 |
(1) |
|
|
3.2 |
% |
Arthur L. French |
|
|
15,487 |
|
|
|
* |
|
William D. Gutermuth |
|
|
10,709 |
|
|
|
* |
|
Interested Directors: |
|
|
|
|
|
|
|
|
Vincent D. Foster |
|
|
1,068,785 |
(2) |
|
|
11.78 |
% |
Todd A. Reppert |
|
|
654,089 |
(3) |
|
|
7.21 |
% |
Executive Officers: |
|
|
|
|
|
|
|
|
Rodger A. Stout |
|
|
67,537 |
|
|
|
* |
|
Jason B. Beauvais |
|
|
9,176 |
|
|
|
* |
|
Michael S. Galvan |
|
|
8,575 |
|
|
|
* |
|
Curtis L. Hartman |
|
|
227,972 |
(4) |
|
|
2.51 |
% |
Dwayne L. Hyzak |
|
|
239,486 |
|
|
|
2.64 |
% |
David L. Magdol |
|
|
247,767 |
|
|
|
2.73 |
% |
All Directors and Officers as a Group (12 persons) |
|
|
2,861,443 |
|
|
|
31.53 |
% |
|
|
|
* |
|
Less than 1% |
|
(1) |
|
Includes (i) 63,121 shares of common stock held by the Dodge Jones Foundation for
which Mr. Canon has sole voting and investment power as Executive Vice President and
(ii) 218,183 shares of common stock held by JMK Investments, LP for which Mr. Canon
has shared voting and investment power as co-manager of its general partner. Mr.
Canon disclaims beneficial ownership of the securities held by the Dodge Jones
Foundation and JMK Investments, LP. |
|
(2) |
|
Includes 7,629 shares of common stock held by Foster Irrevocable Trust for the
benefit of Mr. Fosters children. Although Mr. Foster is not the trustee, and
accordingly does not have voting power or dispositive power over these shares, he
may from time to time direct the trustee to vote and dispose of these shares. Also
includes 2,222 shares and 2,175 shares held in custodial accounts for Mr. Fosters
daughters, Amy Foster and Brittany Foster, respectively. |
|
(3) |
|
Includes 142,387 shares of common stock held by Reppert Investments Limited
Partnership which are beneficially owned by Mr. Reppert. |
|
(4) |
|
Includes 188,947 shares of common stock held in margin accounts or otherwise pledged. |
69
The following table sets forth, as of March 20, 2009, the dollar range of our equity
securities that is beneficially owned by each of our directors.
|
|
|
|
|
Dollar Range of Equity |
|
|
Securities Beneficially |
|
|
Owned(1)(2)(3) |
Interested Directors: |
|
|
Vincent D. Foster
|
|
over $100,000 |
Todd A. Reppert
|
|
over $100,000 |
Independent Directors: |
|
|
Michael Appling Jr.
|
|
over $100,000 |
Joseph E. Canon
|
|
over $100,000 |
Arthur L. French
|
|
over $100,000 |
William D. Gutermuth
|
|
over $100,000 |
|
|
|
(1) |
|
Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act. |
|
(2) |
|
The dollar range of equity securities beneficially owned by our directors is based on a stock
price of $9.47 per share as of March 20, 2009. |
|
(3) |
|
The dollar range of equity securities beneficially owned are: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, or over $100,000. |
SALES OF COMMON STOCK BELOW NET ASSET VALUE
On June 17, 2008, our common stockholders voted to allow us to issue
common stock at any discount from our net asset value (NAV) per share for a period of one
year ending on the earlier of June 16, 2009 or the date of our 2009 annual stockholders meeting,
and we are seeking similar approval from our stockholders at our 2009 annual stockholders meeting
for the following year. In order to sell shares pursuant to this authorization:
|
|
|
a majority of our independent directors who have no financial interest in the sale
must have approved the sale; and |
|
|
|
|
a majority of such directors, who are not interested persons of Main Street, in
consultation with the underwriter or underwriters of the offering if it is to be
underwritten, must have determined in good faith, and as of a time immediately prior to
the first solicitation by us or on our behalf of firm commitments to purchase such
shares or immediately prior to the issuance of such shares, that the price at which
such shares are to be sold is not less than a price which closely approximates the
market value of those shares, less any underwriting commission or discount. |
We are permitted to sell shares of common stock below NAV per share in rights offerings
although we will not do so under this prospectus. Any offering of common stock below NAV per share
will be designed to raise capital for investment in accordance with our investment objectives and
business strategies.
In making a determination that an offering below NAV per share is in our and our stockholders
best interests, our Board of Directors would consider a variety of factors including:
|
|
|
The effect that an offering below NAV per share would have on our stockholders,
including the potential dilution they would experience as a result of the offering; |
|
|
|
|
The amount per share by which the offering price per share and the net proceeds per
share are less than the most recently determined NAV per share; |
|
|
|
|
|
The relationship of recent market prices of our common stock to NAV per share and
the potential impact of the offering on the market price per share of our common stock; |
|
|
|
|
|
|
Whether the proposed offering price would closely approximate the market value of
our shares; |
|
|
|
|
|
The potential market impact of being able to raise capital during the current
financial market difficulties; |
|
|
|
|
The nature of any new investors anticipated to acquire shares in the offering; |
|
|
|
The anticipated rate of return on and quality, type and availability of investments
to be funded with the proceeds from the offering, if any; and |
|
|
|
|
|
The leverage available to us, both before and after any
offering, and the terms thereof. |
|
Sales by us of our common stock at a discount from NAV pose potential risks for our existing
stockholders whether or not they participate in the offering, as well as for new investors who
participate in the offering.
The following three headings and accompanying tables will explain and provide hypothetical
examples on the impact of an offering at a price less than NAV per share on three different sets of
investors:
|
|
|
existing stockholders who do not purchase any shares in the offering; |
|
|
|
|
|
existing stockholders who purchase a relatively small amount of shares in the offering
or a relatively large amount of shares in the offering; and |
|
|
|
|
|
new investors who become stockholders by purchasing shares in the offering. |
Impact on Existing Stockholders who do not Participate in the Offering
Our existing stockholders who do not participate in an offering below NAV per share or who do
not buy additional shares in the secondary market at the same or lower price we obtain in the
offering (after expenses and commissions) face the greatest potential risks. These stockholders
will experience an immediate decrease (often called dilution) in the NAV of the shares they hold
and their NAV per share. These stockholders will also experience a disproportionately greater
decrease in their participation in our earnings and assets and their voting power than the increase
we will experience in our assets, potential earning power and voting interests due to the offering.
These stockholders may also experience a decline in the market price of their shares, which often
reflects to some degree announced or potential
decreases in NAV per share. This decrease could be more pronounced as the size
of the offering and level of discount to NAV increases.
The following table illustrates the level of NAV dilution that would be experienced by a
nonparticipating stockholder in three different hypothetical offerings of different sizes and
levels of discount from NAV per share. Actual sales prices and discounts may differ from the presentation
below.
The examples assume that Company XYZ has 1,000,000 common shares outstanding, $15,000,000 in
total assets and $5,000,000 in total liabilities. The current NAV and NAV per share are thus
$10,000,000 and $10.00. The table illustrates the dilutive effect on nonparticipating Stockholder A
of (1) an offering of 50,000 shares (5% of the outstanding shares) at $9.50 per share after
offering expenses and commission (a 5% discount from NAV), (2) an offering of 100,000 shares (10%
of the outstanding shares) at $9.00 per share after offering expenses and commissions (a 10%
discount from NAV) and (3) an offering of 200,000 shares (20% of the outstanding shares) at $8.00
per share after offering expenses and commissions (a 20% discount from NAV). The prospectus
supplement pursuant to which any discounted offering is made will include a chart based on the
actual number of shares in such offering and the actual discount to the most recently determined
NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Example 1 |
|
Example 2 |
|
Example 3 |
|
|
|
|
|
|
5% Offering |
|
10% Offering |
|
20% Offering |
|
|
|
|
|
|
at 5% Discount |
|
at 10% Discount |
|
at 20% Discount |
|
|
Prior to Sale |
|
Following |
|
|
|
Following |
|
|
|
Following |
|
|
|
|
Below NAV |
|
Sale |
|
% Change |
|
Sale |
|
% Change |
|
Sale |
|
% Change |
Offering Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
Share to Public (1) |
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
9.47 |
|
|
|
|
|
|
$ |
8.42 |
|
|
|
|
|
Net Proceeds per Share to Issuer |
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
|
$ |
9.00 |
|
|
|
|
|
|
$ |
8.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Shares and Decrease to NAV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding |
|
|
1,000,000 |
|
|
|
1,050,000 |
|
|
|
5.00 |
% |
|
|
1,100,000 |
|
|
|
10.00 |
% |
|
|
1,200,000 |
|
|
|
20.00 |
% |
NAV per Share |
|
$ |
10.00 |
|
|
$ |
9.98 |
|
|
|
(0.20 |
)% |
|
$ |
9.91 |
|
|
|
(0.90 |
)% |
|
$ |
9.67 |
|
|
|
(3.30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution to Nonparticipating Stockholder A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder A |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
Percentage Outstanding Held by
Stockholder A |
|
|
1.00 |
% |
|
|
0.95 |
% |
|
|
(4.76 |
)% |
|
|
0.91 |
% |
|
|
(9.09 |
)% |
|
|
0.83 |
% |
|
|
(16.67 |
)% |
NAV Dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder A |
|
$ |
100,000 |
|
|
$ |
99,800 |
|
|
|
|
|
|
$ |
99,100 |
|
|
|
|
|
|
$ |
96,700 |
|
|
|
|
|
Total Investment by Stockholder A
(Assumed to be $10.00 per Share) |
|
$ |
100,000 |
|
|
$ |
100,000 |
|
|
|
|
|
|
$ |
100,000 |
|
|
|
|
|
|
$ |
100,000 |
|
|
|
|
|
Total Dilution to Stockholder A
(Total NAV Less Total Investment) |
|
|
|
|
|
$ |
(200 |
) |
|
|
|
|
|
$ |
(900 |
) |
|
|
|
|
|
$ |
(3,300 |
) |
|
|
|
|
NAV Dilution per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Stockholder A |
|
|
|
|
|
$ |
9.98 |
|
|
|
|
|
|
$ |
9.91 |
|
|
|
|
|
|
$ |
9.67 |
|
|
|
|
|
Investment per Share Held by
Stockholder A (Assumed to be $10.00
per Share on Shares Held Prior to
Sale) |
|
$ |
10.00 |
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
NAV Dilution per Share
Experienced by Stockholder A (NAV per Share Less
Investment per Share) |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
$ |
(0.09 |
) |
|
|
|
|
|
$ |
(0.33 |
) |
|
|
|
|
Percentage NAV Dilution Experienced
by Stockholder A (NAV Dilution per
Share Divided by Investment per
Share) |
|
|
|
|
|
|
|
|
|
|
(0.20 |
)% |
|
|
|
|
|
|
(0.90 |
)% |
|
|
|
|
|
|
(3.30 |
)% |
|
|
|
|
(1) |
|
Assumes 5% in selling compensation and expenses paid by us. |
Impact on Existing Stockholders who do Participate in the Offering
Our existing stockholders who participate in an offering below NAV per share or who buy
additional shares in the secondary market at the same or lower price as we obtain in the offering
(after expenses and commissions) will experience the same types of NAV dilution as the
nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the
same percentage of the discounted offering as their interest in our shares immediately prior to the
offering. The level of NAV dilution to such stockholders will decrease as the number of shares such stockholders
purchase increases. Existing stockholders who buy more than their
proportionate percentage will experience NAV
dilution but will, in contrast to existing stockholders who purchase less than their proportionate
share of the offering, experience an increase (often called accretion) in NAV per share over their
investment per share and will also experience a disproportionately greater increase in their
participation in our earnings and assets and their voting power than our increase in assets,
potential earning power and voting interests due to the offering. The level of accretion will
increase as the excess number of shares purchased by such stockholder increases. Even a stockholder
who over-participates will, however, be subject to the risk that we may make additional discounted
offerings in which such stockholder does not participate, in which case such a stockholder will
experience NAV dilution as described above in such subsequent offerings. These stockholders may
also experience a decline in the market price of their shares, which often reflects to some degree
announced or potential decreases in NAV per
share. This decrease could be more pronounced as the size of the offering and the level of
discount to NAV increases.
The following chart illustrates the level of dilution and accretion in the hypothetical 20%
discount offering from the prior chart (Example 3) for a stockholder that acquires shares equal to
(1) 50% of its proportionate share of the offering (i.e., 1,000 shares, which is 0.5% of an
offering of 200,000 shares rather than its 1.0% proportionate share) and (2) 150% of such
percentage (i.e., 3,000 shares, which is 1.5% of an offering of 200,000 shares rather than its 1.0%
proportionate share). The prospectus supplement pursuant to which any discounted offering is made
will include a chart for this example based on the actual number of shares in such offering and
the actual discount from the most recently determined NAV per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50% |
|
150% |
|
|
|
|
|
|
Participation |
|
Participation |
|
|
Prior to Sale |
|
Following |
|
|
|
Following |
|
|
|
|
Below NAV |
|
Sale |
|
% Change |
|
Sale |
|
% Change |
Offering Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
Share to Public (1) |
|
|
|
|
|
$ |
8.42 |
|
|
|
|
|
|
$ |
8.42 |
|
|
|
|
|
Net Proceeds per Share to Issuer |
|
|
|
|
|
$ |
8.00 |
|
|
|
|
|
|
$ |
8.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Shares and Decrease to NAV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding |
|
|
1,000,000 |
|
|
|
1,200,000 |
|
|
|
20.00 |
% |
|
|
1,200,000 |
|
|
|
20.00 |
% |
NAV per Share |
|
$ |
10.00 |
|
|
$ |
9.67 |
|
|
|
(3.33 |
)% |
|
$ |
9.67 |
|
|
|
(3.33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion to Participating Stockholder A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Dilution/Accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder A |
|
|
10,000 |
|
|
|
11,000 |
|
|
|
10.00 |
% |
|
|
13,000 |
|
|
|
30.00 |
% |
Percentage Outstanding Held by
Stockholder A |
|
|
1.00 |
% |
|
|
0.92 |
% |
|
|
(8.33 |
)% |
|
|
1.08 |
% |
|
|
8.33 |
% |
NAV Dilution/Accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder A |
|
$ |
100,000 |
|
|
$ |
106,333 |
|
|
|
6.33 |
% |
|
$ |
125,667 |
|
|
|
25.67 |
% |
Total Investment by Stockholder A
(Assumed to be $10.00 per Share on
Shares Held Prior to Sale) |
|
|
|
|
|
$ |
108,420 |
|
|
|
|
|
|
$ |
125,260 |
|
|
|
|
|
Total Dilution/Accretion to
Stockholder A (Total NAV Less Total
Investment) |
|
|
|
|
|
$ |
(2,087 |
) |
|
|
|
|
|
$ |
407 |
|
|
|
|
|
NAV Dilution/Accretion per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Stockholder A |
|
|
|
|
|
$ |
9.67 |
|
|
|
|
|
|
$ |
9.67 |
|
|
|
|
|
Investment per Share Held by
Stockholder A (Assumed to be $10.00
per Share on Shares Held Prior to
Sale) |
|
$ |
10.00 |
|
|
$ |
9.86 |
|
|
|
(1.44 |
)% |
|
$ |
9.64 |
|
|
|
(3.65 |
)% |
NAV Dilution/Accretion per Share
Experienced by Stockholder A (NAV per
Share Less Investment per Share) |
|
|
|
|
|
$ |
(0.19 |
) |
|
|
|
|
|
$ |
0.03 |
|
|
|
|
|
Percentage NAV Dilution/Accretion
Experienced by Stockholder A (NAV
Dilution/Accretion per Share Divided
by Investment per Share) |
|
|
|
|
|
|
|
|
|
|
(1.92 |
)% |
|
|
|
|
|
|
0.32 |
% |
|
|
|
|
(1) |
|
Assumes 5% in selling compensation and expenses paid by us. |
Impact on New Investors
Investors
who are not currently stockholders, but who participate in an offering below NAV and
whose investment per share is greater than the resulting NAV per share due to selling compensation
and expenses paid by us will experience an immediate decrease, albeit small, in the NAV of
their shares and their NAV per share compared to the price they pay
for their shares (Example 1 below). On the other hand, investors who
are not currently stockholders, but who participate in an offering below NAV per share and whose
investment per share is also less than the resulting NAV per share will experience an
immediate increase in the NAV of their shares and their NAV per share compared to the price they
pay for their shares (Examples 2 and 3 below). These latter investors will experience a disproportionately greater participation in
our earnings and assets and their voting power than our increase in assets, potential earning power
and voting interests. These investors will, however, be subject to the risk that we may make
additional discounted offerings in which such new stockholder does not participate, in which case
such new stockholder will experience dilution as described above in such subsequent offerings.
These investors may also experience a decline in the market price of their shares, which often
reflects to some degree announced or potential decreases in NAV per share. This
decrease could be more pronounced as the size of the offering and level of discount to NAV
increases.
The following chart illustrates the level of dilution or accretion for new investors that
would be experienced by a new investor in the same hypothetical 5%, 10% and 20% discounted
offerings as described in the first chart above. The illustration is for a new investor who
purchases the same percentage (1.00%) of the shares in the offering as Stockholder A in the prior
examples held immediately prior to the offering. The prospectus supplement pursuant to which any
discounted offering is made will include a chart for these examples based on the actual number of
shares in such offering and the actual discount from the most recently determined NAV per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Example 1 |
|
Example 2 |
|
Example 3 |
|
|
|
|
|
|
5% Offering |
|
10% Offering |
|
20% Offering |
|
|
|
|
|
|
at 5% Discount |
|
at 10% Discount |
|
at 20% Discount |
|
|
Prior to Sale |
|
Following |
|
|
|
|
|
Following |
|
|
|
|
|
Following |
|
|
|
|
Below NAV |
|
Sale |
|
% Change |
|
Sale |
|
% Change |
|
Sale |
|
% Change |
Offering Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
Share to Public (1) |
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
9.47 |
|
|
|
|
|
|
$ |
8.42 |
|
|
|
|
|
Net Proceeds per Share to Issuer |
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
|
$ |
9.00 |
|
|
|
|
|
|
$ |
8.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Shares and Decrease to NAV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding |
|
|
1,000,000 |
|
|
|
1,050,000 |
|
|
|
5.00 |
% |
|
|
1,100,000 |
|
|
|
10.00 |
% |
|
|
1,200,000 |
|
|
|
20.00 |
% |
NAV per Share |
|
$ |
10.00 |
|
|
$ |
9.98 |
|
|
|
(0.20 |
)% |
|
$ |
9.91 |
|
|
|
(0.90 |
)% |
|
$ |
9.67 |
|
|
|
(3.30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion to New Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Investor A |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
Percentage Outstanding Held by Investor A |
|
|
0.00 |
% |
|
|
0.05 |
% |
|
|
|
|
|
|
0.09 |
% |
|
|
|
|
|
|
0.17 |
% |
|
|
|
|
NAV Dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Investor A |
|
|
|
|
|
$ |
4,990 |
|
|
|
|
|
|
$ |
9,910 |
|
|
|
|
|
|
$ |
19,340 |
|
|
|
|
|
Total Investment by Investor A (At Price
to Public) |
|
|
|
|
|
$ |
5,000 |
|
|
|
|
|
|
$ |
9,470 |
|
|
|
|
|
|
$ |
16,840 |
|
|
|
|
|
Total Dilution/Accretion to Investor A
(Total NAV Less Total Investment) |
|
|
|
|
|
$ |
(10 |
) |
|
|
|
|
|
$ |
440 |
|
|
|
|
|
|
$ |
2,500 |
|
|
|
|
|
NAV Dilution per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Investor A |
|
|
|
|
|
$ |
9.98 |
|
|
|
|
|
|
$ |
9.91 |
|
|
|
|
|
|
$ |
9.67 |
|
|
|
|
|
Investment per Share Held by Investor A |
|
|
|
|
|
$ |
10.00 |
|
|
|
|
|
|
$ |
9.47 |
|
|
|
|
|
|
$ |
8.42 |
|
|
|
|
|
NAV Dilution/Accretion per Share
Experienced by Investor A (NAV per Share
Less Investment per Share) |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
$ |
0.44 |
|
|
|
|
|
|
$ |
1.25 |
|
|
|
|
|
Percentage NAV Dilution/Accretion
Experienced by Investor A (NAV
Dilution/Accretion per Share Divided by
Investment per Share) |
|
|
|
|
|
|
|
|
|
|
(0.20 |
)% |
|
|
|
|
|
|
4.65 |
% |
|
|
|
|
|
|
14.85 |
% |
|
|
|
|
(1) |
|
Assumes 5% in selling compensation and expenses paid by us. |
DIVIDEND REINVESTMENT PLAN
We have adopted a dividend reinvestment plan that provides for the reinvestment of
dividends on behalf of our stockholders, unless a stockholder has elected to receive
dividends in cash. As a result, if we declare a cash dividend, our stockholders who have not
opted out of our dividend reinvestment plan by the dividend record date will have their
cash dividend automatically reinvested into additional shares of our common stock.
No action will be required on the part of a registered stockholder to have their cash
dividends reinvested in shares of our common stock. A registered stockholder may elect to
receive an entire dividend in cash by notifying American Stock Transfer & Trust Company, the
plan administrator and our transfer agent and registrar, in writing so that such notice is
received by the plan administrator no later than the record date for dividends to
stockholders. The plan administrator will set up an account for shares acquired through the
plan for each stockholder who has not elected to receive dividends in cash and hold such
shares in non-certificated form. Upon request by a stockholder participating in the plan,
received in writing not less than 10 days prior to the record date, the plan administrator
will, instead of crediting shares to the participants account, issue a certificate
registered in the participants name for the number of whole shares of our common stock and a
check for any fractional share. Those stockholders whose shares are held by a broker or other
financial intermediary may receive dividends in cash by notifying their broker or other
financial intermediary of their election.
When the share price is generally trading above net asset value, we intend to primarily
use newly issued shares to implement the plan. However, we reserve the right to purchase
shares in the open market in connection with our implementation of the plan when our share
price is generally trading below net asset value. The number of newly issued shares to be
issued to a stockholder is determined by dividing the total dollar amount of the dividend
payable to such stockholder by the market price per share of our common stock at the close of
regular trading on the Nasdaq Global Select Market on the dividend payment date. Shares
purchased in open market transactions by the administrator of the dividend reinvestment plan
will be allocated to a stockholder based upon the average purchase price, excluding any
brokerage charges or other charges, of all shares of common stock purchased with respect to
the dividend. Market price per share on that date will be the closing price for such shares
on the Nasdaq Global Select Market or, if no sale is reported for such day, at the average of
their reported bid and asked prices. The number of shares of our common stock to be
outstanding after giving effect to payment of the dividend cannot be established until the
value per share at which additional shares will be issued has been determined and elections
of our stockholders have been tabulated.
There will be no brokerage charges or other charges for dividend reinvestment to
stockholders who participate in the plan. We will pay the plan administrators fees under the
plan.
Stockholders who receive dividends in the form of stock generally are subject to the
same federal, state and local tax consequences as are stockholders who elect to receive their
dividends in cash. A stockholders basis for determining gain or loss upon the sale of stock
received in a dividend from us will be equal to the total dollar amount of the dividend
payable to the
70
stockholder. Any stock received in a dividend will have a holding period for tax
purposes commencing on the day following the day on which the shares are credited to the
U.S. stockholders account.
Participants may terminate their accounts under the plan by notifying the plan
administrator via its website at www.amstock.com, by filling out the transaction request form
located at the bottom of their statement and sending it to the plan administrator at
59 Maiden Lane New York, New York 10038 or by calling the plan administrators at (212)
936-5100.
We may terminate the plan upon notice in writing mailed to each participant at least
30 days prior to any record date for the payment of any dividend by us. All correspondence
concerning the plan should be directed to the plan administrator by mail at 59 Maiden Lane
New York, New York 10038 or by telephone at (212) 936-5100.
DESCRIPTION OF CAPITAL STOCK
The following description is based on relevant portions of the Maryland General
Corporation Law and on our articles of incorporation and bylaws. This summary may not contain
all of the information that is important to you, and we refer you to the Maryland General
Corporation Law and our articles of incorporation and bylaws for a more detailed description
of the provisions summarized below.
Capital Stock
Under the terms of our articles of incorporation, our authorized capital stock consists
of 150,000,000 shares of common stock, par value $0.01 per share, of
which 9,054,931 shares
were outstanding as of April 22, 2009. Under our articles of incorporation, our Board of
Directors is authorized to classify and reclassify any unissued shares of stock into other
classes or series of stock, and to cause the issuance of such shares, without obtaining
stockholder approval. In addition, as permitted by the Maryland General Corporation Law, but
subject to the 1940 Act, our articles of incorporation provide that the Board of Directors,
without any action by our stockholders, may amend the articles of incorporation from time to
time to increase or decrease the aggregate number of shares of stock or the number of shares
of stock of any class or series that we have authority to issue. Under Maryland law, our
stockholders generally are not personally liable for our debts or obligations.
Common Stock
All shares of our common stock have equal voting rights and rights to earnings, assets
and distributions, except as described below. When shares are issued, upon payment therefor,
they will be duly authorized, validly issued, fully paid and nonassessable. Distributions may
be paid to the holders of our common stock if, as and when authorized by our Board of
Directors and declared by us out of assets legally available therefore. Shares of our common
stock have no conversion, exchange, preemptive or redemption rights. In the event of our
liquidation, dissolution or winding up, each share of our common stock would be entitled to
share ratably in all of our assets that are legally available for distribution after we pay
all debts and other liabilities and subject to any preferential rights of holders of our
preferred stock, if any preferred stock is outstanding at such time. Each share of our common
stock is entitled to one vote on all matters submitted to a vote of stockholders, including
the election of directors. Except as provided with respect to any other class or series of
stock, the holders of our common stock will possess exclusive voting power. There is no
cumulative voting in the election of directors, which means that holders of a majority of the
outstanding shares of common stock will elect all of our directors, and holders of less than
a majority of such shares will be unable to elect any director.
Preferred Stock
Our articles of incorporation authorize our Board of Directors to classify and
reclassify any unissued shares of stock into other classes or series of stock, including
preferred stock. Prior to issuance of shares of each class or series, the Board of Directors
is required by Maryland law and by our articles of incorporation to set the terms,
preferences, conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of redemption for
each class or series. Thus, the Board of Directors could authorize the issuance of shares of
preferred stock with terms and conditions which could have the effect of delaying, deferring
or preventing a transaction or a change in control that might involve a premium price for
holders of our common stock or otherwise be in their best interest. You should note, however,
that any issuance of preferred stock must comply with the requirements of the 1940 Act. The
1940 Act requires, among other things, that (1) immediately after issuance and before any
dividend or other distribution is made with respect to our common stock and before any
purchase of common stock is made, such preferred stock together with all other senior
securities must not exceed an amount equal to 50.0% of our total assets after deducting the
amount of such dividend, distribution or purchase price, as the case may be, and (2) the
holders of shares of preferred stock, if any are issued, must be entitled as a class to elect
two directors at all times and to elect a majority of the directors if distributions on such
preferred stock are in arrears by two years or more. Certain matters under the 1940 Act
require the separate vote of the holders of any issued and outstanding preferred stock. We
believe that the
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availability for issuance of preferred stock will provide us with increased flexibility
in structuring future financings and acquisitions.
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
Maryland law permits a Maryland corporation to include in its articles of incorporation
a provision limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of action. Our
articles of incorporation contain such a provision that eliminates directors and officers
liability to the maximum extent permitted by Maryland law, subject to the requirements of the
Investment Company Act of 1940, as amended (the 1940 Act).
Our articles of incorporation require us, to the maximum extent permitted by Maryland
law and subject to the requirements of the 1940 Act, to indemnify any present or former
director or officer or any individual who, while a director or officer and at our request,
serves or has served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which such person may become subject or
which such person may incur by reason of his or her service in any such capacity, except with
respect to any matter as to which such person shall have been finally adjudicated in any
proceeding not to have acted in good faith in the reasonable belief that his or her action
was in our best interest or to be liable to us or our stockholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such persons office.
Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to
the requirements of the 1940 Act, to indemnify any present or former director or officer or
any individual who, while a director or officer and at our request, serves or has served
another corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or trustee and who
is made, or threatened to be made, a party to a proceeding by reason of his or her service in
any such capacity from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her service in any such capacity,
except with respect to any matter as to which such person shall have been finally adjudicated
in any proceeding not to have acted in good faith in the reasonable belief that his or her
action was in our best interest or to be liable to us or our stockholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of such persons office. Our bylaws also require that, to the maximum extent
permitted by Maryland law, we may pay certain expenses incurred by any such indemnified
person in advance of the final disposition of a proceeding upon receipt of an undertaking by
or on behalf of such indemnified person to repay amounts we have so paid if it is ultimately
determined that indemnification of such expenses is not authorized under our bylaws.
Maryland law requires a corporation (unless its articles of incorporation provide
otherwise, which our articles of incorporation do not) to indemnify a director or officer who
has been successful in the defense of any proceeding to which he or she is made, or
threatened to be made, a party by reason of his or her service in that capacity. Maryland law
permits a corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made, or threatened
to be made, a party by reason of his or her service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result
of active and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act or omission
was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation or for a judgment of
liability on the basis that a personal benefit was improperly received, unless in either case
a court orders indemnification, and then only for expenses. In addition, Maryland law permits
a corporation to advance reasonable expenses to a director or officer upon the corporations
receipt of (a) a written affirmation by the director or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that the standard
of conduct was not met.
In addition, we have entered into Indemnity Agreements with our directors and executive
officers. The Indemnity Agreements generally provide that we will, to the extent specified in
the agreements and to the fullest extent permitted by the 1940 Act and Maryland law as in
effect on the day the agreement is executed, indemnify and advance expenses to each
indemnitee that is, or is threatened to be made, a party to or a witness in any civil,
criminal or administrative proceeding. We will indemnify the indemnitee against all expenses,
judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred
in connection with any such proceeding unless it is established that (i) the act or omission
of the indemnitee was material to the matter giving rise to the proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate dishonesty, (ii) the
indemnitee actually received an improper personal benefit, or (iii) in the case of a criminal
proceeding, the indemnitee had reasonable cause to believe his conduct was unlawful.
Additionally, for so long as we are subject to the 1940 Act, no advancement of expenses will
be made until (i) the indemnitee provides a security for his undertaking, (ii) we are insured
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against losses arising by reason of any lawful advances, or (iii) the majority of a
quorum of our disinterested directors, or independent counsel in a written opinion, determine
based on a review of readily available facts that there is reason to believe that the
indemnitee ultimately will be found entitled to indemnification. The Indemnity Agreements
also provide that if the indemnification rights provided for therein are unavailable for any
reason, we will pay, in the first instance, the entire amount incurred by the indemnitee in
connection with any covered proceeding and waive and relinquish any right of contribution we
may have against the indemnitee. The rights provided by the Indemnity Agreements are in
addition to any other rights to indemnification or advancement of expenses to which the
indemnitee may be entitled under applicable law, our articles of incorporation, our bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No
amendment or repeal of the Indemnity Agreements will limit or restrict any right of the
indemnitee in respect of any action taken or omitted by the indemnitee prior to such
amendment or repeal. The Indemnity Agreements will terminate upon the later of (i) ten years
after the date the indemnitee has ceased to serve as our director or officer, or (ii) one
year after the final termination of any proceeding for which the indemnitee is granted rights
of indemnification or advancement of expenses or which is brought by the indemnitee. The
above description of the Indemnity Agreements is subject to, and is qualified in its entirety
by reference to, all the provisions of the form of Indemnity Agreement.
We have obtained primary and excess insurance policies insuring our directors and
officers against certain liabilities they may incur in their capacity as directors and
officers. Under such policies, the insurer, on our behalf, may also pay amounts for which we
have granted indemnification to the directors or officers.
Provisions of the Maryland General Corporation Law and Our Articles of Incorporation and Bylaws
The Maryland General Corporation Law and our articles of incorporation and bylaws
contain provisions that could make it more difficult for a potential acquiror to acquire us
by means of a tender offer, proxy contest or otherwise. These provisions are expected to
discourage certain coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to negotiate first with our Board of Directors. We
believe that the benefits of these provisions outweigh the potential disadvantages of
discouraging any such acquisition proposals because, among other things, the negotiation of
such proposals may improve their terms.
Election of Directors
Our bylaws currently provide that directors are elected by a plurality of the votes cast
in the election of directors. Pursuant to our articles of incorporation and bylaws, our Board
of Directors may amend the bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal
Our articles of incorporation provide that the number of directors will be set only by
the Board of Directors in accordance with our bylaws. Our bylaws provide that a majority of
our entire Board of Directors may at any time increase or decrease the number of directors.
However, unless the bylaws are amended, the number of directors may never be less than one or
more than twelve. We have elected to be subject to the provision of Subtitle 8 of Title 3 of
the Maryland General Corporation Law regarding the filling of vacancies on the Board of
Directors. Accordingly, at such time, except as may be provided by the Board of Directors in
setting the terms of any class or series of preferred stock, any and all vacancies on the
Board of Directors may be filled only by the affirmative vote of a majority of the remaining
directors in office, even if the remaining directors do not constitute a quorum, and any
director elected to fill a vacancy shall serve for the remainder of the full term of the
directorship in which the vacancy occurred and until a successor is elected and qualifies,
subject to any applicable requirements of the 1940 Act. Our articles of incorporation provide
that a director may be removed only for cause, as defined in the articles of incorporation,
and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast
in the election of directors.
Action by Stockholders
Under the Maryland General Corporation Law, stockholder action may be taken only at an
annual or special meeting of stockholders or by unanimous consent in lieu of a meeting
(unless the articles of incorporation provide for stockholder action by less than unanimous
written consent, which our articles of incorporation do not). These provisions, combined with
the requirements of our bylaws regarding the calling of a stockholder-requested special
meeting of stockholders discussed below, may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations
of persons for election to the Board of Directors and the proposal of business to be
considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by
the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who
has complied with the advance notice procedures of the bylaws. With respect to special
meetings of stockholders, only the business specified in our
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notice of the meeting may be brought before the meeting. Nominations of persons for
election to the Board of Directors at a special meeting may be made only (1) pursuant to our
notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of
Directors has determined that directors will be elected at the meeting, by a stockholder who
is entitled to vote at the meeting and who has complied with the advance notice provisions of
the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other
business is to afford our Board of Directors a meaningful opportunity to consider the
qualifications of the proposed nominees and the advisability of any other proposed business
and, to the extent deemed necessary or desirable by our Board of Directors, to inform
stockholders and make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws
do not give our Board of Directors any power to disapprove stockholder nominations for the
election of directors or proposals recommending certain action, they may have the effect of
precluding a contest for the election of directors or the consideration of stockholder
proposals if proper procedures are not followed and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to us and our stockholders.
Calling of Special Meeting of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our Board of
Directors and certain of our officers. Additionally, our bylaws provide that, subject to the
satisfaction of certain procedural and informational requirements by the stockholders
requesting the meeting, a special meeting of stockholders shall be called by our secretary
upon the written request of stockholders entitled to cast not less than a majority of all of
the votes entitled to be cast at such meeting.
Approval of Extraordinary Corporate Action; Amendment of Articles of Incorporation and
Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its articles
of incorporation, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of business, unless
approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the
votes entitled to be cast on the matter. However, a Maryland corporation may provide in its
articles of incorporation for approval of these matters by a lesser percentage, but not less
than a majority of all of the votes entitled to be cast on the matter. Our articles of
incorporation generally provide for approval of amendments to our articles of incorporation
and extraordinary transactions by the stockholders entitled to cast at least a majority of
the votes entitled to be cast on the matter. Our articles of incorporation also provide that
certain amendments and any proposal for our conversion, whether by merger or otherwise, from
a closed-end company to an open-end company or any proposal for our liquidation or
dissolution requires the approval of the stockholders entitled to cast at least 75.0% of the
votes entitled to be cast on such matter. However, if such amendment or proposal is approved
by at least 75.0% of our continuing directors (in addition to approval by our Board of
Directors), such amendment or proposal may be approved by the stockholders entitled to cast a
majority of the votes entitled to be cast on such a matter. The continuing directors are
defined in our articles of incorporation as our current directors, as well as those directors
whose nomination for election by the stockholders or whose election by the directors to fill
vacancies is approved by a majority of the continuing directors then on the Board of
Directors.
Our articles of incorporation and bylaws provide that the Board of Directors will have
the exclusive power to make, alter, amend or repeal any provision of our bylaws.
No Appraisal Rights
Except with respect to appraisal rights arising in connection with the Maryland Control
Share Acquisition Act, or Control Share Act, discussed below, as permitted by the Maryland
General Corporation Law, our articles of incorporation provide that stockholders will not be
entitled to exercise appraisal rights.
Control Share Acquisitions
The Control Share Act provides that control shares of a Maryland corporation acquired in
a control share acquisition have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by
officers or by directors who are employees of the corporation are excluded from shares
entitled to vote on the matter. Control shares are voting shares of stock which, if
aggregated with all other shares of stock owned by the acquiror or in respect of which the
acquiror is able to exercise or direct the exercise of voting power (except solely by virtue
of a revocable proxy), would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power:
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one-tenth but less than one-third; |
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one-third or more but less than a majority; or |
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a majority or more of all voting power. |
The requisite stockholder approval must be obtained each time an acquiror crosses one of
the thresholds of voting power set forth above. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the
board of directors of the corporation to call a special meeting of stockholders to be held
within 50 days of demand to consider the voting rights of the shares. The right to compel the
calling of a special meeting is subject to the satisfaction of certain conditions, including
an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then the corporation may
repurchase for fair value any or all of the control shares, except those for which voting
rights have previously been approved. The right of the corporation to repurchase control
shares is subject to certain conditions and limitations. Fair value is determined, without
regard to the absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of the shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of appraisal rights may not
be less than the highest price per share paid by the acquiror in the control share
acquisition.
The Control Share Act does not apply (a) to shares acquired in a merger, consolidation
or share exchange if the corporation is a party to the transaction or (b) to acquisitions
approved or exempted by the articles of incorporation or bylaws of the corporation.
Our bylaws contain a provision exempting from the Control Share Act any and all
acquisitions by any person of our shares of stock. There can be no assurance that such
provision will not be otherwise amended or eliminated at any time in the future. However, we
will amend our bylaws to be subject to the Control Share Act only if the Board of Directors
determines that it would be in our best interests and if the staff of the SEC does not object
to our determination that our being subject to the Control Share Act does not conflict with
the 1940 Act.
Business Combinations
Under the Maryland Business Combination Act, or the Business Combination Act, business
combinations between a Maryland corporation and an interested stockholder or an affiliate of
an interested stockholder are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange or, in circumstances specified in the
statute, an asset transfer or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns 10.0% or more of the voting power of the corporations shares; or |
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an affiliate or associate of the corporation who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10.0% or more of the voting power of the then
outstanding voting stock of the corporation. |
A person is not an interested stockholder under this statute if the board of directors
approved in advance the transaction by which such stockholder otherwise would have become an
interested stockholder. However, in approving a transaction, the board of directors may
provide that its approval is subject to compliance, at or after the time of approval, with
any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland
corporation and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at least:
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80.0% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
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two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares
held by the interested stockholder with whom or with whose affiliate the business combination is to be
effected or held by an affiliate or associate of the interested stockholder. |
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These super-majority vote requirements do not apply if the corporations common
stockholders receive a minimum price, as defined under Maryland law, for their shares in the
form of cash or other consideration in the same form as previously paid by the interested
stockholder for its shares.
The statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors before the time that the interested
stockholder becomes an interested stockholder. Our Board of Directors has adopted a
resolution exempting any business combination between us and any other person from the
provisions of the Business Combination Act, provided that the business combination is first
approved by the Board of Directors, including a majority of the directors who are not
interested persons as defined in the 1940 Act. This resolution, however, may be altered or
repealed in whole or in part at any time. If these resolutions are repealed, or the Board of
Directors does not otherwise approve a business combination, the statute may discourage
others from trying to acquire control of us and increase the difficulty of consummating any
offer.
Conflict with 1940 Act
Our bylaws provide that, if and to the extent that any provision of the Maryland General
Corporation Law, or any provision of our articles of incorporation or bylaws conflicts with
any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal income tax
considerations applicable to us and to an investment in our shares. This summary does not
purport to be a complete description of the income tax considerations applicable to such an
investment. For example, we have not described tax consequences that may be relevant to
certain types of holders subject to special treatment under U.S. federal income tax laws,
including stockholders subject to the alternative minimum tax, tax-exempt organizations,
insurance companies, dealers in securities, pension plans and trusts, and financial
institutions. This summary assumes that investors hold our common stock as capital assets
(within the meaning of the Code). The discussion is based upon the Code, Treasury
regulations, and administrative and judicial interpretations, each as of the date of this
prospectus and all of which are subject to change, possibly retroactively, which could affect
the continuing validity of this discussion. We have not sought and will not seek any ruling
from the Internal Revenue Service regarding this offering. This summary does not discuss any
aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the
special treatment under U.S. federal income tax laws that could result if we invested in
tax-exempt securities or certain other investment assets.
A U.S. stockholder generally is a beneficial owner of shares of our common stock who
is for U.S. federal income tax purposes:
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A citizen or individual resident of the United States; |
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A corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or any political subdivision thereof; |
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A trust if a court within the United States is asked to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority to control all substantive decisions of
the trust; or |
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A trust or an estate, the income of which is subject to U.S. federal income taxation regardless of its source. |
A Non-U.S. stockholder generally is a beneficial owner of shares of our common stock
that is not a U.S. stockholder.
If a partnership (including an entity treated as a partnership for U.S. federal income
tax purposes) holds shares of our common stock, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the activities of the
partnership. A prospective stockholder that is a partner of a partnership holding shares of
our common stock should consult his, her or its tax advisers with respect to the purchase,
ownership and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an
investment in our shares will depend on the facts of his, her or its particular situation. We
encourage investors to consult their own tax advisers regarding the specific consequences of
such an investment, including tax reporting requirements, the applicability of federal,
state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty
and the effect of any possible changes in the tax laws.
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Election
to be Taxed as a Regulated Investment Company
MSCC
has elected to be treated for federal income tax purposes as a RIC under Subchapter
M of the Code Commencing October 2, 2007. As a RIC, we generally do not have to pay corporate-level federal income
taxes on any income that we distribute to our stockholders as dividends. To qualify as a RIC,
we must, among other things, meet certain source-of-income and asset diversification
requirements (as described below). In addition, in order to maintain RIC tax treatment, we
must distribute to our stockholders, for each taxable year, at least 90% of our investment
company taxable income, which is generally our net ordinary income plus the excess of
realized net short-term capital gains over realized net long-term capital losses, subject to
carrying forward taxable income for payment in the following year and paying a 4.0% excise
tax as described below (the Annual Distribution Requirement).
Taxation as a Regulated Investment Company
For any
taxable year in which we qualify as a RIC and satisfy the Annual Distribution Requirement, then we will not be subject
to federal income tax on the portion of our income we distribute
(or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax
at the regular corporate rates on any income or capital gains not distributed (or deemed
distributed) to our stockholders.
We will be subject to a 4% nondeductible federal excise tax on
certain undistributed income unless we distribute in a timely
manner an amount at least equal to the sum of (1) 98% of
our net ordinary income and capital gain net income for each
calendar year, and (2) any income recognized, but not
distributed, in preceding years (the Excise Tax Avoidance
Requirement). Dividends declared and paid by us in a year
will generally differ from taxable income for that year as such
dividends may include the distribution of current year taxable
income, less amounts carried over into the following year, and
the distribution of prior year taxable income carried over into
and distributed in the current year. For amounts we carry over
into the following year, we will be required to pay the 4%
excise tax based on 98% of our annual taxable income in excess
of distributions for the year.
In order to qualify as a RIC for federal income tax purposes, we must, among other
things:
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continue to qualify as a BDC under the 1940 Act at all times during each taxable year; |
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derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect
to certain securities, loans, gains from the sale of stock or other securities, net income from certain
qualified publicly traded partnerships, or other income derived with respect to our business of investing in
such stock or securities (the 90% Income Test); and |
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diversify our holdings so that at the end of each quarter of the taxable year: |
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at least 50% of the value of our assets consists of cash, cash
equivalents, U.S. Government securities, securities of other RICs, and
other securities if such other securities of any one issuer do not
represent more than 5% of the value of our assets or more than 10%
of the outstanding voting securities of the issuer; and |
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no more than 25% of the value of our assets is invested in the
securities, other than U.S. government securities or securities of
other RICs, of one issuer, of two or more issuers that are controlled,
as determined under applicable Code rules, by us and that are engaged
in the same or similar or related trades or businesses or of certain
qualified publicly traded partnerships (collectively, the Diversification
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In order to comply with the 90% Income Test, we formed MSEI, a
wholly-owned subsidiary of MSCC, for the primary purpose of
permitting us to own equity interests in portfolio companies
which are pass through entities for tax purposes.
Absent MSEI, a portion of the gross income from such portfolio
companies would flow directly to us for purposes of the 90%
Income Test. To the extent such income did not consist of
investment income, it could jeopardize our ability to qualify as
a RIC and, therefore cause us to incur significant federal
income taxes. MSEI is consolidated with Main Street for
generally accepted accounting principles in the United States,
or U.S. GAAP purposes, and the portfolio investments held by
MSEI are included in our consolidated financial statements. MSEI
is not consolidated with Main Street for income tax purposes and
may generate income tax expense as a result of its ownership of
the portfolio investments. This income tax expense, if any, is
reflected in our Consolidated Statement of Operations.
We
may be required to recognize taxable income in circumstances in which we do not
receive cash. For example, if we hold debt obligations that are treated under applicable tax
rules as having original issue discount (such as debt instruments
issued with warrants), we must include in income
each year a portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by us in the same
taxable year. We may also have to include in income other amounts that we have not yet
received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the
loan or are paid in non-cash compensation such as warrants or stock. Because any original
issue discount or other amounts accrued will be included in our investment company taxable
income
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for the year of accrual, we may be required to make a distribution to our stockholders
in order to satisfy the Annual Distribution Requirement, even though we will not have
received any corresponding cash amount.
Although we do not presently expect to do so, we are authorized to borrow funds and to
sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we
are not permitted to make distributions to our stockholders in
certain circumstances while our debt obligations and
other senior securities are outstanding unless certain asset coverage tests are met. See
Regulation Regulation as a Business Development Company
Senior Securities. Moreover, our ability to dispose of assets to meet our
distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or
(2) other requirements relating to our status as a RIC, including the Diversification Tests.
If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise
Tax Avoidance Requirement, we may make such dispositions at times that, from an investment
standpoint, are not advantageous.
Pursuant to a recent revenue procedure issued by the Internal
Revenue Service, or the IRS, the IRS has indicated that it will
treat distributions from certain publicly traded RICs (including
business development companies) that are paid part in cash and
part in stock as dividends that would satisfy the RICs
annual distribution requirements. In order to qualify for such
treatment, the revenue procedure requires that at least 10% of
the total distribution be paid in cash and that each stockholder
have a right to elect to receive its entire distribution in
cash. If too many stockholders elect to receive cash, each
stockholder electing to receive cash must receive a
proportionate share of the cash to be distributed (although no
stockholder electing to receive cash may receive less than 10%
of such stockholders distribution in cash). This revenue
procedure applies to distributions made with respect to taxable
years ending prior to January 1, 2010.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the
Annual Distribution Requirement.
Taxation of U.S. Stockholders
Distributions by us generally are taxable to U.S. stockholders as ordinary income or
capital gains. Distributions of our investment company taxable income (which is, generally,
our net ordinary income plus realized net short-term capital gains in excess of realized net
long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the
extent of our current or accumulated earnings and profits, whether paid in cash or reinvested
in additional common stock. To the extent such distributions paid by us to non-corporate
stockholders (including individuals) are attributable to dividends from U.S. corporations and
certain qualified foreign corporations, such distributions (Qualifying Dividends) may be
eligible for a maximum tax rate of 15.0%. In this regard, it is anticipated that
distributions paid by us will generally not be attributable to dividends and, therefore,
generally will not qualify for the 15.0% maximum rate applicable to Qualifying Dividends.
Distributions of our net capital gains (which is generally our realized net long-term capital
gains in excess of realized net short-term capital losses) properly designated by us as
capital gain dividends will be taxable to a U.S. stockholder as long-term capital gains
that are currently taxable at a maximum rate of 15.0% in the case of individuals, trusts or
estates, regardless of the U.S. stockholders holding period for his, her or its common stock
and regardless of whether paid in cash or reinvested in additional common stock.
Distributions in excess of our earnings and profits first will reduce a U.S. stockholders
adjusted tax basis in such stockholders common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such U.S. stockholder.
We may retain some or all of our realized net long-term capital gains in excess of
realized net short-term capital losses, but to designate the retained net capital gain as a
deemed distribution. In that case, among other consequences, we will pay tax on the
retained amount, each U.S. stockholder will be required to include his, her or its share of
the deemed distribution in income as if it had been actually distributed to the
U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his,
her or its allocable share of the tax paid thereon by us. Because we expect to pay tax on any
retained capital gains at our regular corporate tax rate, and because that rate is in excess
of the maximum rate currently payable by individuals on long-term capital gains, the amount
of tax that individual U.S. stockholders will be treated as having paid will exceed the tax
they owe on the capital gain distribution and such excess generally may be refunded or
claimed as a credit against the U.S. stockholders other U.S. federal income tax obligations.
The amount of the deemed distribution net of such tax will be added to the U.S. stockholders
cost basis for his, her or its common stock. In order to utilize the deemed distribution
approach, we must provide written notice to our stockholders prior to the expiration of
60 days after the close of the relevant taxable year. We cannot treat any of our investment
company taxable income as a deemed distribution.
In any fiscal year, we may elect to make distributions to our stockholders in excess of
our taxable earnings for that fiscal year. As a result, a portion of those distributions may
be deemed a return of capital to our stockholders.
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied
for any year and (2) the amount of capital gain dividends paid for that year, we may, under
certain circumstances, elect to treat a dividend that is paid during the following taxable
year as if it had been paid during the taxable year in question. If we make such an election,
the U.S. stockholder will still be treated as receiving the dividend in the taxable year in
which the distribution is made. However, any dividend declared by us in October, November or
December of any calendar year, payable to stockholders of record on a specified date in such
a month and actually paid during January of the following year, will be treated as if it had
been received by our U.S. stockholders on December 31 of the year in which the dividend was
declared.
If an investor purchases shares of our common stock shortly before the record date of a
distribution, the price of the shares will include the value of the distribution and the
investor will be subject to tax on the distribution even though economically it may represent
a return of his, her or its investment.
A stockholder generally will recognize taxable gain or loss if the stockholder sells or
otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss
will be measured by the difference between such stockholders adjusted tax basis in the
common stock sold and the amount of the proceeds received in exchange. Any gain arising from
such sale or
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disposition generally will be treated as long-term capital gain or loss if the
stockholder has held his, her or its shares for more than one year. Otherwise, it will be
classified as short-term capital gain or loss. However, any capital loss arising from the
sale or disposition of shares of our common stock held for six months or less will be treated
as long-term capital loss to the extent of the amount of capital gain dividends received, or
undistributed capital gain deemed received, with respect to such shares. In addition, all or
a portion of any loss recognized upon a disposition of shares of our common stock may be
disallowed if other shares of our common stock are purchased (whether through reinvestment of
distributions or otherwise) within 30 days before or after the disposition.
In general, individual U.S. stockholders currently are subject to a maximum federal
income tax rate of 15.0% on their net capital gain (i.e., the excess of realized net
long-term capital gains over realized net short-term capital losses), including any long-term
capital gain derived from an investment in our shares. Such rate is lower than the maximum
rate on ordinary income currently payable by individuals. Corporate U.S. stockholders
currently are subject to federal income tax on net capital gain at the maximum 35.0% rate
also applied to ordinary income. Non-corporate stockholders with net capital losses for a
year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of
such losses against their ordinary income each year; any net capital losses of a
non-corporate stockholder in excess of $3,000 generally may be carried forward and used in
subsequent years as provided in the Code. Corporate stockholders generally may not deduct any
net capital losses for a year, but may carryback such losses for three years or carry forward
such losses for five years.
We will send to each of our U.S. stockholders, as promptly as possible after the end of
each calendar year, a notice detailing, on a per share and per distribution basis, the
amounts includible in such U.S. stockholders taxable income for such year as ordinary income
and as long-term capital gain. In addition, the federal tax status of each years
distributions generally will be reported to the Internal Revenue Service (including the
amount of dividends, if any, eligible for the 15.0% maximum rate). Dividends paid by us
generally will not be eligible for the dividends-received deduction or the preferential tax
rate applicable to Qualifying Dividends because our income generally will not consist of
dividends. Distributions may also be subject to additional state, local and foreign taxes
depending on a U.S. stockholders particular situation.
As a RIC, we will be subject to the alternative minimum tax (AMT), but any items that
are treated differently for AMT purposes must be apportioned between us and our stockholders
and this may affect the stockholders AMT liabilities. Although regulations explaining the
precise method of apportionment have not yet been issued by the Internal Revenue Service, we
intend in general to apportion these items in the same proportion that dividends paid to each
stockholder bear to our taxable income (determined without regard to the dividends paid
deduction), unless we determine that a different method for a particular item is warranted
under the circumstances.
We may be required to withhold federal income tax (backup withholding) currently at a
rate of 28.0% from all taxable distributions to any non-corporate U.S. stockholder (1) who
fails to furnish us with a correct taxpayer identification number or a certificate that such
stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us
that such stockholder has failed to properly report certain interest and dividend income to
the IRS and to respond to notices to that effect. An individuals taxpayer identification
number is his or her social security number. Any amount withheld under backup withholding is
allowed as a credit against the U.S. stockholders federal income tax liability, provided
that proper information is provided to the IRS.
Taxation of Non-U.S. Stockholders
Whether an investment in the shares is appropriate for a Non-U.S. stockholder will
depend upon that persons particular circumstances. An investment in the shares by a
Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult
their tax advisers before investing in our common stock.
Distributions of our investment company taxable income to Non-U.S. stockholders
(including interest income and realized net short-term capital gains in excess of realized
long-term capital losses, which generally would be free of withholding if paid to
Non-U.S. stockholders directly) will be subject to withholding of federal tax at a 30.0% rate
(or lower rate provided by an applicable treaty) to the extent of our current and accumulated
earnings and profits unless an applicable exception applies. If the distributions are
effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if an
income tax treaty applies, attributable to a permanent establishment in the United States, we
will not be required to withhold federal tax if the Non-U.S. stockholder complies with
applicable certification and disclosure requirements, although the distributions will be
subject to federal income tax at the rates applicable to U.S. persons. (Special certification
requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign
trust, and such entities are urged to consult their own tax advisers.)
In addition, with respect to certain distributions made to Non-U.S. stockholders in our
taxable years beginning before January 1, 2010, no withholding will be required and the
distributions generally will not be subject to federal income tax if (i) the distributions
are properly designated in a notice timely delivered to our stockholders as interest-related
dividends or short-term capital gain dividends, (ii) the distributions are derived from
sources specified in the Code for such dividends and (iii) certain
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other requirements are satisfied. Currently, we do not anticipate that any significant
amount of our distributions will be designated as eligible for this exemption from
withholding.
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and
gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be
subject to federal withholding tax and generally will not be subject to federal income tax
unless the distributions or gains, as the case may be, are effectively connected with a
U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are
attributable to a permanent establishment maintained by the Non-U.S. stockholder in the
United States.
If we distribute our net capital gains in the form of deemed rather than actual
distributions, a Non-U.S. stockholder will be entitled to a federal income tax credit or tax
refund equal to the stockholders allocable share of the tax we pay on the capital gains
deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must
obtain a U.S. taxpayer identification number and file a federal income tax return even if the
Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification
number or file a federal income tax return. For a corporate Non-U.S. stockholder,
distributions (both actual and deemed), and gains realized upon the sale of our common stock
that are effectively connected to a U.S. trade or business may, under certain circumstances,
be subject to an additional branch profits tax at a 30.0% rate (or at a lower rate if
provided for by an applicable treaty). Accordingly, investment in the shares may not be
appropriate for a Non-U.S. stockholder.
A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise
subject to withholding of federal tax, may be subject to information reporting and backup
withholding of federal income tax on dividends unless the Non-U.S. stockholder provides us or
the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or
otherwise meets documentary evidence requirements for establishing that it is a
Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal
income tax and withholding tax, and state, local and foreign tax consequences of an
investment in the shares.
Failure to Qualify as a RIC
If we were unable to qualify for treatment as a RIC in any year, we would be subject to
tax on all of our taxable income at regular corporate rates, regardless of whether we make
any distributions to our stockholders. Distributions would not be required, and any
distributions would be taxable to our stockholders as ordinary dividend income eligible for
the 15.0% maximum rate to the extent of our current and accumulated earnings and profits.
Subject to certain limitations under the Code, corporate distributees would be eligible for
the dividends-received deduction. Distributions in excess of our current and accumulated
earnings and profits would be treated first as a return of capital to the extent of the
stockholders tax basis, and any remaining distributions would be treated as a capital gain.
REGULATION
Regulation
as a Business Development Company
We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains
prohibitions and restrictions relating to transactions between BDCs and their affiliates,
principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act
requires that a majority of the members of the board of directors of a BDC be persons other
than interested persons, as that term is defined in the 1940 Act. In addition, the 1940 Act
provides that we may not change the nature of our business so as to cease to be, or to
withdraw our election as, a BDC unless approved by a majority of our outstanding voting
securities.
The 1940 Act defines a majority of the outstanding voting securities as the lesser of
(i) 67% or more of the voting securities present at a meeting if the holders of more than
50% of our outstanding voting securities are present or represented by proxy or (ii) 50%
of our voting securities.
Qualifying
Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed
in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the
time the acquisition is made, qualifying assets represent at least 70% of the companys
total assets. The principal categories of qualifying assets relevant to our business are any
of the following:
(1) Securities purchased in transactions not involving any public offering from the
issuer of such securities, which issuer (subject to certain limited exceptions) is an
eligible portfolio company (as defined below), or from any person who is, or has been
during the preceding 13 months, an affiliated person of an eligible portfolio company, or
from any other person, subject to such rules as may be prescribed by the SEC.
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(2) Securities of any eligible portfolio company that we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an
investment company or from an affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer,
immediately prior to the purchase of its securities was unable to meet its obligations as
they came due without material assistance other than conventional lending or financing
arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a
private transaction if there is no ready market for such securities and we already own
60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to
securities described in (1) through (4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities or high-quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized and have its principal place of business
in the United States and must be operated for the purpose of making investments in the
types of securities described in (1), (2) or (3) above.
An eligible portfolio company is defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of business in,
the United States;
(b) is not an investment company (other than a small business investment company
wholly owned by the BDC) or a company that would be an investment company but for
certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
(i) does not have any class of securities that is traded on a national
securities exchange or has a class of securities listed on a national securities
exchange but has an aggregate market value of outstanding voting and non-voting
common equity of less than $250 million;
(ii) is controlled by a BDC or a group of companies including a BDC and the
BDC has an affiliated person who is a director of the eligible portfolio
company; or
(iii) is a small and solvent company having total assets of not more than
$4 million and capital and surplus of not less than $2 million.
Managerial
Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70%
test, we must either control the issuer of the securities or must offer to make available to
the issuer of the securities (other than small and solvent companies described above)
significant managerial assistance; except that, where we purchase such securities in
conjunction with one or more other persons acting together, one of the other persons in the
group may make available such managerial assistance. Making available managerial assistance
means, among other things, any arrangement whereby the BDC, through its directors, officers
or employees, offers to provide, and, if accepted, does so provide, significant guidance and
counsel concerning the management, operations or business objectives and policies of a
portfolio company.
Idle
Funds Investments
Pending investment in other types of qualifying
assets, as described above, our investments may consist of
U.S. government securities, investments in high-quality
debt investments and diversified bond funds, which we refer to,
collectively, as idle funds investments, so that 70% of our
assets are qualifying assets.
Senior
Securities
We are permitted, under specified conditions, to issue multiple
classes of debt and one class of stock senior to our common
stock if our asset coverage, as defined in the 1940 Act, is at
least equal to 200% of all debt
and/or
senior stock immediately after each such issuance. In addition,
while any senior securities remain outstanding (other than
senior securities representing indebtedness issued in
consideration of a privately arranged loan which is not intended
to be publicly distributed), we must make provisions to prohibit
any distribution to our stockholders or the repurchase of such
securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or
repurchase. We may also borrow amounts up to 5% of the value of
our total assets for temporary or emergency purposes without
regard to asset coverage. For a discussion of the risks
associated with leverage, see Risk Factors
Risks Relating to Our Business and Structure, including,
without limitation, Because we borrow money,
the potential for gain or loss on amounts invested in us is
magnified and may increase the risk of investing in us.
In January 2008, we received an exemptive order from the SEC to
exclude debt securities issued by the Fund from the asset
coverage requirements of the 1940 Act as applicable to Main
Street. The exemptive order provides for the exclusion of all
debt securities issued by the Fund, including the
$55 million of currently outstanding debt related to its
participation in the SBIC program. This exemptive order provides
us with expanded capacity and flexibility in obtaining future
sources of capital for our investment and operational objectives.
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Common
Stock
We are not generally able to issue and sell our common stock at a price below net asset
value per share. We may, however, sell our common stock, warrants, options or rights to
acquire our common stock, at a price below the current net asset value of the common stock if
our Board of Directors determines that such sale is in our best interests and that of our
stockholders, and our stockholders approve such sale. In any such case, the price at which
our securities are to be issued and sold may not be less than a price which, in the
determination of our board of directors, closely approximates the market value of such
securities (less any distributing commission or discount). On June 17, 2008, our stockholders approved proposals that (1) authorize us to sell shares
of our common stock below the then current net asset value per share of our common
stock in one or more offerings for a period of one year ending on the earlier of June 16, 2009 or the date of our 2009 annual meeting of stockholders and (2) authorize us to issue
securities to subscribe to, convert to, or purchase shares of our common stock in one or
more offerings.
We may also make rights offerings
to our stockholders at prices per share less than the net asset value per share, subject to
applicable requirements of the 1940 Act. See Risk Factors Risks Relating to Our Business
and Structure Stockholders may incur dilution if we sell shares of our common stock in one
or more offerings at prices below the then current net asset value per share of our common
stock or issue securities to subscribe to, convert to or purchase shares of our common
stock.
Code
of Ethics
We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that
establishes procedures for personal investments and restricts certain personal securities
transactions. Personnel subject to the code may invest in securities for their personal
investment accounts, including securities that may be purchased or held by us, so long as
such investments are made in accordance with the codes requirements.
Proxy
Voting Policies and Procedures
We vote proxies relating to our portfolio securities in a manner in which we believe is
consistent with the best interest of our stockholders. We review on a case-by-case basis each
proposal submitted to a stockholder vote to determine its impact on the portfolio securities
held by us. Although we generally vote against proposals that we expect would have a negative
impact on our portfolio securities, we may vote for such a proposal if there exists
compelling long-term reasons to do so.
Our proxy voting decisions are made by the deal team which is responsible for monitoring
each of our investments. To ensure that our vote is not the product of a conflict of
interest, we require that: (i) anyone involved in the decision-making process to disclose to
our chief compliance officer any potential conflict of which he or she is aware and any
contact that he or she has had with any interested party regarding a proxy vote and
(ii) employees involved in the decision making process or vote administration are prohibited
from revealing how we intend to vote on a proposal in order to reduce any attempted influence
from interested parties.
Stockholders may obtain information, without charge, regarding how we voted proxies with
respect to our portfolio securities by making a written request for proxy voting information
to: Chief Compliance Officer, 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
Other
1940 Act Regulations
We may also be prohibited under the 1940 Act from knowingly participating in certain
transactions with our affiliates without the prior approval of our Board of Directors who are
not interested persons and, in some cases, prior approval by the SEC. In June 2008, we
received an exemptive order from the SEC to permit co-investments in portfolio companies
among Main Street and certain of its affiliates, including MSC II, subject to certain
conditions of the order.
We are required to provide and maintain a bond issued by a reputable fidelity insurance
company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are
prohibited from protecting any director or officer against any liability to us or our
stockholders arising from willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such persons office.
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We are required to adopt and implement written policies and procedures reasonably
designed to prevent violation of the federal securities laws, review these policies and
procedures annually for their adequacy and the effectiveness of their implementation, and to
designate a chief compliance officer to be responsible for administering the policies and
procedures.
We may be periodically examined by the SEC for compliance with the 1940 Act.
Small
Business Investment Company Regulations
The Fund is licensed by the SBA to operate as a SBIC under
Section 301(c) of the Small Business Investment Act of
1958. As a part of the Formation Transactions, the Fund became a
wholly-owned subsidiary of MSCC, and continues to hold its SBIC
license. The Fund initially obtained its SBIC license on
September 30, 2002.
SBICs are designed to stimulate the flow of private equity
capital to eligible small businesses. Under SBIC regulations,
SBICs may make loans to eligible small businesses, invest in the
equity securities of such businesses and provide them with
consulting and advisory services. The Fund has typically
invested in secured debt, acquired warrants
and/or made
equity investments in qualifying small businesses.
Under present SBIC regulations, eligible small businesses
generally include businesses that (together with their
affiliates) have a tangible net worth not exceeding
$18 million and have average annual net income after
federal income taxes not exceeding $6 million (average net
income to be computed without benefit of any carryover loss) for
the two most recent fiscal years. In addition, an SBIC must
devote 20% of its investment activity to smaller
concerns as defined by the SBA. A smaller concern generally
includes businesses that have a tangible net worth not exceeding
$6 million and have average annual net income after federal
income taxes not exceeding $2 million (average net income
to be computed without benefit of any net carryover loss) for
the two most recent fiscal years. SBIC regulations also provide
alternative size standard criteria to determine eligibility for
designation as an eligible small business or smaller concern,
which criteria depend on the primary industry in which the
business is engaged and are based on such factors as the number
of employees and gross revenue. However, once an SBIC has
invested in a company, it may continue to make follow on
investments in the company, regardless of the size of the
portfolio company at the time of the follow on investment, up to
the time of the portfolio companys initial public
offering.
The SBA prohibits an SBIC from providing funds to small
businesses for certain purposes, such as relending and
investment outside the United States, to businesses engaged in a
few prohibited industries, and to certain passive
(non-operating) companies. In addition, without prior SBA
approval, an SBIC may not invest an amount equal to more than
approximately 30% of the SBICs regulatory capital in any
one portfolio company and its affiliates.
The SBA places certain limitations on the financing terms of
investments by SBICs in portfolio companies (such as limiting
the permissible interest rate on debt securities held by an SBIC
in a portfolio company). Although prior regulations prohibited
an SBIC from controlling a small business concern except in
limited circumstances, regulations adopted by the SBA in 2002
now allow an SBIC to exercise control over a small business for
a period of seven years from the date on which the SBIC
initially acquires its control position. This control period may
be extended for an additional period of time with the SBAs
prior written approval.
The SBA restricts the ability of an SBIC to lend money to any of
its officers, directors and employees or to invest in affiliates
thereof. The SBA also prohibits, without prior SBA approval, a
change of control of an SBIC or transfers that would
result in any person (or a group of persons acting in concert)
owning 10% or more of a class of capital stock of a licensed
SBIC. A change of control is any event which would
result in the transfer of the power, direct or indirect, to
direct the management and policies of an SBIC, whether through
ownership, contractual arrangements or otherwise.
An SBIC (or group of SBICs under common control) may generally
have outstanding debentures guaranteed by the SBA in amounts up
to twice the amount of the privately-raised funds of the
SBIC(s). Debentures guaranteed by the SBA have a maturity of ten
years, require semi-annual payments of interest, do not require
any principal payments prior to maturity, and, historically,
were subject to certain prepayment penalties. Those prepayment
penalties no longer apply as of September 2006. As of
December 31, 2008, we, through the Fund, had issued
$55 million of SBA-guaranteed debentures, which had an
annual weight-averaged interest rate of approximately 5.8%.
The recently enacted American Recovery and Reinvestment Act of
2009 (the 2009 Stimulus Bill) contains several
provisions applicable to SBIC funds, including the Fund, Main
Streets wholly owned subsidiary. One of the key
SBIC-related provisions included in the 2009 Stimulus Bill
increases the maximum amount of combined SBIC leverage (or
SBIC
leverage cap) to $225 million for affiliated SBIC funds.
The prior maximum amount of SBIC leverage available to
affiliated SBIC funds was approximately $137 million, as
adjusted annually based upon changes in the Consumer Price
Index. Due to the increase in the maximum amount of SBIC
leverage available to affiliated SBIC funds, Main Street,
through the Fund, will now have access to incremental SBIC
leverage to support its future investment activities. Since the
increase in the SBIC leverage cap applies to affiliated
SBIC funds, Main Street will allocate such increased borrowing
capacity between the Fund and MSC II, an independently owned
SBIC that is managed by Main Street and
therefore deemed to be
affiliated with the Fund for SBIC regulatory purposes. It is
currently estimated that at least $55 million to
$60 million of additional SBIC leverage is now accessible
by Main Street, through the Fund, for future investment
activities, subject to the required capitalization of the Fund.
SBICs must invest idle funds that are not being used to make
loans in investments permitted under SBIC regulations in the
following limited types of securities: (i) direct
obligations of, or obligations guaranteed as to principal and
interest by, the United States government, which mature within
15 months from the date of the investment;
(ii) repurchase agreements with federally insured
institutions with a maturity of seven days or less (and the
securities underlying the repurchase obligations must be direct
obligations of or guaranteed by the federal government);
(iii) certificates of deposit with a maturity of one year
or less, issued by a federally insured institution; (iv) a
deposit account in a federally insured institution that is
subject to a withdrawal restriction of one year or less;
(v) a checking account in a federally insured institution;
or (vi) a reasonable petty cash fund.
83
SBICs are periodically examined and audited by the SBAs
staff to determine their compliance with SBIC regulations
and are periodically required to file certain forms with the SBA.
We requested that the SEC allow us to exclude any indebtedness
guaranteed by the SBA and issued by the Fund from the 200% asset
coverage requirements applicable to us as a BDC. In January
2008, we received an exemptive order from the SEC to exclude
such debt securities issued by the Fund, including the
$55 million of currently outstanding debt related to the
Funds participation in the SBIC program.
Neither the SBA nor the U.S. government or any of its
agencies or officers has approved any ownership interest to be
issued by us or any obligation that we or any of our
subsidiaries may incur.
Securities
Exchange Act of 1934 and Sarbanes-Oxley Act Compliance
We are subject to the reporting and disclosure requirements of
the Securities Exchange Act of 1934 (the Exchange
Act), including the filing of quarterly, annual and
current reports, proxy statements and other required items. In
addition, we are subject to the Sarbanes-Oxley Act of 2002,
which imposes a wide variety of regulatory requirements on
publicly-held companies and their insiders. For example:
|
|
|
pursuant to
Rule 13a-14
of the Exchange Act, our Chief Executive Officer and Chief
Financial Officer are required to certify the accuracy of the
financial statements contained in our periodic reports; |
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pursuant to Item 307 of
Regulation S-K,
our periodic reports are required to disclose our conclusions
about the effectiveness of our disclosure controls and
procedures; |
|
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|
pursuant to
Rule 13a-15
of the Exchange Act, our management is required to prepare a
report regarding its assessment of our internal control over
financial reporting, and separately, our independent registered
public accounting firm audits our internal controls over
financial reporting; and |
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pursuant to Item 308 of
Regulation S-K
and
Rule 13a-15
of the Exchange Act, our periodic reports must disclose whether
there were significant changes in our internal control over
financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
|
The Nasdaq Global Select Market Corporate Governance Regulations
The Nasdaq Global Select Market has adopted corporate governance regulations that listed
companies must comply with. We believe we are in compliance with such corporate governance
listing standards. We intend to monitor our compliance with all future listing standards and
to take all necessary actions to ensure that we stay in compliance.
PLAN OF DISTRIBUTION
We may sell our common stock through underwriters or dealers, at the market to or
through a market maker or into an existing trading market or otherwise, directly to one or
more purchasers or through agents or through a combination of any such methods of sale. Any
underwriter or agent involved in the offer and sale of our common stock will also be named in
the applicable prospectus supplement.
The distribution of our common stock may be effected from time to time in one or more
transactions at a fixed price or prices, which may be changed, at prevailing market prices at
the time of sale, at prices related to such prevailing market prices, or at negotiated
prices, provided, however, that the offering price per share of our common stock less any
underwriting commissions or discounts must equal or exceed the net asset value per share of
our common stock except (i) with the consent of the majority of our common stockholders or
(ii) under such other circumstances as the SEC may permit. See Risk Factors
Risks Relating to Our Business and Structure Stockholders
may incur dilution if we sell shares of our common stock in one or more offerings at prices
below the then current net asset value per share of our common stock or issue securities to
subscribe to, convert to or purchase shares of our common stock for a discussion of
proposals approved by our stockholders that permit us to issue shares of our common stock
below net asset value.
In connection with the sale of our common stock, underwriters or agents may receive
compensation from us or from purchasers of our common stock, for whom they may act as agents,
in the form of discounts, concessions or commissions.
84
Underwriters may sell our common stock to or through dealers and such dealers may
receive compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as agents.
Underwriters, dealers and agents that participate in the distribution of our common stock may
be deemed to be underwriters under the Securities Act, and any discounts and commissions they
receive from us and any profit realized by them on the resale of our common stock may be
deemed to be underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified and any such compensation received from us will be
described in the applicable prospectus supplement.
We may enter into derivative transactions with third parties, or sell securities not
covered by this prospectus to third parties in privately negotiated transactions. If the
applicable prospectus supplement indicates, in connection with those derivatives, the third
parties may sell common stock covered by this prospectus and the applicable prospectus
supplement, including in short sale transactions. If so, the third party may use securities
pledged by us or borrowed from us or others to settle those sales or to close out any related
open borrowings of stock, and may use securities received from us in settlement of those
derivatives to close out any related open borrowings of stock. The third parties in such sale
transactions will be underwriters and, if not identified in this prospectus, will be
identified in the applicable prospectus supplement (or a post-effective amendment).
Any of our common stock sold pursuant to a prospectus supplement will be listed on the
Nasdaq Global Select Market, or another exchange on which our common stock is traded.
Under agreements into which we may enter, underwriters, dealers and agents who
participate in the distribution of our common stock may be entitled to indemnification by us
against certain liabilities, including liabilities under the Securities Act. Underwriters,
dealers and agents may engage in transactions with, or perform services for, us in the
ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize underwriters
or other persons acting as our agents to solicit offers by certain institutions to purchase
our common stock from us pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved by us. The
obligations of any purchaser under any such contract will be subject to the condition that
the purchase of our common stock shall not at the time of delivery be prohibited under the
laws of the jurisdiction to which such purchaser is subject. The underwriters and such other
agents will not have any responsibility in respect of the validity or performance of such
contracts. Such contracts will be subject only to those conditions set forth in the
prospectus supplement, and the prospectus supplement will set forth the commission payable
for solicitation of such contracts.
In order to comply with the securities laws of certain states, if applicable, our common
stock offered hereby will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain states, our common stock may not be sold unless
it has been registered or qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
The maximum commission or discount to be received by any member of the Financial
Industry Regulatory Authority, Inc. will not be greater than 10% for the sale of any
securities being registered and 0.5% for due diligence.
CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR
Our
securities are held under custody agreements by Amegy Bank National
Association, whose address is 1221 McKinney Street Level P-1 Houston,
Texas 77010, and Branch Banking and Trust Company, whose address is
5130 Parkway Plaza Boulevard, Charlotte, North Carolina 28217.
American Stock Transfer & Trust Company acts as our transfer agent, distribution paying agent
and registrar. The principal business address of our transfer agent is 59 Maiden Lane New
York, New York 10038, telephone number: (212) 936-5100.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in privately negotiated
transactions, we infrequently use brokers in the normal course of our business. Our
investment team is primarily responsible for the execution of the publicly traded securities
portion of our portfolio transactions and the allocation of brokerage commissions. We do not
expect to execute transactions through any particular broker or dealer, but will seek to
obtain the best net results for us, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of execution,
and operational facilities of the firm and the firms risk and skill in positioning blocks of
securities. While we will generally seek reasonably competitive trade execution costs, we
will not necessarily pay the lowest spread or commission available. Subject to applicable
legal requirements, we may select a broker based partly upon brokerage or research services
provided to us. In return
85
for such services, we may pay a higher commission than other brokers would charge if we
determine in good faith that such commission is reasonable in relation to the services
provided. We did not pay any brokerage commissions during the year
ended December 31, 2008.
LEGAL MATTERS
Certain legal matters regarding the shares of common stock offered hereby will be passed
upon for us by Sutherland Asbill & Brennan LLP, Washington D.C. Certain legal matters will
be passed upon for underwriters, if any, by the counsel named in the prospectus supplement,
if any.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The consolidated financial statements and Schedule 12-14 of Main Street Capital Corporation as
of December 31, 2008 and December 31, 2007 and for the two years then ended, the combined financial statements of Main
Street Mezzanine Fund, LP and Main Street Mezzanine Management, LLC as of December 31, 2006 and for
the year then ended, and the Senior Securities table, included in this
prospectus and elsewhere in the registration statement have been so included in reliance upon the
reports of Grant Thornton LLP, independent registered public accountants, upon the authority of said
firm as experts in giving said reports.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form N-2, together with all
amendments and related exhibits, under the Securities Act, with respect to our shares of
common stock offered by this prospectus or any prospectus supplement. The registration
statement contains additional information about us and our shares of common stock being
offered by this prospectus or any prospectus supplement.
We file with or submit to the SEC annual, quarterly and current reports, proxy
statements and other information meeting the informational requirements of the Exchange Act.
You may inspect and copy these reports, proxy statements and other information, as well as
the registration statement and related exhibits and schedules, at the Public Reference Room
of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information statements and other
information filed electronically by us with the SEC, which are available on the SECs website
at www.sec.gov. Copies of these reports, proxy and information statements and other
information may be obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549.
PRIVACY NOTICE
We are committed to protecting your privacy. This privacy notice explains the privacy
policies of Main Street and its affiliated companies. This notice supersedes any other
privacy notice you may have received from Main Street.
We will safeguard, according to strict standards of security and confidentiality, all
information we receive about you. The only information we collect from you is your name,
address, and number of shares you hold. This information is used only so that we can send you
annual reports and other information about us, and send you proxy statements or other
information required by law.
We do not share this information with any non-affiliated third party except as described
below.
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The People and Companies that Make Up Main Street. It is our policy
that only our authorized employees who need to know your personal
information will have access to it. Our personnel who violate our
privacy policy are subject to disciplinary action. |
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Service Providers. We may disclose your personal information to
companies that provide services on our behalf, such as record keeping,
processing your trades, and mailing you information. These companies
are required to protect your information and use it solely for the
purpose for which they received it. |
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|
Courts and Government Officials. If required by law, we may disclose
your personal information in accordance with a court order or at the
request of government regulators. Only that information required by
law, subpoena, or court order will be disclosed. |
86
INDEX TO FINANCIAL STATEMENTS
|
|
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|
|
F-2 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
F-16 |
F-1
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Main Street Capital Corporation
We have audited the accompanying consolidated balance sheet of
Main Street Capital Corporation (a Maryland corporation), and
its consolidated subsidiaries, Main Street Mezzanine Management,
LLC, Main Street Equity Interests, Inc. and Main Street
Mezzanine Fund, LP, including the consolidated schedule of
investments, as of December 31, 2008 and 2007 and the
related consolidated statements of operations, changes in net
assets and cash flows and the consolidated financial highlights
(see Note H) for the two years then ended. We have
also audited the combined statements of operations, changes in
net assets, and cash flows and the combined financial highlights
of Main Street Mezzanine Fund, LP and Main Street Mezzanine
Management, LLC for the year ended December 31, 2006. These
financial statements and financial highlights are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements and
financial highlights referred to above present fairly, in all
material respects, the consolidated financial position of Main
Street Capital Corporation and subsidiaries as of
December 31, 2008 and 2007 and the consolidated results of
their operations, changes in net assets, cash flows and
financial highlights for the two years then ended and the
combined results of operations, changes in net assets, cash
flows and financial highlights of Main Street Mezzanine Fund, LP
and Main Street Mezzanine Management, LLC for the year ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note B to the consolidated financial
statements, the Company changed its method of accounting for the
fair value of its portfolio investments in 2008 due to the
adoption of Statement of Financial Accounting Standards
No. 157, Fair Value Measurements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Main
Street Capital Corporations internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 11, 2009, expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Houston, Texas
March 12, 2009
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Main Street Capital Corporation
We have audited Main Street Capital Corporation and
subsidiaries (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Main Street
Capital Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Main Street Capital Corporation maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Main Street Capital Corporation
and subsidiaries as of December 31, 2008 and 2007,
including the consolidated schedule of investments as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in net assets and cash flows,
and the financial highlights (see Note H), for the two
years then ended and the combined results of operations, changes
in net assets, cash flows and financial highlights of Main
Street Mezzanine Fund, LP and Main Street Mezzanine Management,
LLC for the year ended December 31, 2006, and our report
dated March 11, 2009, expressed an unqualified opinion on
those consolidated and combined financial statements.
Houston, Texas
March 12, 2009
F-3
MAIN
STREET CAPITAL CORPORATION
Consolidated
Balance Sheets
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|
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|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Control investments (cost: $60,767,805 and $43,053,372 as of
December 31, 2008 and 2007, respectively)
|
|
$
|
65,542,608
|
|
|
$
|
48,108,197
|
|
Affiliate investments (cost: $37,946,800 and $33,037,053 as of
December 31, 2008 and 2007, respectively)
|
|
|
39,412,695
|
|
|
|
36,176,216
|
|
Non-Control/Non-Affiliate investments (cost: $6,245,405 and
$3,381,001 as of December 31, 2008 and 2007, respectively)
|
|
|
5,375,886
|
|
|
|
3,741,001
|
|
Investment in affiliated Investment Manager (cost: $18,000,000
as of December 31, 2008 and 2007)
|
|
|
16,675,626
|
|
|
|
17,625,000
|
|
|
|
|
|
|
|
|
|
|
Total investments (cost: $122,960,010 and $97,471,426 as of
December 31, 2008 and 2007, respectively)
|
|
|
127,006,815
|
|
|
|
105,650,414
|
|
Idle funds investments (cost: $4,218,704 and $24,063,261 as of
December 31, 2008 and 2007, respectively)
|
|
|
4,389,795
|
|
|
|
24,063,261
|
|
Cash and cash equivalents
|
|
|
35,374,826
|
|
|
|
41,889,324
|
|
Deferred tax asset
|
|
|
1,121,681
|
|
|
|
|
|
Other assets
|
|
|
1,100,922
|
|
|
|
1,574,888
|
|
Deferred financing costs (net of accumulated amortization of
$956,037 and $529,952 as of December 31, 2008 and 2007,
respectively)
|
|
|
1,635,238
|
|
|
|
1,670,135
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
170,629,277
|
|
|
$
|
174,848,022
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
SBIC debentures
|
|
$
|
55,000,000
|
|
|
$
|
55,000,000
|
|
Deferred tax liability
|
|
|
|
|
|
|
3,025,672
|
|
Interest payable
|
|
|
1,108,193
|
|
|
|
1,062,672
|
|
Accounts payable and other liabilities
|
|
|
2,165,028
|
|
|
|
610,470
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
58,273,221
|
|
|
|
59,698,814
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share
(150,000,000 shares authorized; 9,241,183 and 8,959,718
issued and 9,206,483 and 8,959,718 outstanding as of
December 31, 2008 and 2007, respectively)
|
|
|
92,412
|
|
|
|
89,597
|
|
Additional paid-in capital
|
|
|
104,798,399
|
|
|
|
104,076,033
|
|
Undistributed net realized income
|
|
|
3,658,495
|
|
|
|
6,067,131
|
|
Net unrealized appreciation from investments, net of income taxes
|
|
|
4,137,756
|
|
|
|
4,916,447
|
|
Treasury stock, at cost (34,700 and 0 shares as of December
31, 2008 and 2007, respectively)
|
|
|
(331,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
112,356,056
|
|
|
|
115,149,208
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
170,629,277
|
|
|
$
|
174,848,022
|
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER SHARE
|
|
$
|
12.20
|
|
|
$
|
12.85
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
F-4
MAIN
STREET CAPITAL CORPORATION
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Consolidated)
|
|
|
(Consolidated)
|
|
|
(Combined)
|
|
|
INVESTMENT INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, fee and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
$
|
9,826,369
|
|
|
$
|
5,201,382
|
|
|
$
|
4,295,354
|
|
Affiliate investments
|
|
|
4,842,442
|
|
|
|
5,390,655
|
|
|
|
3,573,570
|
|
Non-Control/Non-Affiliate investments
|
|
|
1,298,386
|
|
|
|
720,076
|
|
|
|
1,144,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest, fee and dividend income
|
|
|
15,967,197
|
|
|
|
11,312,113
|
|
|
|
9,013,137
|
|
Interest from idle funds and other
|
|
|
1,328,229
|
|
|
|
1,162,865
|
|
|
|
748,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
17,295,426
|
|
|
|
12,474,978
|
|
|
|
9,761,807
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(3,777,919
|
)
|
|
|
(3,245,839
|
)
|
|
|
(2,717,236
|
)
|
General and administrative
|
|
|
(1,684,084
|
)
|
|
|
(512,253
|
)
|
|
|
(197,979
|
)
|
Expenses reimbursed to Investment Manager
|
|
|
(1,006,835
|
)
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(511,452
|
)
|
|
|
|
|
|
|
|
|
Management fees to affiliate
|
|
|
|
|
|
|
(1,499,937
|
)
|
|
|
(1,942,032
|
)
|
Professional costs related to initial public offering
|
|
|
|
|
|
|
(695,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(6,980,290
|
)
|
|
|
(5,953,279
|
)
|
|
|
(4,857,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME
|
|
|
10,315,136
|
|
|
|
6,521,699
|
|
|
|
4,904,560
|
|
NET REALIZED GAIN (LOSS) FROM INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
188,214
|
|
|
|
1,802,713
|
|
|
|
(805,469
|
)
|
Affiliate investments
|
|
|
1,209,280
|
|
|
|
3,160,034
|
|
|
|
1,940,794
|
|
Non-Control/Non-Affiliate investments
|
|
|
|
|
|
|
(270,538
|
)
|
|
|
1,294,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gain (loss) from investments
|
|
|
1,397,494
|
|
|
|
4,692,209
|
|
|
|
2,429,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REALIZED INCOME
|
|
|
11,712,630
|
|
|
|
11,213,908
|
|
|
|
7,334,483
|
|
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM
INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
(217,717
|
)
|
|
|
(3,075,392
|
)
|
|
|
6,631,698
|
|
Affiliate investments
|
|
|
(1,735,573
|
)
|
|
|
(2,340,933
|
)
|
|
|
2,831,649
|
|
Non-Control/Non-Affiliate investments
|
|
|
(1,058,428
|
)
|
|
|
384,832
|
|
|
|
(974,833
|
)
|
Investment in affiliated Investment Manager
|
|
|
(949,374
|
)
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized appreciation (depreciation) from
investments
|
|
|
(3,961,092
|
)
|
|
|
(5,406,493
|
)
|
|
|
8,488,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision)
|
|
|
3,182,401
|
|
|
|
(3,262,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
10,933,939
|
|
|
$
|
2,544,876
|
|
|
$
|
15,822,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INVESTMENT INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
$
|
1.15
|
|
|
$
|
0.76
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REALIZED INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
$
|
1.31
|
|
|
$
|
1.31
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS/DISTRIBUTIONS PAID PER SHARE
BASIC AND DILUTED
|
|
$
|
1.43
|
|
|
$
|
1.10
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
$
|
1.22
|
|
|
$
|
0.30
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
8,967,383
|
|
|
|
8,587,701
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
8,971,064
|
|
|
|
8,587,701
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
F-5
MAIN
STREET CAPITAL CORPORATION
Statements
of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
Members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Limited
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Undistributed
|
|
|
Investments,
|
|
|
Treasry Stock
|
|
|
Total
|
|
|
|
(General
|
|
|
Partners
|
|
|
Number
|
|
|
Par
|
|
|
Paid-In
|
|
|
Net Realized
|
|
|
net of Income
|
|
|
Number
|
|
|
|
|
|
Net
|
|
|
|
Partner)
|
|
|
Capital
|
|
|
of Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Income
|
|
|
Taxes
|
|
|
of Shares
|
|
|
Value
|
|
|
Assets
|
|
|
Balances at December 31, 2005
|
|
$
|
179,942
|
|
|
$
|
25,415,978
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,575,857
|
|
|
$
|
5,096,965
|
|
|
|
|
|
|
$
|
|
|
|
$
|
33,268,742
|
|
Capital contributions
|
|
|
1,828
|
|
|
|
353,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355,089
|
|
Distributions to partners
|
|
|
|
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,644,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,174,297
|
)
|
Net increase resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,334,483
|
|
|
|
8,488,514
|
|
|
|
|
|
|
|
|
|
|
|
15,822,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
181,770
|
|
|
|
25,239,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,266,043
|
|
|
|
13,585,479
|
|
|
|
|
|
|
|
|
|
|
|
43,272,531
|
|
Capital contributions
|
|
|
|
|
|
|
300,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,081
|
|
Distributions to partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,500,000
|
)
|
Formation Transactions
|
|
|
(181,770
|
)
|
|
|
(25,539,320
|
)
|
|
|
4,525,726
|
|
|
|
45,257
|
|
|
|
43,675,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000,000
|
|
Initial Capitalization
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
10
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Public offering of common stock
|
|
|
|
|
|
|
|
|
|
|
4,300,000
|
|
|
|
43,000
|
|
|
|
60,139,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,182,997
|
|
Costs related to offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,642,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,642,573
|
)
|
Dividends paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,912,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,912,820
|
)
|
Dividend reinvestment
|
|
|
|
|
|
|
|
|
|
|
132,992
|
|
|
|
1,330
|
|
|
|
1,901,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,903,116
|
|
Net increase resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,213,908
|
|
|
|
(8,669,032
|
)
|
|
|
|
|
|
|
|
|
|
|
2,544,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
8,959,718
|
|
|
|
89,597
|
|
|
|
104,076,033
|
|
|
|
6,067,131
|
|
|
|
4,916,447
|
|
|
|
|
|
|
|
|
|
|
|
115,149,208
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
265,645
|
|
|
|
2,657
|
|
|
|
(2,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock dividend reinvestment plan
|
|
|
|
|
|
|
|
|
|
|
15,820
|
|
|
|
158
|
|
|
|
213,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213,729
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,700
|
)
|
|
|
(331,006
|
)
|
|
|
(331,006
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,452
|
|
Dividends declared to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,121,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,121,266
|
)
|
Net increase resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,712,630
|
|
|
|
(778,691
|
)
|
|
|
|
|
|
|
|
|
|
|
10,933,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
|
9,241,183
|
|
|
$
|
92,412
|
|
|
$
|
104,798,399
|
|
|
$
|
3,658,495
|
|
|
$
|
4,137,756
|
|
|
|
(34,700
|
)
|
|
$
|
(331,006
|
)
|
|
$
|
112,356,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
F-6
MAIN
STREET CAPITAL CORPORATION
Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Consolidated)
|
|
|
(Consolidated)
|
|
|
(Combined)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations:
|
|
$
|
10,933,939
|
|
|
$
|
2,544,876
|
|
|
$
|
15,822,997
|
|
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of unearned income
|
|
|
(1,062,452
|
)
|
|
|
(998,069
|
)
|
|
|
(1,380,351
|
)
|
Net
payment-in-kind
interest accrual
|
|
|
(216,505
|
)
|
|
|
(260,806
|
)
|
|
|
(216,805
|
)
|
Share-based compensation
|
|
|
511,452
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
426,084
|
|
|
|
186,106
|
|
|
|
157,850
|
|
Net change in unrealized (appreciation) depreciation from
investments
|
|
|
3,961,092
|
|
|
|
5,406,493
|
|
|
|
(8,488,514
|
)
|
Net realized gain from investments
|
|
|
(1,397,494
|
)
|
|
|
(4,692,209
|
)
|
|
|
(2,429,923
|
)
|
Deferred taxes
|
|
|
(4,147,353
|
)
|
|
|
3,025,672
|
|
|
|
|
|
Changes in other assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
418,166
|
|
|
|
(876,945
|
)
|
|
|
(91,373
|
)
|
Interest payable
|
|
|
45,521
|
|
|
|
207,731
|
|
|
|
83,459
|
|
Accounts payable and other liabilities
|
|
|
828,098
|
|
|
|
394,510
|
|
|
|
76,543
|
|
Deferred debt origination fees received
|
|
|
612,143
|
|
|
|
467,558
|
|
|
|
709,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,912,691
|
|
|
|
5,404,917
|
|
|
|
4,243,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTMENT ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in portfolio companies
|
|
|
(47,698,567
|
)
|
|
|
(29,479,023
|
)
|
|
|
(28,088,005
|
)
|
Investments in idle funds
|
|
|
(4,218,704
|
)
|
|
|
(24,063,261
|
)
|
|
|
|
|
Principal payments received on loans and debt securities
|
|
|
16,300,750
|
|
|
|
9,614,338
|
|
|
|
12,199,956
|
|
Proceeds from sale of equity securities and related notes
|
|
|
8,029,339
|
|
|
|
5,934,420
|
|
|
|
5,021,313
|
|
Proceeds from idle funds investments
|
|
|
24,063,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investment activities
|
|
|
(3,523,921
|
)
|
|
|
(37,993,526
|
)
|
|
|
(10,866,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering/capitalization
|
|
|
|
|
|
|
60,183,997
|
|
|
|
|
|
Proceeds from capital contributions
|
|
|
|
|
|
|
300,081
|
|
|
|
355,089
|
|
Purchase of treasury stock
|
|
|
(331,006
|
)
|
|
|
|
|
|
|
|
|
Payment of distributions to members and partners
|
|
|
|
|
|
|
(6,500,000
|
)
|
|
|
(6,174,297
|
)
|
Payment of dividends to stockholders
|
|
|
(13,181,074
|
)
|
|
|
(1,009,704
|
)
|
|
|
|
|
Proceeds from issuance of SBIC debentures
|
|
|
|
|
|
|
9,900,000
|
|
|
|
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
(1,642,573
|
)
|
|
|
|
|
Payment of deferred loan costs and SBIC debenture fees
|
|
|
(391,188
|
)
|
|
|
(522,587
|
)
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(13,903,268
|
)
|
|
|
60,709,214
|
|
|
|
(5,869,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(6,514,498
|
)
|
|
|
28,120,605
|
|
|
|
(12,492,081
|
)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
41,889,324
|
|
|
|
13,768,719
|
|
|
|
26,260,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
35,374,826
|
|
|
$
|
41,889,324
|
|
|
$
|
13,768,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
F-7
MAIN
STREET CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Control Investments(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Café Brazil, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity April 20, 2011)
|
|
Casual Restaurant Group
|
|
$
|
2,750,000
|
|
|
$
|
2,728,113
|
|
|
$
|
2,750,000
|
|
Member Units(7) (Fully diluted 42.3%)
|
|
|
|
|
|
|
|
|
41,837
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,769,950
|
|
|
|
3,750,000
|
|
CBT Nuggets, LLC
|
|
Produces and Sells
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity June 1, 2011)
|
|
IT Certification
|
|
|
1,680,000
|
|
|
|
1,642,518
|
|
|
|
1,680,000
|
|
10% Secured Debt (Maturity December 31, 2009)
|
|
Training Videos
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
Member Units(7) (Fully diluted 29.1%)
|
|
|
|
|
|
|
|
|
432,000
|
|
|
|
1,625,000
|
|
Warrants (Fully diluted 10.5%)
|
|
|
|
|
|
|
|
|
72,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,296,518
|
|
|
|
3,955,000
|
|
Ceres Management, LLC (Lambs)
|
|
Aftermarket Automotive
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity May 31, 2013)
|
|
Services Chain
|
|
|
2,400,000
|
|
|
|
2,372,601
|
|
|
|
2,372,601
|
|
Member Units (Fully diluted 42.0%)
|
|
|
|
|
|
|
|
|
1,200,000
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,572,601
|
|
|
|
3,672,601
|
|
Condit Exhibits, LLC
|
|
Tradeshow Exhibits/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% current / 5% PIK Secured Debt (Maturity
July 1, 2013)
|
|
Custom Displays
|
|
|
2,308,073
|
|
|
|
2,273,194
|
|
|
|
2,273,194
|
|
Warrants (Fully diluted 28.1%)
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,573,194
|
|
|
|
2,573,194
|
|
Gulf Manufacturing, LLC
|
|
Industrial Metal
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 1% Secured Debt (Maturity August 31,
2012)
|
|
Fabrication
|
|
|
1,200,000
|
|
|
|
1,190,764
|
|
|
|
1,200,000
|
|
13% Secured Debt (Maturity August 31, 2012)
|
|
|
|
|
1,900,000
|
|
|
|
1,747,777
|
|
|
|
1,880,000
|
|
Member Units(7) (Fully diluted 18.6%)
|
|
|
|
|
|
|
|
|
472,000
|
|
|
|
1,100,000
|
|
Warrants (Fully diluted 8.4%)
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,570,541
|
|
|
|
4,730,000
|
|
Hawthorne Customs & Dispatch Services, LLC
|
|
Transportation/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity January 31, 2011)
|
|
Logistics
|
|
|
1,200,000
|
|
|
|
1,171,988
|
|
|
|
1,171,988
|
|
Member Units(7) (Fully diluted 27.8%)
|
|
|
|
|
|
|
|
|
375,000
|
|
|
|
435,000
|
|
Warrants (Fully diluted 16.5%)
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
230,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584,488
|
|
|
|
1,836,988
|
|
Hydratec Holdings, LLC
|
|
Agricultural Services
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5% Secured Debt (Maturity October 31, 2012)
|
|
|
|
|
5,400,000
|
|
|
|
5,311,329
|
|
|
|
5,311,329
|
|
Prime plus 1% Secured Debt (Maturity
October 31, 2012)
|
|
|
|
|
1,595,244
|
|
|
|
1,579,911
|
|
|
|
1,579,911
|
|
Member Units (Fully diluted 60%)
|
|
|
|
|
|
|
|
|
1,800,000
|
|
|
|
2,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,691,240
|
|
|
|
8,941,240
|
|
Jensen Jewelers of Idaho, LLC
|
|
Retail Jewelry
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime Plus 2% Secured Debt (Maturity
November 14, 2011)
|
|
|
|
|
1,044,000
|
|
|
|
1,030,957
|
|
|
|
1,044,000
|
|
13% current / 6% PIK Secured Debt (Maturity
November 14, 2011)
|
|
|
|
|
1,004,591
|
|
|
|
986,980
|
|
|
|
1,004,591
|
|
Member Units(7) (Fully diluted 24.3%)
|
|
|
|
|
|
|
|
|
376,000
|
|
|
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,393,937
|
|
|
|
2,428,591
|
|
NAPCO Precast, LLC
|
|
Precast Concrete
|
|
|
|
|
|
|
|
|
|
|
|
|
18% Secured Debt (Maturity February 1, 2013)
|
|
Manufacturing
|
|
|
6,461,538
|
|
|
|
6,348,011
|
|
|
|
6,461,538
|
|
Prime Plus 2% Secured Debt (Maturity
February 1, 2013)(8)
|
|
|
|
|
3,692,308
|
|
|
|
3,660,945
|
|
|
|
3,692,308
|
|
Member Units(7) (Fully diluted 36.1%)
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
5,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,008,956
|
|
|
|
15,253,846
|
|
OMi Holdings, Inc.
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity April 1, 2013)
|
|
Overhead Cranes
|
|
|
6,660,000
|
|
|
|
6,603,400
|
|
|
|
6,603,400
|
|
Common Stock (Fully diluted 28.8%)
|
|
|
|
|
|
|
|
|
900,000
|
|
|
|
570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,503,400
|
|
|
|
7,173,400
|
|
F-8
MAIN
STREET CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Continued)
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Quest Design & Production, LLC
|
|
Design and Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Secured Debt (Maturity June 30, 2013)
|
|
of Custom Display
|
|
|
600,000
|
|
|
|
465,060
|
|
|
|
600,000
|
|
0% Secured Debt (Maturity June 30, 2013)
|
|
Systems
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1,400,000
|
|
Warrants (Fully diluted 40.0%)
|
|
|
|
|
|
|
|
|
1,595,858
|
|
|
|
|
|
Warrants (Fully diluted 20.0%)
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100,918
|
|
|
|
2,000,000
|
|
Universal Scaffolding & Equipment, LLC
|
|
Manufacturer of Scaffolding
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 1% Secured Debt (Maturity August 17,
2012)(8)
|
|
and Shoring Equipment
|
|
|
881,833
|
|
|
|
875,072
|
|
|
|
875,072
|
|
13% current / 5% PIK Secured Debt (Maturity
August 17, 2012)
|
|
|
|
|
3,362,698
|
|
|
|
3,311,508
|
|
|
|
3,160,000
|
|
Member Units (Fully diluted 18.4%)
|
|
|
|
|
|
|
|
|
992,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,178,643
|
|
|
|
4,035,072
|
|
Uvalco Supply, LLC
|
|
Farm and Ranch Supply
|
|
|
|
|
|
|
|
|
|
|
|
|
Member Units (Fully diluted 39.6%)
|
|
|
|
|
|
|
|
|
905,743
|
|
|
|
1,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zieglers NYPD, LLC
|
|
Restaurant
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 2% Secured Debt (Maturity October 1,
2013)(8)
|
|
|
|
|
600,000
|
|
|
|
594,239
|
|
|
|
594,239
|
|
13% current / 5% PIK Secured Debt (Maturity
October 1, 2013)
|
|
|
|
|
2,704,262
|
|
|
|
2,663,437
|
|
|
|
2,663,437
|
|
Warrants (Fully diluted 28.6%)
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,617,676
|
|
|
|
3,617,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Control Investments
|
|
|
|
|
|
|
|
|
60,767,805
|
|
|
|
65,542,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
MAIN
STREET CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Continued)
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Affiliate Investments(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Millwork Company, Inc.
|
|
Manufacturer/Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity February 5, 2012)
|
|
of Wood Doors
|
|
|
3,066,667
|
|
|
|
2,955,442
|
|
|
|
2,955,442
|
|
Warrants (Fully diluted 12.2%)
|
|
|
|
|
|
|
|
|
97,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053,250
|
|
|
|
2,955,442
|
|
American Sensor Technologies, Inc.
|
|
Manufacturer of Commercial/
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 0.5% Secured Debt (Maturity May 31,
2010)(8)
|
|
Industrial Sensors
|
|
|
3,800,000
|
|
|
|
3,800,000
|
|
|
|
3,800,000
|
|
Warrants (Fully diluted 20.0%)
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,850,000
|
|
|
|
4,050,000
|
|
Carlton Global Resources, LLC
|
|
Processor of
|
|
|
|
|
|
|
|
|
|
|
|
|
13% PIK Secured Debt (Maturity November 15,
2011)
|
|
Industrial Minerals
|
|
|
4,791,944
|
|
|
|
4,655,836
|
|
|
|
|
|
Member Units (Fully diluted 8.5%)
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,055,836
|
|
|
|
|
|
California Healthcare Medical Billing, Inc.
|
|
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity October 17, 2013)
|
|
Services
|
|
|
1,410,000
|
|
|
|
1,141,706
|
|
|
|
1,141,706
|
|
Common Stock (Fully diluted 6%)
|
|
|
|
|
|
|
|
|
390,000
|
|
|
|
390,000
|
|
Warrants (Fully diluted 12%)
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,771,706
|
|
|
|
1,771,706
|
|
Houston Plating & Coatings, LLC
|
|
Plating & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 2% Secured Debt (Maturity July 18,
2013)
|
|
Coating Services
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
Member Units(7) (Fully diluted 11.1%)
|
|
|
|
|
|
|
|
|
210,000
|
|
|
|
2,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510,000
|
|
|
|
3,050,000
|
|
KBK Industries, LLC
|
|
Specialty Manufacturer
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity January 23, 2011)
|
|
of Oilfield and
|
|
|
3,937,500
|
|
|
|
3,787,758
|
|
|
|
3,937,500
|
|
8% Secured Debt (Maturity March 1, 2010)
|
|
Industrial Products
|
|
|
468,750
|
|
|
|
468,750
|
|
|
|
468,750
|
|
8% Secured Debt (Maturity March 31, 2009)
|
|
|
|
|
450,000
|
|
|
|
450,000
|
|
|
|
450,000
|
|
Member Units(7) (Fully diluted 14.5%)
|
|
|
|
|
|
|
|
|
187,500
|
|
|
|
775,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,894,008
|
|
|
|
5,631,250
|
|
Laurus Healthcare, LP
|
|
Healthcare Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity May 7, 2009)
|
|
|
|
|
2,275,000
|
|
|
|
2,259,664
|
|
|
|
2,275,000
|
|
Warrants (Fully diluted 17.5%)
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,364,664
|
|
|
|
4,775,000
|
|
National Trench Safety, LLC
|
|
Trench & Traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
10% PIK Debt (Maturity April 16, 2014)
|
|
Safety Equipment
|
|
|
404,256
|
|
|
|
404,256
|
|
|
|
404,256
|
|
Member Units (Fully diluted 11.7%)
|
|
|
|
|
|
|
|
|
1,792,308
|
|
|
|
1,792,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,196,564
|
|
|
|
2,196,564
|
|
Pulse Systems, LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity June 1, 2009)
|
|
Components for
|
|
|
1,831,274
|
|
|
|
1,819,464
|
|
|
|
1,831,274
|
|
Warrants (Fully diluted 7.4%)
|
|
Medical Devices
|
|
|
|
|
|
|
132,856
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,952,320
|
|
|
|
2,281,274
|
|
Schneider Sales Management, LLC
|
|
Sales Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity October 15, 2013)
|
|
and Training
|
|
|
1,980,000
|
|
|
|
1,909,972
|
|
|
|
1,909,972
|
|
Warrants (Fully diluted 12.0%)
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954,972
|
|
|
|
1,954,972
|
|
Vision Interests, Inc.
|
|
Manufacturer/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity June 5, 2012)
|
|
Installer of Commercial
|
|
|
3,760,000
|
|
|
|
3,579,117
|
|
|
|
3,579,117
|
|
Common Stock (Fully diluted 8.9%)
|
|
Signage
|
|
|
|
|
|
|
372,000
|
|
|
|
420,000
|
|
Warrants (Fully diluted 11.2%)
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
420,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,111,117
|
|
|
|
4,419,117
|
|
Walden Smokey Point, Inc.
|
|
Specialty Transportation/
|
|
|
|
|
|
|
|
|
|
|
|
|
14% current / 4% PIK Secured Debt (Maturity
December 30, 2013)
|
|
Logistics
|
|
|
4,800,533
|
|
|
|
4,704,533
|
|
|
|
4,704,533
|
|
Common Stock (Fully diluted 7.6%)
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,304,533
|
|
|
|
5,304,533
|
|
WorldCall, Inc.
|
|
Telecommunication/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity October 22, 2009)
|
|
Information Services
|
|
|
646,225
|
|
|
|
631,199
|
|
|
|
640,000
|
|
Common Stock (Fully diluted 9.9%)
|
|
|
|
|
|
|
|
|
296,631
|
|
|
|
382,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
927,830
|
|
|
|
1,022,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Affiliate Investments
|
|
|
|
|
|
|
|
|
37,946,800
|
|
|
|
39,412,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
MAIN
STREET CAPITAL CORPORATION
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Continued)
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliate Investments(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Teak Fine Hardwoods, Inc.
|
|
Hardwood Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (Fully diluted 3.3%)
|
|
|
|
|
|
|
|
|
130,000
|
|
|
|
490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hayden Acquisition, LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
8% Secured Debt (Maturity March 9, 2009)
|
|
Utility Structures
|
|
|
1,800,000
|
|
|
|
1,781,303
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support Systems Homes, Inc.
|
|
Manages Substance
|
|
|
|
|
|
|
|
|
|
|
|
|
15% Secured Debt
|
|
Abuse Treatment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Maturity August 21, 2018)
|
|
Centers
|
|
|
226,589
|
|
|
|
226,589
|
|
|
|
226,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Innovations, LLC
|
|
Manufacturer of Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Secured Debt (Maturity August 31, 2009)
|
|
Cutting Tools and Punches
|
|
|
416,364
|
|
|
|
409,297
|
|
|
|
409,297
|
|
13.5% Secured Debt (Maturity January 16, 2015)
|
|
|
|
|
3,750,000
|
|
|
|
3,698,216
|
|
|
|
3,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,107,513
|
|
|
|
4,159,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
6,245,405
|
|
|
|
5,375,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Main Street Capital Partners, LLC (Investment Manager)
|
|
Asset Management
|
|
|
|
|
|
|
|
|
|
|
|
|
100% of Membership Interests
|
|
|
|
|
|
|
|
|
18,000,000
|
|
|
|
16,675,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments, December 31, 2008
|
|
|
|
|
|
|
|
$
|
122,960,010
|
|
|
$
|
127,006,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Idle Funds Investments
|
|
Investments in High-Quality
|
|
|
|
|
|
|
|
|
|
|
|
|
8.3% General Electric Capital Corporate Bond
|
|
Debt Investments and
|
|
|
1,218,704
|
|
|
|
1,218,704
|
|
|
|
1,218,704
|
|
(Maturity September 20, 2009)
|
|
Diversified Bond Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50% National City Bank Bond
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
(Maturity March 15, 2010)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard High-Yield Corp Fund Admiral Shares
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,086,514
|
|
Vanguard Long-Term Investment-Grade Fund Admiral Shares
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,084,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,218,704
|
|
|
$
|
4,389,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt investments are generally income producing. Equity and
warrants are non-income producing, unless otherwise noted. |
|
(2) |
|
See Note C for summary geographic location of portfolio
companies. |
|
(3) |
|
Controlled 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. |
|
(4) |
|
Affiliate investments are defined by the 1940 Act as
investments in which between 5% and 25% of the voting securities
are owned. |
|
(5) |
|
Non-Control/Non-Affiliate investments are defined by the 1940
Act as investments that are neither Control Investments nor
Affiliate Investments. |
|
(6) |
|
Principal is net of prepayments. Cost is net of prepayments
and accumulated unearned income. |
|
(7) |
|
Income producing through payment of dividends or
distributions. |
|
(8) |
|
Subject to contractual minimum rates. |
F-11
MAIN
STREET CAPITAL CORPORATION
SCHEDULE
OF INVESTMENTS
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Control Investments(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Café Brazil, LLC
|
|
Casual Restaurant
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity April 20, 2009)
|
|
Group
|
|
$
|
2,750,000
|
|
|
$
|
2,702,931
|
|
|
$
|
2,702,931
|
|
Member Units(7) (Fully diluted 42.3%)
|
|
|
|
|
|
|
|
|
41,837
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,744,768
|
|
|
|
3,952,931
|
|
CBT Nuggets , LLC
|
|
Produces and Sells
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 2% Secured Debt (Maturity June 1,
2011)
|
|
IT Certification
|
|
|
360,000
|
|
|
|
354,678
|
|
|
|
354,678
|
|
14% Secured Debt (Maturity June 1, 2011)
|
|
Training Videos
|
|
|
1,860,000
|
|
|
|
1,805,275
|
|
|
|
1,805,275
|
|
Member Units (Fully diluted 29.1%)
|
|
|
|
|
|
|
|
|
432,000
|
|
|
|
1,145,000
|
|
Warrants (Fully diluted 10.5%)
|
|
|
|
|
|
|
|
|
72,000
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,663,953
|
|
|
|
3,649,953
|
|
Gulf Manufacturing, LLC
|
|
Industrial Metal
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 1% Secured Debt (Maturity August 31,
2012)
|
|
Fabrication
|
|
|
1,200,000
|
|
|
|
1,188,636
|
|
|
|
1,188,636
|
|
13% Secured Debt (Maturity August 31, 2012)
|
|
|
|
|
2,000,000
|
|
|
|
1,809,216
|
|
|
|
1,809,216
|
|
Member Units (Fully diluted 18.4%)
|
|
|
|
|
|
|
|
|
472,000
|
|
|
|
472,000
|
|
Warrants (Fully diluted 8.4%)
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,629,852
|
|
|
|
3,719,852
|
|
Hawthorne Customs & Dispatch Services , LLC
|
|
Transportation/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity January 31, 2011)
|
|
Logistics
|
|
|
1,350,000
|
|
|
|
1,304,693
|
|
|
|
1,304,693
|
|
Member Units(7) (Fully diluted 27.8%)
|
|
|
|
|
|
|
|
|
375,000
|
|
|
|
435,000
|
|
Warrants (Fully diluted 16.5%)
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
230,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,717,193
|
|
|
|
1,969,693
|
|
Hayden Acquisition, LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity March 9, 2009)
|
|
Utility Structures
|
|
|
1,955,000
|
|
|
|
1,901,040
|
|
|
|
1,901,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydratec Holdings, LLC
|
|
Agricultural Services
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5% Secured Debt (Maturity October 31, 2012)
|
|
|
|
|
5,700,000
|
|
|
|
5,588,729
|
|
|
|
5,588,729
|
|
Prime plus 1% Secured Debt (Maturity
October 31, 2012)
|
|
|
|
|
1,845,244
|
|
|
|
1,825,911
|
|
|
|
1,825,911
|
|
Member Units (Fully diluted 60%)
|
|
|
|
|
|
|
|
|
1,800,000
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,214,640
|
|
|
|
9,214,640
|
|
Jensen Jewelers of Idaho, LLC
|
|
Retail Jewelry
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime Plus 2% Secured Debt (Maturity
November 14, 2011)
|
|
|
|
|
1,200,000
|
|
|
|
1,180,509
|
|
|
|
1,180,509
|
|
13% current / 6% PIK Secured Debt (Maturity
November 14, 2011)
|
|
|
|
|
1,069,457
|
|
|
|
1,044,190
|
|
|
|
1,044,190
|
|
Member Units(7) (Fully diluted 25.1%)
|
|
|
|
|
|
|
|
|
376,000
|
|
|
|
815,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600,699
|
|
|
|
3,039,699
|
|
Magna Card, Inc.
|
|
Wholesale/Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
12% current / 0.4% PIK Secured Debt
(Maturity September 30, 2010)
|
|
Magnetic Products
|
|
|
2,021,079
|
|
|
|
1,958,775
|
|
|
|
|
|
Warrants (Fully diluted 35.8%)
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058,775
|
|
|
|
|
|
Quest Design & Production, LLC
|
|
Design and Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
8% current / 5% PIK Secured Debt (Maturity
December 31, 2010)
|
|
of Custom Display Systems
|
|
|
3,991,542
|
|
|
|
3,964,853
|
|
|
|
3,964,853
|
|
Warrants (Fully diluted 26.0%)
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,004,853
|
|
|
|
4,004,853
|
|
TA Acquisition Group, LP
|
|
Processor of
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity July 29, 2010)
|
|
Construction
|
|
|
1,870,000
|
|
|
|
1,813,789
|
|
|
|
1,813,789
|
|
Partnership Interest(7) (Fully diluted 18.3%)
|
|
Aggregates
|
|
|
|
|
|
|
357,500
|
|
|
|
3,435,000
|
|
Warrants (Fully diluted 18.3%)
|
|
|
|
|
|
|
|
|
82,500
|
|
|
|
3,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,253,789
|
|
|
|
8,698,789
|
|
Technical Innovations , LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity October 31, 2009)
|
|
Specialty Cutting
|
|
|
787,500
|
|
|
|
748,716
|
|
|
|
748,716
|
|
Prime Secured Debt (Maturity October 31, 2009)
|
|
Tools and Punches
|
|
|
262,500
|
|
|
|
249,572
|
|
|
|
249,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
998,288
|
|
|
|
998,288
|
|
F-12
MAIN
STREET CAPITAL CORPORATION
SCHEDULE
OF INVESTMENTS (Continued)
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Universal Scaffolding & Equipment, LLC
|
|
Manufacturer of Scaffolding
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 1% Secured Debt (Maturity August 16,
2012)
|
|
and Shoring Equipment
|
|
|
1,122,333
|
|
|
|
1,111,741
|
|
|
|
1,111,741
|
|
13% current / 5% PIK Secured Debt (Maturity
August 16, 2012)
|
|
|
|
|
3,196,376
|
|
|
|
3,136,274
|
|
|
|
3,136,274
|
|
Member Units (Fully diluted 18.4%)
|
|
|
|
|
|
|
|
|
992,063
|
|
|
|
1,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,240,078
|
|
|
|
5,273,015
|
|
Wicks N More, LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity April 26, 2011)
|
|
High-end Candles
|
|
|
3,720,000
|
|
|
|
3,455,444
|
|
|
|
1,685,444
|
|
Member Units (Fully diluted 11.5%)
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
Warrants (Fully diluted 21.3%)
|
|
|
|
|
|
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,025,444
|
|
|
|
1,685,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Control Investments
|
|
|
|
|
|
|
|
|
43,053,372
|
|
|
|
48,108,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
MAIN
STREET CAPITAL CORPORATION
SCHEDULE
OF INVESTMENTS (Continued)
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Affiliate Investments(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Millwork Company, Inc.
|
|
Manufacturer/Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity February 5, 2012)
|
|
of Wood Doors
|
|
|
2,666,667
|
|
|
|
2,547,510
|
|
|
|
2,547,510
|
|
Warrants (Fully diluted 10.9%)
|
|
|
|
|
|
|
|
|
87,120
|
|
|
|
87,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,634,630
|
|
|
|
2,634,630
|
|
American Sensor Technologies, Inc.
|
|
Manufacturer of Commercial/
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 0.5% Secured Debt (Maturity May 31,
2010)
|
|
Industrial Sensors
|
|
|
3,500,000
|
|
|
|
3,404,755
|
|
|
|
3,404,755
|
|
Warrants (Fully diluted 20.0%)
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,454,755
|
|
|
|
4,154,755
|
|
Carlton Global Resources, LLC
|
|
Processor of
|
|
|
|
|
|
|
|
|
|
|
|
|
13% PIK Secured Debt (Maturity November 15,
2011)
|
|
Industrial Minerals
|
|
|
4,687,777
|
|
|
|
4,555,835
|
|
|
|
2,618,421
|
|
Member Units (Fully diluted 8.5%)
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,955,835
|
|
|
|
2,618,421
|
|
Houston Plating & Coatings, LLC
|
|
Plating & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime plus 2% Secured Debt (Maturity July 19,
2011)
|
|
Coating Services
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Member Units(7) (Fully diluted 11.8%)
|
|
|
|
|
|
|
|
|
210,000
|
|
|
|
2,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,000
|
|
|
|
2,550,000
|
|
KBK Industries, LLC
|
|
Specialty Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity January 23, 2011)
|
|
Oilfield and Industrial
|
|
|
3,937,500
|
|
|
|
3,730,881
|
|
|
|
3,730,881
|
|
8% Secured Debt (Maturity July 1, 2009)
|
|
Products
|
|
|
623,063
|
|
|
|
623,063
|
|
|
|
623,063
|
|
Prime Plus 2% Secured Debt (Maturity
January 31, 2008)
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
686,250
|
|
Member Units(7) (Fully diluted 14.5%)
|
|
|
|
|
|
|
|
|
187,500
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616,444
|
|
|
|
5,740,194
|
|
Laurus Healthcare, LP
|
|
Healthcare Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity May 7, 2009)
|
|
|
|
|
3,010,000
|
|
|
|
2,934,625
|
|
|
|
2,934,625
|
|
Warrants (Fully diluted 18.2%)
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
715,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,039,625
|
|
|
|
3,649,625
|
|
National Trench Safety, LLC
|
|
Trench & Traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
10% PIK Debt (Maturity April 16, 2014)
|
|
Safety Equipment
|
|
|
365,334
|
|
|
|
314,805
|
|
|
|
314,805
|
|
Member Units (Fully diluted 10.9%)
|
|
|
|
|
|
|
|
|
1,792,308
|
|
|
|
1,792,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,107,113
|
|
|
|
2,107,113
|
|
Pulse Systems, LLC
|
|
Manufacturer of
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Secured Debt (Maturity June 1, 2009)
|
|
Components for
|
|
|
2,307,498
|
|
|
|
2,260,420
|
|
|
|
2,260,420
|
|
Warrants (Fully diluted 6.6%)
|
|
Medical Devices
|
|
|
|
|
|
|
118,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,378,420
|
|
|
|
2,610,420
|
|
Transportation General, Inc.
|
|
Taxi Cab/Transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity May 31, 2010)
|
|
Services
|
|
|
3,600,000
|
|
|
|
3,501,966
|
|
|
|
3,501,966
|
|
Warrants (Fully diluted 24.0%)
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,571,966
|
|
|
|
3,841,966
|
|
Turbine Air Systems, Ltd.
|
|
Commercial and
|
|
|
|
|
|
|
|
|
|
|
|
|
12% Secured Debt (Maturity October 11, 2011)
|
|
Industrial Chilling Systems
|
|
|
1,000,000
|
|
|
|
905,213
|
|
|
|
905,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vision Interests, Inc.
|
|
Manufacturer/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity June 5, 2012)
|
|
Installer of Commercial
|
|
|
3,760,000
|
|
|
|
3,541,662
|
|
|
|
3,541,662
|
|
Common Stock (Fully diluted 8.9%)
|
|
Signage
|
|
|
|
|
|
|
372,000
|
|
|
|
372,000
|
|
Warrants (Fully diluted 11.2%)
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,073,662
|
|
|
|
4,288,662
|
|
WorldCall, Inc.
|
|
Telecommunication/
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Secured Debt (Maturity October 22, 2009)
|
|
Information Services
|
|
|
782,500
|
|
|
|
745,217
|
|
|
|
745,217
|
|
Common Stock (Fully diluted 6.2%)
|
|
|
|
|
|
|
|
|
169,173
|
|
|
|
180,000
|
|
Warrants (Fully diluted 13.4%)
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
989,390
|
|
|
|
1,075,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Affiliate Investments
|
|
|
|
|
|
|
|
|
33,037,053
|
|
|
|
36,176,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
MAIN
STREET CAPITAL CORPORATION
SCHEDULE
OF INVESTMENTS (Continued)
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)
|
|
Industry
|
|
Principal(6)
|
|
|
Cost(6)
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliate Investments(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Teak Fine Hardwoods, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13% Current/5.5% PIK Secured Debt (Maturity
April 13, 2011)
|
|
Hardwood Products
|
|
|
1,651,028
|
|
|
|
1,586,391
|
|
|
|
1,586,391
|
|
Common Stock (Fully diluted 3.3%)
|
|
|
|
|
|
|
|
|
130,000
|
|
|
|
490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,716,391
|
|
|
|
2,076,391
|
|
Support Systems Homes, Inc.
|
|
Manages Substance
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Current/4% PIK Secured Debt
|
|
Abuse Treatment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Maturity June 5, 2012)
|
|
Centers
|
|
|
1,525,674
|
|
|
|
1,507,596
|
|
|
|
1,507,596
|
|
8% Secured Debt (Maturity June 5, 2012)
|
|
|
|
|
158,888
|
|
|
|
157,014
|
|
|
|
157,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,664,610
|
|
|
|
1,664,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
3,381,001
|
|
|
|
3,741,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Main Street Capital Partners, LLC (Investment Manager)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% of Membership Interests
|
|
Asset Management
|
|
|
|
|
|
|
18,000,000
|
|
|
|
17,625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments, December 31, 2007
|
|
|
|
|
|
|
|
$
|
97,471,426
|
|
|
$
|
105,650,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Idle Funds Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.691% Federal Home Loan Bank Discount Note
|
|
Investments in U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Maturity April 11, 2008)
|
|
Agency Securities
|
|
|
3,500,000
|
|
|
$
|
3,421,791
|
|
|
$
|
3,421,791
|
|
4.691% Federal National Mortgage Association Discount
(Maturity April 2, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,425,490
|
|
|
|
3,425,490
|
|
4.675% Federal Home Loan Bank Discount Note
(Maturity March 20, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,431,089
|
|
|
|
3,431,089
|
|
4.668% Federal Home Loan Bank Discount Note
(Maturity March 5, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,437,408
|
|
|
|
3,437,408
|
|
4.673% Federal Home Loan Bank Discount Note
(Maturity February 20, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,443,197
|
|
|
|
3,443,197
|
|
4.77% Federal Home Loan Mortgage Corp Discount Note
(Maturity February 7, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,448,948
|
|
|
|
3,448,948
|
|
4.64% Federal National Mortgage Association Discount
(Maturity January 23, 2008)
|
|
|
|
|
3,500,000
|
|
|
|
3,455,338
|
|
|
|
3,455,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Idle Funds Investments, December 31, 2007
|
|
|
|
|
|
|
|
$
|
24,063,261
|
|
|
$
|
24,063,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All debt investments are generally income producing. Equity
and warrants are non-income producing, unless otherwise
noted. |
|
(2) |
|
See Note C for summary geographic location of portfolio
companies. |
|
(3) |
|
Controlled 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. |
|
(4) |
|
Affiliate investments are defined by the 1940 Act as
investments in which between 5% and 25% of the voting securities
are owned. |
|
(5) |
|
Non-Control/Non-Affiliate investments are defined by the 1940
Act as investments that are neither Control Investments nor
Affiliate Investments. |
|
(6) |
|
Principal is net of prepayments. Cost is net of prepayments
and accumulated unearned income. |
|
(7) |
|
Income producing through payment of dividends or
distributions. |
|
(8) |
|
Subject to contractual minimum rates. |
F-15
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE A
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
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 (the
Fund) and its general partner, Main Street Mezzanine
Management, LLC (the General Partner),
(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). The
term Main Street refers to the Fund plus the General
Partner prior to the IPO and to Main Street Capital Corporation
and its subsidiaries, including the Fund and the General
Partner, after the IPO.
On October 2, 2007, prior to the IPO, the following
transactions were consummated (collectively, the Formation
Transactions):
|
|
|
|
|
MSCC acquired 100% of the limited partnership interests in the
Fund, which became a wholly-owned consolidated subsidiary of
MSCC; the Fund retained its Small Business Investment Company
(SBIC) license, continued to hold its existing
investments, and will make new investments with available funds;
|
|
|
|
MSCC acquired 100% of the equity interests in the General
Partner of the Fund, which became a wholly-owned consolidated
subsidiary of MSCC; and
|
|
|
|
MSCC acquired 100% of the equity interests in the Investment
Manager. The Investment Manager became a wholly-owned portfolio
company of MSCC under the 1940 Act, as the Investment Manager is
not an investment company and does not conduct substantially all
of its investment management activities for Main Street and its
subsidiaries. See Note D for further information regarding
this classification and accounting treatment.
|
Immediately following the Formation Transactions, Main Street
Equity Interests, Inc. (MSEI) was formed as a
wholly-owned consolidated subsidiary of MSCC. MSEI has elected
for tax purposes to be treated as a corporation and is taxed at
normal corporate tax rates based on its taxable income.
The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP). For the years ended
December 31, 2008 and 2007, the consolidated financial
statements of Main Street include the accounts of MSCC, the
Fund, MSEI and the General Partner. The Investment Manager is
accounted for as a portfolio investment. The Formation
Transactions involved an exchange of equity interests between
companies under common control. In accordance with the guidance
on exchanges of equity interests between entities under common
control contained in Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations
(SFAS 141), Main Streets results of
operations and cash flows for the year ended December 31,
2007 are presented as if the Formation Transactions had occurred
as of January 1, 2007. Main Streets results of
operations for the years ended December 31, 2008 and 2007,
cash flows for the years ended December 31, 2008 and 2007
and financial positions as of December 31, 2008 and 2007
are presented on a consolidated basis. In addition, the results
of Main Streets operations and its cash flows for the year
ended December 31, 2006 have been presented on a combined
basis in order to provide comparative information with respect
to prior periods. The effects of all intercompany transactions
between Main Street and its subsidiaries have been eliminated in
consolidation. As a result of adopting the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS 157), in the first quarter of 2008,
certain reclassifications have been made to prior period
balances to conform with the current financial statement
presentation.
F-16
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the Fund owns a
controlled 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 investments made by Main
Street qualify for this exception. Therefore, the investments
are 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) from Investments on the Statement of
Operations until the investment is disposed of resulting in any
gain or loss on exit being recognized as a Net Realized
Gain (Loss) from Investments.
Portfolio
Investment Classification
Main Street classifies its portfolio investments in accordance
with the requirements of the 1940 Act. Under the 1940 Act,
Control Investments are defined as investments in
companies in which Main Street owns more than 25% of the voting
securities or has rights to maintain greater than 50% of the
board representation. Under the 1940 Act, Affiliate
Investments are defined as those investments in companies
in which Main Street owns between 5% and 25% of the voting
securities. Under the 1940 Act, Non-Control/Non-Affiliate
Investments are defined as investments that are neither
Control Investments nor Affiliate Investments. The
Investment in affiliated Investment Manager
represents Main Streets investment in a wholly-owned,
investment manager subsidiary that is accounted for as a
portfolio investment of Main Street.
|
|
NOTE B
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
1.
|
Valuation
of Portfolio Investments
|
Main Street accounts for its portfolio investments at fair
value. As a result, Main Street adopted the provisions of
SFAS 157 in the first quarter of 2008. SFAS 157
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. SFAS 157 requires
Main Street to assume that the portfolio investment is to be
sold in the principal market to market participants, or in the
absence of a principal market, in the most advantageous market,
which may be a hypothetical market. Market participants are
defined as buyers and sellers in the principal or most
advantageous market that are independent, knowledgeable, and
willing and able to transact. With the adoption of this
statement, Main Street incorporated the income approach to
estimate the fair value of its debt investments principally
using a yield-to-maturity model, resulting in the recognition of
$0.7 million in unrealized appreciation from ten debt
investments upon adoption. Prior to the adoption of
SFAS 157, Main Street reported unearned income as a single
line item on the consolidated balance sheets and consolidated
schedule of investments. Unearned income is no longer reported
as a separate line and is now part of the investment portfolio
cost and fair value on the consolidated balance sheets and the
consolidated schedule of investments. This change in
presentation had no impact on the overall net cost or fair value
of Main Streets investment portfolio and had no impact on
Main Streets financial position or results of operations.
Main Streets business plan calls for it to invest
primarily in illiquid securities issued by private companies
and/or
thinly traded public companies. These investments may be subject
to restrictions on resale and will generally have no established
trading market. As a result, Main Street determines in good
faith the fair value of its portfolio investments pursuant to a
valuation policy in accordance with SFAS 157 and a
valuation process approved by its Board of Directors and in
accordance with the 1940 Act. Main Street reviews external
events, including private mergers, sales and acquisitions
involving comparable companies,
F-17
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and includes these events in the valuation process. Main
Streets valuation policy is intended to provide a
consistent basis for determining the fair value of the portfolio.
For valuation purposes, control investments are composed of
equity and debt securities for which Main Street has a
controlling interest in the portfolio company or has the ability
to nominate a majority of the portfolio companys board of
directors. Market quotations are generally not readily available
for Main Streets control investments. As a result, Main
Street determines the fair value of control investments 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,
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, Main Street
analyzes various factors, including the portfolio companys
historical and projected financial results. Main Street
allocates the enterprise value to investments in order of the
legal priority of the investments. 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. The valuation approaches for Main Streets
control investments estimate the value of the investment if it
were to sell, or exit, the investment, assuming the highest and
best use of the investment by market participants. In addition,
these valuation approaches consider the value associated with
Main Streets ability to control the capital structure of
the portfolio company, as well as the timing of a potential exit.
For valuation purposes, non-control investments are composed of
debt and equity securities for which Main Street does not have a
controlling interest in the portfolio company, or the ability to
nominate a majority of the portfolio companys board of
directors. Market quotations for Main Streets non-control
investments are not readily available. For Main Streets
non-control investments, Main Street uses the market approach to
value its equity investments and the income approach to value
its debt instruments. For non-control debt investments, Main
Street determines the fair value primarily using a yield
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 Streets
estimate of the expected repayment date of a debt security is
generally the legal maturity date of the instrument, as Main
Street generally intends to hold its loans to maturity. The
yield analysis considers changes in leverage levels, credit
quality, portfolio company performance and other factors. Main
Street will use the value determined by the yield analysis as
the fair value for that security; however, because of Main
Streets general intent to hold its loans to maturity, the
fair value will not exceed the face amount of the debt security.
A change in the assumptions that Main Street uses to estimate
the fair value of its debt securities using the yield analysis
could have a material impact on the determination of fair value.
If there is deterioration in credit quality or a debt security
is in workout status, Main Street may consider other factors in
determining the fair value of a debt security, including the
value attributable to the debt security from the enterprise
value of the portfolio company or the proceeds that would be
received in a liquidation analysis.
Due to the inherent uncertainty in the valuation process, Main
Streets estimate of fair value 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
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.
F-18
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Main Street uses a standard investment ranking system in
connection with its investment oversight, portfolio
management/analysis and investment valuation procedures. This
system takes into account both quantitative and qualitative
factors of the portfolio company and the investments held. Each
quarter, Main Street estimates the fair value of each portfolio
investment, and the Board of Directors of Main Street oversees,
reviews and approves, in good faith, Main Streets fair
value estimates consistent with the 1940 Act requirements.
Duff & Phelps, LLC, an independent valuation firm
(Duff & Phelps), has provided third-party
valuation consulting services to Main Street, which consisted of
certain mutually agreed limited procedures that Main Street
identified and requested Duff & Phelps to perform
(hereinafter referred to as the Procedures). During
2008, the Procedures were performed on investments in
24
portfolio companies and on the investment in the Investment
Manager comprising approximately 84% of the total portfolio
investments at fair value as of December 31, 2008, with the
Procedures performed on investments in 5 portfolio companies for
the quarter ended March 31, 2008, investments in 8
portfolio companies for the quarter ended June 30, 2008, 5
portfolio companies for the quarter ended September 30,
2008 and 6 portfolio companies and the Investment Manager for
the quarter ended December 31, 2008. Duff &
Phelps had also reviewed a total of 24 portfolio companies
comprising approximately 77% of the total portfolio investments
at fair value as of December 31, 2007. Upon completion of
the Procedures in each case, Duff & Phelps concluded
that the fair value, as determined by Main Street, of those
investments subjected to the Procedures did not appear to be
unreasonable. The Board of Directors of Main Street has final
responsibility for overseeing, reviewing and approving, in good
faith, Main Streets estimate of the fair value for the
investments.
Main Street believes its investments as of December 31,
2008 and 2007 approximate fair value as of those dates based on
the market in which Main Street operates and other conditions in
existence at those reporting periods.
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 above, the financial statements
include portfolio investments whose values have been estimated
by Main Street with the oversight, review and approval by Main
Streets 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.
|
|
4.
|
Idle
Funds Investments
|
Idle funds investments consist primarily of short term
investments in U.S. government agency securities,
investments in high-quality debt investments and diversified
bond funds. With the exception of diversified bond funds, idle
funds investments generally mature in one year or less but
longer than three months from the time of investment, and
managements intent is to generally hold such investments
to maturity.
F-19
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Interest
and Dividend Income
|
Interest and dividend income is recorded 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 Streets valuation
policy, accrued interest and dividend income is evaluated
periodically for collectibility. 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 securitys
status significantly improves regarding ability to service the
debt or other obligations, or if a loan or debt security is
fully impaired or written off, it will be removed from
non-accrual status.
While not significant to its total portfolio, Main Street holds
debt instruments in its portfolio that contain
payment-in-kind
(PIK) interest provisions. The PIK interest,
computed at the contractual rate specified in each debt
agreement, is 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.
For each of the two years ended December 31, 2008, and
2007, Main Street had one investment on non-accrual status
comprising approximately 0.5% and 3.1%, respectively, of the
total portfolio investments at fair value for each of the two
years then ended (excluding Main Streets investment in the
Investment Manager).
|
|
6.
|
Deferred
Financing Costs
|
Deferred financing costs include SBIC debenture commitment fees
and SBIC debenture leverage fees which have been capitalized and
which are amortized into interest expense over the term of the
debenture agreement (10 years).
Deferred financing costs also include costs related to a
two-year treasury line of credit and a three-year investment
credit facility. These costs have been capitalized and are
amortized into interest expense over their respective terms.
|
|
7.
|
Fee
Income Structuring and Advisory Services
|
Main Street may periodically provide services, including
structuring and advisory services, to its portfolio companies.
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 accreted
into interest income over the life of the financing.
|
|
8.
|
Unearned
Income Debt Origination Fees and Original Issue
Discount
|
Main Street capitalizes upfront debt origination fees received
in connection with financings and reflects such fees as unearned
income netted against investments. Main Street will also
capitalize and offset direct loan origination costs against the
origination fees received. The unearned income from the fees,
net of debt origination costs, is accreted into interest income
based on the effective interest method over the life of the
financing.
In connection with its 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 securities and its nominal cost
equity at the time of origination. Any resulting discount from
recording the
F-20
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
debt is reflected as unearned income, which is netted against
the investment, and accreted into interest income based on the
effective interest method over the life of the debt.
|
|
9.
|
Share-Based
Compensation
|
Main Street accounts for its share-based compensation plans
using the fair value method, as prescribed by
SFAS No. 123R, Share-Based Payment
(SFAS 123R). 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 that fair value as share-based
compensation expense over the requisite service period or
vesting term.
MSCC has elected and intends to qualify for the tax treatment
applicable to regulated investment companies (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as
amended (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, Main Street 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, Main Street 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. Any such carryover
taxable income must be distributed through a dividend declared
prior to filing the final tax return related to the year which
generated such taxable income.
MSCCs wholly owned subsidiary, MSEI, is a taxable entity
which holds certain portfolio investments of Main Street. MSEI
is consolidated with Main Street for U.S. GAAP reporting
purposes, and the portfolio investments held by MSEI are
included in Main Streets consolidated financial
statements. The purpose of MSEI is to permit Main Street to hold
equity investments in portfolio companies which are pass
through entities for tax purposes in order to comply with
the source income requirements contained in the RIC
tax requirements. MSEI is not consolidated with Main Street for
income tax purposes and may generate income tax expense as a
result of its ownership of certain portfolio investments. This
income tax expense, if any, is reflected in Main Streets
Consolidated Statement of Operations.
MSEI uses 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.
Prior to the Formation Transactions, Main Street was taxed under
the partnership provisions of the Code. Under these provisions
of the Code, the General Partner and limited partners were
responsible for reporting their share of the partnerships
income or loss on their income tax returns.
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.
|
|
11.
|
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.
F-21
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net change in unrealized appreciation or depreciation from
investments reflects the net change in the valuation of the
investment portfolio pursuant to Main Streets valuation
guidelines and the reclassification of any prior period
unrealized appreciation or depreciation on exited investments.
|
|
12.
|
Concentration
of Credit Risks
|
Main Street places its cash in financial institutions, and at
times, such balances may be in excess of the federally insured
limit.
|
|
13.
|
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. Idle funds
investments consist primarily of short term investments in
U.S. government agency securities, investments in
high-quality debt investments and diversified bond funds. The
fair value determination for these investments primarily
consists of Level 1 observable inputs. The SBIC debentures
remain a strategic advantage due to their flexible structure,
long-term duration, and low fixed interest rates. As of
December 31, 2008, had Main Street adopted the provisions
of SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159) relating to accounting for debt
obligations at their fair value, Main Street estimates the fair
value of its SBIC debentures would be approximately
$41 million, or $14 million less than the face value
of the SBIC debentures.
|
|
14.
|
Initial
Public Offering Costs
|
For the year ended December 31, 2007, Main Street incurred
total costs of $2,337,823 associated with the initial public
offering of Main Street. These costs principally related to
accounting, legal and other professional fees associated with
the companys initial public offering which was completed
in October 2007.
Of the $2,337,823 in total costs incurred related to initial
public offering, $695,250 of such costs were professional fees
related to the IPO which were deducted in determining the Net
Investment Income and Net Increase in Net Assets Resulting from
Operations for the year ended December 31, 2007. The
remaining $1,642,573 in offering costs incurred has been
reflected as a reduction to Additional Paid In Capital.
Basic and diluted per share calculations are computed utilizing
the weighted average number of shares of common stock
outstanding for the period. The diluted weighted average number
of shares of common stock outstanding for 2008 reflects the
dilution attributable to unvested shares of restricted stock
that are part of Main Streets share-based compensation
plans as discussed in Note M. The diluted weighted average
number of shares was calculated using the Treasury Stock method.
The weighted average number of shares of common stock
outstanding for 2007 was calculated as if the Formation
Transactions and the IPO had occurred on January 1, 2007,
consistent with the guidance on exchanges of shares between
entities under common control contained in SFAS 141. This
approach resulted in more relevant and meaningful per share
computations.
For the year ended December 31, 2008, the difference
between the weighted average number of basic and diluted shares
was small enough to result in the same earnings per share
calculation for both basic and diluted earnings per share. As
Main Street had no common stock equivalents outstanding as of
December 31, 2007, diluted earnings per share was the same
as basic earnings per share. For the year ended
December 31, 2006, earnings per share calculations were not
appropriate due to the partnership structure comprising the
combined
F-22
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial statements of the Fund and the General Partner nor
would calculations be representative of Main Street
prospectively.
|
|
16.
|
Recently
Issued Accounting Standards
|
In June 2008, the Financial Accounting Standards Board
(FASB) issued
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This FASB
Staff Position (FSP) addresses whether instruments
granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share
(EPS). This FSP will be effective for financial
statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years.
All prior-period EPS data presented will be adjusted
retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform
to the provisions of this FSP. Early application is not
permitted. Main Street is currently analyzing the effect, if
any, this statement may have on its consolidated results of
operations.
In October 2008, the FASB issued Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active
(FSP 157-3).
FSP 157-3
provides an illustrative example of how to determine the fair
value of a financial asset in an inactive market. The FSP does
not change the fair value measurement principles set forth in
SFAS 157. Since adopting SFAS 157 in January 2008,
Main Streets practices for determining the fair value of
its investment portfolio have been, and continue to be,
consistent with the guidance provided in the example in
FSP 157-3.
Therefore, Main Streets adoption of
FSP 157-3
did not affect its practices for determining the fair value of
its investment portfolio and does not have a material effect on
its financial position or results of operations.
NOTE C
FAIR VALUE HIERARCHY FOR PORTFOLIO AND IDLE FUNDS
INVESTMENTS
In connection with valuing portfolio and idle funds investments,
Main Street adopted the provisions of SFAS 157 in the first
quarter of 2008. SFAS 157 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 portfolio investments
at fair value.
Fair
Value Hierarchy
In accordance with SFAS 157, Main Street has categorized
its portfolio and idle funds 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).
Portfolio and idle funds investments recorded on Main
Streets 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);
|
F-23
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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. These inputs reflect managements own
assumptions about the assumptions a market participant would use
in pricing the investment (for example, investments in illiquid
securities issued by private companies).
As required by SFAS 157, 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, gains and losses for 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
December 31, 2008, all of Main Streets idle funds
investments consisted primarily of investments in high-quality
debt investments and diversified bond funds. The fair value
determination for these investments primarily consisted of
observable inputs. As a result, all of Main Streets idle
funds investments were categorized as Level 1 with a fair
value of $4,389,795.
As of December 31, 2008, all of Main Streets
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 Streets portfolio investments were
categorized as Level 3. The fair value determination of
each portfolio investment 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, 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;
|
|
|
|
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;
|
F-24
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Qualitative assessment of key management;
|
|
|
|
Contractual rights, obligations or restrictions associated with
the investment; and
|
|
|
|
Other factors deemed relevant.
|
The following table provides a summary of changes in fair value
of Main Streets Level 3 investments for the year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions/
|
|
|
|
|
|
Changes from
|
|
|
Unrealized
|
|
|
|
|
Type of
|
|
December 31, 2007
|
|
|
Accretion of
|
|
|
Repayments/
|
|
|
New
|
|
|
Unrealized
|
|
|
Appreciation
|
|
|
December 31, 2008
|
|
Investment
|
|
Fair Value
|
|
|
Unearned Income
|
|
|
Realized Losses
|
|
|
Investments
|
|
|
to Realized
|
|
|
(Depreciation)
|
|
|
Fair Value
|
|
|
Debt
|
|
$
|
64,581,986
|
|
|
$
|
1,062,452
|
|
|
$
|
(23,595,109
|
)
|
|
$
|
40,586,637
|
|
|
$
|
4,568,891
|
|
|
$
|
(5,453,814
|
)
|
|
$
|
81,751,043
|
|
Equity
|
|
|
16,361,308
|
|
|
|
|
|
|
|
(590,041
|
)
|
|
|
5,995,743
|
|
|
|
(2,717,500
|
)
|
|
|
3,685,636
|
|
|
|
22,735,146
|
|
Equity warrants
|
|
|
7,082,120
|
|
|
|
|
|
|
|
1,069,046
|
|
|
|
959,856
|
|
|
|
(3,636,654
|
)
|
|
|
370,632
|
|
|
|
5,845,000
|
|
Investment Manager
|
|
|
17,625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(949,374
|
)
|
|
|
16,675,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105,650,414
|
|
|
$
|
1,062,452
|
|
|
$
|
(23,116,104
|
)
|
|
$
|
47,542,236
|
|
|
$
|
(1,785,263
|
)
|
|
$
|
(2,346,920
|
)
|
|
$
|
127,006,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Investments
Main Streets portfolio investments principally consist of
secured debt, equity warrants and direct equity investments in
privately held companies. The debt investments are 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 original investment.
Main Street also receives nominally priced equity warrants and
makes direct equity investments, usually in connection with a
debt investment in a portfolio company.
As discussed further in Note D, the Investment Manager is a
wholly owned subsidiary of MSCC. However, the Investment Manager
is accounted for as a portfolio investment of Main Street, since
it is not an investment company and since it conducts a
significant portion of its investment management activities for
entities other than MSCC or one of its subsidiaries. To allow
for more relevant disclosure of Main Streets
core investment portfolio, Main Streets
investment in the Investment Manager has been excluded from the
tables and amounts set forth in this Note C.
Investment income, consisting of interest, dividends and fees,
can fluctuate dramatically. Revenue recognition in any given
year could also be highly concentrated among several portfolio
companies. For the year ended December 31, 2008, Main
Street recorded investment income from one portfolio company in
excess of 10% of total investment income. The investment income
from that portfolio company represented approximately 21% of the
total investment income for the period, principally related to
high levels of dividend income and transaction and structuring
fees on the investment in such company. For the year ended
December 31, 2007, Main Street did not record investment
income from any portfolio company in excess of 10% of total
investment income.
As of December 31, 2008, Main Street had debt and equity
investments in 31 core portfolio companies with an aggregate
fair value of $110,331,189 and a weighted average effective
yield on its debt investments of 14.0%. Approximately 84% of
Main Streets total core portfolio investments at cost were
in the form of debt investments and 91% of such debt investments
at cost were secured by first priority liens on the assets of
Main Streets portfolio companies as of December 31,
2008. At December 31, 2008, Main Street had equity
ownership in approximately 94% of its core portfolio companies
and the average fully diluted equity ownership in those
portfolio companies was approximately 25%. As of
December 31, 2007, Main Street had debt and equity
investments in 27 core portfolio companies with an aggregate
fair value of $88,025,414 and a weighted average effective yield
on its debt investments of 14.3%. The weighted average yields
were computed using the effective interest rates for all debt
investments at December 31, 2008 and 2007, including
F-25
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortization of deferred debt origination fees and accretion of
original issue discount but excluding any debt investments on
non-accrual status.
Summaries of the composition of Main Streets core
investment portfolio at cost and fair value as a percentage of
total portfolio investments are shown in the following table:
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
First lien debt
|
|
|
76.2
|
%
|
|
|
81.5
|
%
|
Equity
|
|
|
11.0
|
%
|
|
|
10.7
|
%
|
Second lien debt
|
|
|
7.4
|
%
|
|
|
6.1
|
%
|
Equity warrants
|
|
|
5.4
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
First lien debt
|
|
|
67.0
|
%
|
|
|
70.1
|
%
|
Equity
|
|
|
15.7
|
%
|
|
|
18.6
|
%
|
Equity warrants
|
|
|
10.2
|
%
|
|
|
8.0
|
%
|
Second lien debt
|
|
|
7.1
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the core investment portfolio
composition by geographic region of the United States at cost
and fair value as a percentage of total portfolio investments.
The geographic composition is determined by the location of the
corporate headquarters of the portfolio company.
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Southwest
|
|
|
50.2
|
%
|
|
|
31.9
|
%
|
West
|
|
|
36.3
|
%
|
|
|
37.1
|
%
|
Southeast
|
|
|
5.1
|
%
|
|
|
11.4
|
%
|
Midwest
|
|
|
4.7
|
%
|
|
|
5.8
|
%
|
Northeast
|
|
|
3.7
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Southwest
|
|
|
56.0
|
%
|
|
|
41.2
|
%
|
West
|
|
|
31.1
|
%
|
|
|
32.9
|
%
|
Midwest
|
|
|
5.1
|
%
|
|
|
6.5
|
%
|
Southeast
|
|
|
4.1
|
%
|
|
|
10.3
|
%
|
Northeast
|
|
|
3.7
|
%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
F-26
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below are tables showing the composition of Main
Streets core investment portfolio by industry at cost and
fair value as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
Cost:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Industrial equipment
|
|
|
12.0
|
%
|
|
|
6.6
|
%
|
Precast concrete manufacturing
|
|
|
11.3
|
%
|
|
|
|
|
Custom wood products
|
|
|
9.3
|
%
|
|
|
8.4
|
%
|
Agricultural services
|
|
|
8.3
|
%
|
|
|
11.6
|
%
|
Electronics manufacturing
|
|
|
7.6
|
%
|
|
|
9.5
|
%
|
Transportation/Logistics
|
|
|
6.6
|
%
|
|
|
6.7
|
%
|
Retail
|
|
|
6.5
|
%
|
|
|
3.3
|
%
|
Restaurant
|
|
|
6.1
|
%
|
|
|
3.4
|
%
|
Health care products
|
|
|
5.8
|
%
|
|
|
4.2
|
%
|
Mining and minerals
|
|
|
4.8
|
%
|
|
|
9.1
|
%
|
Manufacturing
|
|
|
4.7
|
%
|
|
|
12.0
|
%
|
Health care services
|
|
|
4.2
|
%
|
|
|
5.9
|
%
|
Professional services
|
|
|
4.1
|
%
|
|
|
3.3
|
%
|
Metal fabrication
|
|
|
3.4
|
%
|
|
|
4.6
|
%
|
Equipment rental
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
Infrastructure products
|
|
|
1.7
|
%
|
|
|
2.4
|
%
|
Information services
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
Industrial services
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
Distribution
|
|
|
0.1
|
%
|
|
|
2.2
|
%
|
Consumer products
|
|
|
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
F-27
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Precast concrete manufacturing
|
|
|
13.7
|
%
|
|
|
|
|
Industrial equipment
|
|
|
10.2
|
%
|
|
|
6.0
|
%
|
Agricultural services
|
|
|
8.1
|
%
|
|
|
10.5
|
%
|
Electronics manufacturing
|
|
|
7.7
|
%
|
|
|
9.6
|
%
|
Retail
|
|
|
7.0
|
%
|
|
|
3.4
|
%
|
Custom wood products
|
|
|
6.8
|
%
|
|
|
7.5
|
%
|
Restaurant
|
|
|
6.7
|
%
|
|
|
4.5
|
%
|
Transportation/Logistics
|
|
|
6.5
|
%
|
|
|
6.6
|
%
|
Health care services
|
|
|
6.1
|
%
|
|
|
6.0
|
%
|
Health care products
|
|
|
5.8
|
%
|
|
|
4.1
|
%
|
Professional services
|
|
|
5.4
|
%
|
|
|
4.1
|
%
|
Manufacturing
|
|
|
5.1
|
%
|
|
|
9.5
|
%
|
Metal fabrication
|
|
|
4.3
|
%
|
|
|
4.2
|
%
|
Industrial services
|
|
|
2.8
|
%
|
|
|
2.9
|
%
|
Equipment rental
|
|
|
2.0
|
%
|
|
|
2.4
|
%
|
Information services
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
Infrastructure products
|
|
|
0.5
|
%
|
|
|
2.2
|
%
|
Distribution
|
|
|
0.4
|
%
|
|
|
2.4
|
%
|
Mining and minerals
|
|
|
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Main Streets core portfolio investments are generally in
lower middle-market companies conducting business in a variety
of industries. At December 31, 2008, Main Street had one
investment that was greater than 10% of its total core
investment portfolio at fair value. That investment represented
approximately 13.8% of the portfolio at fair value. At
December 31, 2007, Main Street had one investment that was
greater than 10% of its total core investment portfolio at fair
value. That investment represented approximately 10.5% of the
core 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, the
Investment Manager is accounted for as a portfolio investment of
Main Street, since the Investment Manager is not an investment
company and since it conducts a significant portion of its
investment management activities for Main Street Capital II, LP
(MSC II), a separate SBIC fund, which is not part of
MSCC or one of its subsidiaries. The Investment Manager receives
recurring investment management fees from MSC II pursuant to a
separate investment advisory agreement, paid quarterly, which
currently total $3.3 million per year. The portfolio
investment in the Investment Manager is accounted for using fair
value accounting, with the fair value determined by Main Street
and approved, in good faith, by Main Streets Board of
Directors, based on the same valuation methodologies applied to
determine the original $18 million valuation. The original
valuation for the Investment Manager was based on the estimated
present value of the net cash flows received for investment
management services provided to MSC II, over the estimated
dollar averaged life of the related management contract, and was
also based on comparable public market transactions. The net
cash flows utilized in the valuation of the Investment Manager
exclude any revenues and expenses from all related parties
(including MSCC) but include the management fees from MSC II and
an estimated allocation of costs related to providing services
to MSC II. Any change in fair value of the
F-28
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment Manager investment is recognized on Main
Streets 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 Streets balance sheet. Main Street believes that the
valuation for the Investment Manager will decrease over the life
of the management contract with MSC II, absent obtaining
additional recurring cash flows from performing investment
management activities for other external investment entities.
The Investment Manager has elected, for tax purposes, to be
treated as a taxable entity and is taxed at normal corporate tax
rates based on its taxable income. The taxable income of the
Investment Manager may differ from its book income due to
temporary book and tax timing differences, as well as permanent
differences. The Investment Manager provides for any current
taxes payable and deferred tax items in its separate 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 investment management
fees received from MSC II. As a wholly owned subsidiary of MSCC,
the Investment Manager manages the
day-to-day
operational and investment activities of MSCC and its
subsidiaries, as well as the investment activities of MSC II.
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 MSCCs 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 for its excess expenses
associated with providing investment management and other
services to MSCC and its subsidiaries, as well as MSC II. Each
quarter, as part of the support services agreement, MSCC makes
payments to cover all expenses incurred by the Investment
Manager, less the recurring management fees that the Investment
Manager receives from MSC II pursuant to a long-term investment
advisory services agreement. For the year ended
December 31, 2008, the expenses reimbursed by MSCC to the
Investment Manager were approximately $1.0 million. For the
period from October 2, 2007 through December 31, 2007,
no expenses were reimbursed by MSCC to the Investment Manager.
In its separate stand alone financial statements as presented
below, the Investment Manager recognized an $18 million
intangible asset related to the investment advisory agreement
with MSC II and 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. Because the $18 million
value
attributed to MSCCs 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 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. As of
December 31, 2008, the Investment Manager recognized
$1,174,207 in cumulative amortization expense associated with
the intangible asset. Amortization expense is not included in
the expenses reimbursed by MSCC to the Investment
Manager based
upon the support services agreement between the two entities
since it is non-cash in nature.
F-29
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information from the separate financial
statements of the Investment Manager is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Cash
|
|
$
|
20,772
|
|
|
$
|
86,439
|
|
Accounts receivable
|
|
|
17,990
|
|
|
|
14,142
|
|
Accounts receivable MSCC
|
|
|
302,633
|
|
|
|
|
|
Intangible asset (net of accumulated amortization of $1,174,207
as of December 31, 2008)
|
|
|
16,825,793
|
|
|
|
18,000,000
|
|
Deposits and other
|
|
|
103,392
|
|
|
|
29,094
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,270,580
|
|
|
$
|
18,129,675
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accounts payable MSCC
|
|
$
|
|
|
|
$
|
207,898
|
|
Accrued liabilities
|
|
|
589,360
|
|
|
|
66,349
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
589,360
|
|
|
|
274,247
|
|
Equity
|
|
|
16,681,220
|
|
|
|
17,855,428
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
17,270,580
|
|
|
$
|
18,129,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
October 2,
|
|
|
|
|
|
|
2007
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Management fee income from Main Street Capital II
|
|
$
|
3,325,200
|
|
|
$
|
831,300
|
|
Other management advisory fees
|
|
|
47,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
3,372,950
|
|
|
|
831,300
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Salaries, benefits and other personnel costs
|
|
|
(3,483,336
|
)
|
|
|
(612,377
|
)
|
Occupancy expense
|
|
|
(184,285
|
)
|
|
|
(45,343
|
)
|
Professional expenses
|
|
|
(81,208
|
)
|
|
|
(57,703
|
)
|
Amortization expense intangible asset
|
|
|
(1,174,207
|
)
|
|
|
|
|
Other
|
|
|
(630,956
|
)
|
|
|
(115,877
|
)
|
Expense reimbursement from MSCC
|
|
|
1,006,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net expenses
|
|
|
(4,547,157
|
)
|
|
|
(831,300
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,174,207
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the Formation Transactions and the IPO, the Fund
had a
separate investment advisory agreement with the Investment
Manager which provided for recurring management
fees to be paid
from the Fund to the Investment Manager. As part of
this
agreement, the Investment Manager was responsible for
managing
the day-to-day operational and
investment activities of the
Fund. Subsequent to the Formation Transactions and IPO, the Fund
has not paid any management fees
to the Investment Manager since
both entities
are now
F-30
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
wholly owned by MSCC. Management fees paid by the
Fund to the
Investment Manager, prior to the Formation Transactions and
IPO,
for the years ended December 31, 2007 and 2006 were
$1,499,937 and $1,942,032, respectively.
|
|
NOTE E
|
DEFERRED
FINANCING COSTS
|
Deferred financing costs balances as of December 31, 2008
and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
SBIC debenture commitment fees
|
|
$
|
550,000
|
|
|
$
|
550,000
|
|
SBIC debenture leverage fees
|
|
|
1,367,575
|
|
|
|
1,367,575
|
|
Other
|
|
|
673,700
|
|
|
|
282,512
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,591,275
|
|
|
|
2,200,087
|
|
Accumulated amortization
|
|
|
(956,037
|
)
|
|
|
(529,952
|
)
|
|
|
|
|
|
|
|
|
|
Ending deferred financing costs balance
|
|
$
|
1,635,238
|
|
|
$
|
1,670,135
|
|
|
|
|
|
|
|
|
|
|
Estimated aggregate amortization expense for each of the five
years succeeding December 31, 2008 and thereafter is as
follows:
|
|
|
|
|
|
|
Estimated
|
|
Years Ending December 31,
|
|
Amortization
|
|
|
2009
|
|
$
|
402,091
|
|
2010
|
|
$
|
316,689
|
|
2011
|
|
$
|
295,867
|
|
2012
|
|
$
|
191,758
|
|
2013
|
|
$
|
182,424
|
|
2014 and thereafter
|
|
$
|
246,409
|
|
SBIC debentures payable at both December 31, 2008 and
2007
was $55,000,000. SBIC debentures provide for interest to be paid
semi-annually with principal due at the applicable
10-year
maturity date. Main Street paid interest on the SBIC debentures
of $3,188,015 and $2,852,002 for the years ended 2008 and
2007,
respectively. The weighted average interest rate as of
December 31, 2008 and 2007 was
5.78%. The first principal
maturity due under the existing SBIC debentures is in 2013. Main
Street is subject to regular compliance examinations by the SBA.
There have been no historical findings resulting from these
examinations.
F-31
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SBIC Debentures payable at December 31, 2008 and 2007
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
|
Pooling Date
|
|
Date
|
|
|
Rate
|
|
|
Amount
|
|
|
9/24/2003
|
|
|
9/1/2013
|
|
|
|
5.76
|
%
|
|
$
|
4,000,000
|
|
3/24/2004
|
|
|
3/1/2014
|
|
|
|
5.01
|
%
|
|
|
3,000,000
|
|
9/22/2004
|
|
|
9/1/2014
|
|
|
|
5.57
|
%
|
|
|
9,000,000
|
|
9/22/2004
|
|
|
9/1/2014
|
|
|
|
5.54
|
%
|
|
|
6,000,000
|
|
3/23/2005
|
|
|
3/1/2015
|
|
|
|
5.93
|
%
|
|
|
2,000,000
|
|
3/23/2005
|
|
|
3/1/2015
|
|
|
|
5.89
|
%
|
|
|
2,000,000
|
|
9/28/2005
|
|
|
9/1/2015
|
|
|
|
5.80
|
%
|
|
|
19,100,000
|
|
3/28/2007
|
|
|
3/1/2017
|
|
|
|
6.23
|
%
|
|
|
3,900,000
|
|
3/28/2007
|
|
|
3/1/2017
|
|
|
|
6.26
|
%
|
|
|
1,000,000
|
|
3/28/2007
|
|
|
3/1/2017
|
|
|
|
6.32
|
%
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
$
|
55,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G
|
INVESTMENT
AND TREASURY CREDIT FACILITIES
|
On October 24, 2008, Main Street entered into a
$30 million, three-year investment credit facility (the
Investment Facility) with Branch Banking and
Trust Company (BB&T) and Compass Bank, as
lenders, and BB&T, as administrative agent for the lenders.
The purpose of the Investment Facility is to provide additional
liquidity in support of future investment and operational
activities. The Investment Facility allows for an increase in
the total size of the facility up to $75 million, subject
to certain conditions, and has a maturity date of
October 24, 2011. Borrowings under the Investment Facility
bear interest, subject to Main Streets election, on a per
annum basis equal to (i) the applicable LIBOR rate plus
2.75% or (ii) the applicable base rate plus 0.75%. Main
Street will pay unused commitment fees of 0.375% per annum on
the average unused lender commitments under the Investment
Facility. The Investment Facility is secured by certain assets
of MSCC, MSEI and the Investment Manager. The Investment
Facility contains certain affirmative and negative covenants,
including but not limited to: (i) maintaining a minimum
liquidity of not less than 10% of the aggregate principal amount
outstanding, (ii) maintaining an interest coverage ratio of
at least 2.00 to 1.00, and (iii) maintaining a minimum
tangible net worth. At December 31, 2008, Main Street had
no borrowings outstanding under the Investment Facility, and
Main Street was in compliance with all covenants of the
Investment Facility.
On December 31, 2007, Main Street entered into a
treasury-based credit facility (the Treasury
Facility) among Main Street, Wachovia Bank, National
Association and BB&T, as administrative agent for the
lenders. The purpose of the Treasury Facility is to provide
flexibility in the sizing of portfolio investments and to
facilitate the growth of Main Streets investment
portfolio. Under the Treasury Facility, the lenders had agreed
to extend revolving loans to Main Street in an amount not to
exceed $100 million; however, due to the maturation of Main
Streets investment portfolio and the additional
flexibility provided by the Investment Facility, Main Street
unilaterally reduced the Treasury Facility from
$100 million to $50 million during October 2008. The
reduction in the size of the Treasury Facility will reduce the
amount of unused commitment fees paid by Main Street. The
Treasury Facility has a two-year term and bears interest, at
Main Streets option, either (i) at the LIBOR rate or
(ii) at a published prime rate of interest, plus 0.25% in
each case. The applicable interest rates under the Treasury
Facility would be increased by 0.15% if usage under the Treasury
Facility is in excess of 50% of the days within a given calendar
quarter. The Treasury Facility requires payment of 0.15% per
annum in unused commitment fees based on average daily unused
balances under the facility. The Treasury Facility is secured by
certain securities accounts maintained for Main Street by
BB&T
F-32
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and is also guaranteed by Main Streets wholly-owned
Investment Manager. The Treasury Facility contains certain
affirmative and negative covenants, including but not limited
to: (i) maintaining a cash
collateral coverage ratio of at least
1.01 to 1.0, (ii)
maintaining an interest coverage ratio of
at least 2.0 to 1.0, and (iii) maintaining a minimum
tangible net worth. At December 31, 2008, Main Street had
no borrowings outstanding under the Treasury Facility, and
Main
Street was in compliance with all covenants of the Treasury
Facility.
|
|
NOTE H
|
FINANCIAL
HIGHLIGHTS
|
The financial highlights are prepared in accordance with the
guidance on exchanges of shares between entities under common
control contained in SFAS 141, with ratios and per share
amounts calculated as if the Formation Transactions and the IPO
had occurred as of January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Per Share Data:
|
|
2008
|
|
|
2007
|
|
|
Net asset value at beginning of period
|
|
$
|
12.85
|
|
|
$
|
4.90
|
|
Net investment income(1)
|
|
|
1.15
|
|
|
|
0.76
|
|
Net realized gains(1)(2)
|
|
|
0.16
|
|
|
|
0.55
|
|
Net change in unrealized depreciation on investments(1)(2)
|
|
|
(0.44
|
)
|
|
|
(0.63
|
)
|
Income tax benefit (provision)(1)
|
|
|
0.35
|
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations(1)
|
|
|
1.22
|
|
|
|
0.30
|
|
Net increase in net assets associated with the Formation
Transactions and the Offering
|
|
|
|
|
|
|
8.66
|
|
Net decrease in net assets from dividends paid to stockholders
|
|
|
(1.43
|
)
|
|
|
(0.33
|
)
|
Net decrease in net assets from dividends declared as of
December 31, 2008 for the January 15,
2009 monthly dividend
|
|
|
(0.13
|
)
|
|
|
|
|
Net decrease in net assets from distributions to partners, net
of contributions(3)
|
|
|
|
|
|
|
(0.72
|
)
|
Increase due to shares issued pursuant to the dividend
reinvestment plan
|
|
|
0.02
|
|
|
|
0.22
|
|
Increase due to share-based compensation
|
|
|
0.06
|
|
|
|
|
|
Accretive effect of share repurchase program (repurchases below
net asset value)
|
|
|
0.01
|
|
|
|
|
|
Other(4)
|
|
|
(0.40
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Net asset value at December 31, 2008 and 2007
|
|
$
|
12.20
|
|
|
$
|
12.85
|
|
|
|
|
|
|
|
|
|
|
Market value at December 31, 2008 and 2007
|
|
$
|
9.77
|
|
|
$
|
14.01
|
|
Shares outstanding at December 31, 2008 and 2007
|
|
|
9,206,483
|
|
|
|
8,959,718
|
|
|
|
|
(1) |
|
Based on weighted average number of common shares outstanding
for the period. |
|
(2) |
|
Net realized gains and net change in unrealized appreciation or
depreciation can fluctuate significantly from period to period. |
|
(3) |
|
Net of partner contributions made during the period. |
|
(4) |
|
Represents the impact of the different share amounts used in
calculating per share data 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. |
F-33
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
Net assets at end of period
|
|
$
|
112,356,056
|
|
|
$
|
115,149,208
|
|
|
$
|
43,272,531
|
|
Average net assets
|
|
$
|
114,977,272
|
|
|
$
|
56,882,526
|
|
|
$
|
38,621,188
|
|
Average outstanding debt
|
|
$
|
55,000,000
|
|
|
$
|
53,020,000
|
|
|
$
|
45,100,000
|
|
Ratio of total expenses, excluding interest expense, to average
net assets(2)(4)
|
|
|
2.79
|
%
|
|
|
4.76
|
%
|
|
|
5.54
|
%
|
Ratio of total expenses to average net assets(2)(4)
|
|
|
6.07
|
%
|
|
|
10.47
|
%
|
|
|
12.58
|
%
|
Ratio of net investment income to average net assets(2)(4)
|
|
|
8.97
|
%
|
|
|
11.47
|
%
|
|
|
12.70
|
%
|
Total return based on change in net asset value(3)(5)
|
|
|
9.84
|
%
|
|
|
5.88
|
%
|
|
|
47.56
|
%
|
|
|
|
(1) |
|
The amounts reflected in the financial highlights represent the
combined general partner and limited partner amounts. |
|
(2) |
|
The Investment Manager voluntarily waived $48,000 of management
fees for the year ended December 31, 2006. |
|
(3) |
|
Total return based on change in net asset value was calculated
using the sum of ending net asset value plus distributions to
stockholders and/or members and partners during the period less
capital contributions during the period, as divided by the
beginning net asset value. |
|
(4) |
|
The December 31, 2007 ratio includes the impact of
professional costs related to the IPO. These costs were 25.7%
and 11.7% of operating expense and total expenses, respectively,
for that period. |
|
(5) |
|
For the period prior to the Formation Transactions, this ratio
combines the total return for both the managing investors (the
General Partner) and the non-managing investors (limited
partners). |
|
|
NOTE I
|
DIVIDENDS,
DISTRIBUTIONS AND TAXABLE INCOME
|
In September 2008, Main Street announced that it would begin
making dividend payments on a monthly, as opposed to a
quarterly, basis beginning in October 2008. Main Streets
Board of Directors declared monthly dividends of $0.125 per
share for each of October, November and December 2008.
For the year ended December 31, 2008, Main Streets
Board of Directors declared dividends of approximately
$14.1 million or $1.55 per share of common stock, with
$13.0 million or $1.425 per share paid to stockholders
during 2008 and $1.1 million or $0.125 per share accrued
based upon record date as of December 31, 2008 for the
January 2009 monthly dividend. The dividends were comprised
of ordinary income totaling $8.6 million, or $0.95 per
share, and long term capital gain totaling $5.5 million, or
$0.60 per share. During the period from October 2, 2007
(the date of the Formation Transactions) through
December 31, 2007, Main Streets Board of Directors
declared a dividend of $2.9 million, or $0.33 per common
share. The dividend was comprised of ordinary income totaling
$0.9 million, or $0.105 per share, and long term capital
gain totaling $2.0 million, or $0.225 per share. Ordinary
dividend distributions from a RIC do not qualify for the 15%
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.
MSCC has elected to be treated for federal income tax purposes
as a RIC on its 2007 tax return. As a RIC, Main Street generally
will not pay corporate-level federal income taxes on any net
ordinary income or capital gains that Main Street distributes to
its stockholders as dividends. Main Street must distribute at
least 90% of its investment company taxable income to qualify
for pass-through tax treatment and maintain its RIC status. Main
Street has distributed and currently intends to distribute
sufficient dividends to qualify as a RIC.
F-34
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As part of maintaining RIC status, dividends 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 Main Streets
federal income tax return. Main Street will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the companys annual taxable income for a given year
exceeds the distributions for such year. For the years ended
December 31, 2008 and 2007, estimated annual taxable income
exceeded dividend distributions from such taxable income, and
accordingly, Main Street accrued to Income tax provision
(benefit) an excise tax of $112,625 on the 2008 estimated
excess taxable income carried forward into 2009 and $60,000 on
the 2007 estimated excess taxable income carried forward into
2008. For the year ended December 31, 2008, estimated
excess taxable income carried forward into 2009 totaled
$2,799,963 million and was reduced by, for tax purposes,
the monthly dividend paid in January 2009 since it was declared
and accrued prior to December 31, 2008. This tax treatment
resulted in a reduction of the 2008 excise taxes required to be
paid. Excluding the impact for this tax treatment of the January
2009 dividend, Main Street estimates that it generated
undistributed taxable income of $3,952,448 million during
2008 that will be carried forward toward distributions paid in
2009. For the year ended December 31, 2007, excess taxable
income carried forward into 2008 totaled $1,481,131 million.
Main Streets wholly-owned subsidiary, MSEI, is a taxable
entity which holds certain portfolio investments of Main Street.
MSEI is consolidated with Main Street, and the portfolio
investments held by MSEI are included in Main Streets
consolidated financial statements. The purpose of MSEI is to
permit Main Street to hold portfolio companies which are
pass through entities for tax purposes in order to
comply with the source income requirements contained
in the RIC tax provisions of the Code. MSEI is not consolidated
with Main Street for income tax purposes and may generate income
tax expense or income tax benefit as a result of its ownership
of the portfolio investments. This income tax expense or
benefit, if any, is reflected in Main Streets Consolidated
Statement of Operations. For the year ended December 31,
2008, Main Street recognized an income tax benefit of $3,182,401
primarily related to non-cash deferred taxes on unrealized
depreciation for certain portfolio investments that are owned by
MSEI. Main Street does not anticipate having this level of
income tax benefit in future periods. For the period from
October 2, 2007 (the date of the Formation Transactions)
through December 31, 2007, Main Street recognized a
cumulative income tax expense of $3,262,539 primarily related to
non-cash deferred taxes on unrealized appreciation from
portfolio investments that were contributed to MSEI.
Main Streets provision for income taxes, including MSEI,
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
663,767
|
|
|
$
|
162,274
|
|
State
|
|
|
188,560
|
|
|
|
14,593
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense (benefit)
|
|
|
852,327
|
|
|
|
176,867
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,061,969
|
)
|
|
|
2,967,286
|
|
State
|
|
|
(85,384
|
)
|
|
|
58,386
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense (benefit)
|
|
|
(4,147,353
|
)
|
|
|
3,025,672
|
|
Excise tax
|
|
|
112,625
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
(3,182,401
|
)
|
|
$
|
3,262,539
|
|
|
|
|
|
|
|
|
|
|
Listed below is a reconciliation of Net Increase in Net
Assets Resulting From Operations to taxable income and to
total distributions to common stockholders for the years ended
December 31, 2008 and 2007.
F-35
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Estimated)
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
10,933,939
|
|
|
$
|
2,544,876
|
|
Earnings prior to Formation Transactions
|
|
|
|
|
|
|
(5,819,311
|
)
|
Share-based compensation
|
|
|
511,452
|
|
|
|
|
|
Net change in unrealized depreciation on investments
|
|
|
3,961,092
|
|
|
|
4,597,897
|
|
Income tax provision (benefit)
|
|
|
(3,182,401
|
)
|
|
|
3,262,539
|
|
Pre-tax loss (income) of taxable subsidiary, MSEI, not
consolidated for tax purposes
|
|
|
2,182,580
|
|
|
|
(126,624
|
)
|
Book income and tax income differences, including debt
origination, structuring fees and realized gains
|
|
|
1,033,436
|
|
|
|
(65,426
|
)
|
|
|
|
|
|
|
|
|
|
Taxable income(1)
|
|
|
15,440,098
|
|
|
|
4,393,951
|
|
Taxable income earned in prior year and carried forward for
distribution in current year
|
|
|
1,481,131
|
|
|
|
|
|
Taxable income earned in current year and carried forward for
distribution
|
|
|
(2,799,963
|
)
|
|
|
(1,481,131
|
)
|
|
|
|
|
|
|
|
|
|
Total distributions declared to common stockholders
|
|
$
|
14,121,266
|
|
|
$
|
2,912,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Main Streets taxable income for 2008 is an estimate and
will not be finally determined until the company files its 2008
tax return in September 2009. Therefore, the final taxable
income, and the taxable income earned in 2008 and carried
forward for distribution in 2009, may be different than this
estimate. |
The net deferred tax asset at December 31, 2008 was
$1,121,681 and primarily related to timing differences from
recognition of unrealized losses from debt and equity
investments in portfolio companies as well as timing differences
from taxable income from equity investments in portfolio
companies which are flow through entities. The net deferred tax
liability at December 31, 2007 was $3,025,672 and primarily
related to timing differences from recognition of unrealized
gains from equity investments in portfolio companies. Management
believes that the realization of the deferred tax asset is more
likely than not based on expectations as to future taxable
income and scheduled reversals of temporary differences.
Accordingly, Main Street did not record a valuation allowance at
December 31, 2008.
Prior to the Formation Transactions, Main Street was taxed under
the partnership provisions of the Code. Under these provisions
of the Code, the General Partner and limited partners are
responsible for reporting their share of the partnerships
income or loss on their income tax returns. Taxable income
generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the
recognition of income and expenses, and generally excludes net
unrealized appreciation or depreciation, as gains or losses are
not included in taxable income until they are realized. Listed
below is a reconciliation of Net Increase in Net Assets
Resulting From Operations to taxable income for the year ended
December 31, 2006.
F-36
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Net increase in members equity and partners capital
resulting from operations
|
|
$
|
15,822,997
|
|
Net change in unrealized depreciation from investments
|
|
|
(8,488,514
|
)
|
Accrual basis to cash basis adjustments:
|
|
|
|
|
Deferred debt origination fees included in taxable income
|
|
|
709,980
|
|
Accretion of unearned fee income for book income
|
|
|
(517,649
|
)
|
Net change in interest receivable
|
|
|
(93,480
|
)
|
Net change in interest payable
|
|
|
83,459
|
|
Portfolio company pass through taxable income (loss)
|
|
|
610,866
|
|
Other
|
|
|
(321,295
|
)
|
|
|
|
|
|
Taxable income
|
|
$
|
7,806,364
|
|
|
|
|
|
|
|
|
NOTE J
|
COMMON
STOCK AND SHARE REPURCHASE PROGRAM
|
On November 13, 2008, Main Street announced that its Board
of Directors authorized its officers, in their discretion and
subject to compliance with the 1940 Act and other applicable
law, to purchase on the open market or in privately negotiated
transactions, an amount up to $5 million of the outstanding
shares of Main Streets common stock at prices per share
not to exceed Main Streets last reported net asset value
per share. The share repurchase program is authorized to be in
effect through the earlier of December 31, 2009 or such
time as the approved $5 million repurchase amount has been
fully utilized. Main Street can not assure the extent that it
will conduct future open market purchases. The share repurchase
program does not require Main Street to repurchase any specific
number of shares and may be discontinued at any time. Shares
purchased under the repurchase program will be accounted for as
treasury stock until such time as the shares are cancelled or
reissued. During November and December 2008, Main Street
purchased 34,700 shares in connection with the repurchase
program at a weighted average cost of $9.54 per share.
On October 2, 2007, Main Street initiated the Formation
Transactions and acquired 100% of the equity interests in the
Fund, the General Partner and the Investment Manager in exchange
for 4,525,726 shares.
On October 4, 2007, Main Street completed the IPO. The IPO
consisted of the public offering and sale of
4,300,000 shares of common stock, including the
underwriters exercise of the over-allotment option, at a
price to the public of $15.00 per share, resulting in net
proceeds of approximately $60.2 million, after deducting
underwriters commissions totaling approximately
$4.3 million.
|
|
NOTE K
|
PARTNERS
CAPITAL CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS
|
Prior to the Formation Transactions, the Fund had received
irrevocable commitments from investors to contribute capital of
$26,665,548, which had been substantially paid in through the
date of the Formation Transactions (October 2, 2007).
The Fund is a licensed SBIC, and prior to the Formation
Transactions, was able to make distributions of cash
and/or
property only at such times as permitted by the SBIC Act and as
determined under the Partnership Agreement. Under the
Partnership Agreement, the General Partner was entitled to 20%
of the Funds distributions, subject to a
clawback provision that required the General Partner
to return an amount of allocated profits and distributions to
the Fund if, and to the extent that, distributions to the
General Partner over the life of the Fund caused the limited
partners of the Fund to receive cumulative distributions which
were less than their share (approximately 80%) of the cumulative
net profits of the Fund. The Fund made total distributions of
$6,500,000 and $6,174,297 (including a $530,000 return of
capital distribution) from January 1,
F-37
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007 through the date of the Formation Transactions
(October 2, 2007) and for the year ended
December 31, 2006, respectively.
|
|
NOTE L
|
DIVIDEND
REINVESTMENT PLAN (DRIP)
|
Main Streets 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 companys 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 MSCCs common stock on the valuation
date determined by Main Streets 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.
For the year ended December 31, 2008, $4,918,649 of the
total $12,968,780 in dividends paid to stockholders that were
attributable to 2008 represented DRIP participation, and
382,794 shares of common stock were purchased in the open
market to satisfy the DRIP participation requirements.
Additionally, 15,820 shares valued at $213,729 were issued
to satisfy remaining DRIP obligations. During December 2008,
Main Street funded $400,000 to its dividend reinvestment plan
administrator for the purchase of common stock in the open
market to satisfy the DRIP participation requirements in
connection with the January 2009 monthly dividend. For the
year ended December 31, 2007, $1,903,116 of the total
$2,912,820 in dividends paid to stockholders represented DRIP
participation and 132,992 shares of common stock were
issued to satisfy the DRIP participation requirements. The
shares disclosed above relate only to Main Streets DRIP
and exclude any activity related to broker-managed dividend
reinvestment plans.
|
|
NOTE M
|
SHARE-BASED
COMPENSATION
|
Main Street accounts for its share-based compensation plan using
the fair value method, as prescribed by SFAS 123R.
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 will amortize this
fair value into share-based compensation expense over the
requisite service period or vesting term.
On July 1, 2008, Main Streets Board of Directors
approved the issuance of 245,645 shares of restricted stock
to Main Street employees pursuant to the Main Street Capital
Corporation 2008 Equity Incentive Plan. These shares will vest
over a four-year period from the grant date and will be expensed
over a four-year service period starting on the grant date.
On July 1, 2008, a total of 20,000 shares of
restricted stock were issued to Main Streets independent
directors pursuant to the Main Street Capital Corporation 2008
Non-Employee Director Restricted Stock Plan. One-half of those
shares vested immediately on the grant date, and the remaining
half will vest on the day immediately preceding the next annual
meeting at which Main Street stockholders elect directors,
provided that these independent directors have been in
continuous service as members of the Board through such date. As
a result, 50% of those shares were expensed during July 2008
with the remaining 50% to be expensed over a one-year service
period starting on the grant date.
For the year ended December 31, 2008, Main Street
recognized total share-based compensation expense of $511,452
related to the restricted stock issued to Main Street employees
and Main Streets independent directors. As of
December 31, 2008, there were no forfeitures of non-vested
restricted shares.
F-38
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, there was $2,380,167 of total
unrecognized compensation cost related to Main Streets
non-vested restricted shares. This cost is expected to be
recognized over a weighted-average period of approximately
3.25 years.
|
|
NOTE N
|
EARNINGS
PER SHARE
|
The following table summarizes our calculation of basic and
diluted earnings per share for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Consolidated)
|
|
|
(Consolidated)
|
|
|
(Combined)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
10,933,939
|
|
|
$
|
2,544,876
|
|
|
$
|
15,822,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
8,967,383
|
|
|
|
8,587,701
|
|
|
|
N/A
|
|
Dilutive effect of restricted stock on which forfeiture
provisions have not lapsed
|
|
|
3,681
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average shares outstanding
|
|
|
8,971,064
|
|
|
|
8,587,701
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.22
|
|
|
$
|
0.30
|
|
|
|
N/A
|
|
Diluted
|
|
$
|
1.22
|
|
|
$
|
0.30
|
|
|
|
N/A
|
|
We use the treasury stock method to calculate diluted earnings
per share. We include non-vested restricted shares in our
calculation of diluted earnings per share when we believe it is
probable the requisite service period criteria will be met and
the forfeiture provisions have not lapsed.
At December 31, 2008, Main Street had two outstanding
commitments to fund unused revolving loans for up to $900,000.
|
|
NOTE P
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
Listed below are the supplemental cash flow disclosures for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest paid
|
|
$
|
3,306,313
|
|
|
$
|
2,852,002
|
|
|
$
|
2,475,926
|
|
Taxes paid
|
|
$
|
355,053
|
|
|
$
|
|
|
|
$
|
|
|
Non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for Investment in the Investment Manager
|
|
$
|
|
|
|
$
|
18,000,000
|
|
|
$
|
|
|
Issuance of shares for dividend reinvestment plan
|
|
$
|
213,729
|
|
|
$
|
1,903,116
|
|
|
$
|
|
|
F-39
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE Q
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Qtr. 1
|
|
|
Qtr. 2
|
|
|
Qtr. 3
|
|
|
Qtr. 4
|
|
|
Total investment income
|
|
$
|
4,027,366
|
|
|
$
|
4,176,911
|
|
|
$
|
4,457,324
|
|
|
$
|
4,633,825
|
|
Net investment income
|
|
$
|
2,504,062
|
|
|
$
|
2,586,575
|
|
|
$
|
2,529,950
|
|
|
$
|
2,694,549
|
|
Net increase in net assets resulting from operations
|
|
$
|
3,202,636
|
|
|
$
|
4,488,097
|
|
|
$
|
2,673,703
|
|
|
$
|
569,503
|
|
Net investment income per share-basic and diluted
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
Net increase in net assets resulting from operations per
share-basic and diluted
|
|
$
|
0.36
|
|
|
$
|
0.50
|
|
|
$
|
0.30
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Qtr. 1
|
|
|
Qtr. 2
|
|
|
Qtr. 3
|
|
|
Qtr. 4
|
|
|
Total investment income
|
|
$
|
2,412,577
|
|
|
$
|
3,142,284
|
|
|
$
|
3,127,383
|
|
|
$
|
3,792,734
|
|
Net investment income
|
|
$
|
1,170,179
|
|
|
$
|
970,897
|
|
|
$
|
1,745,144
|
|
|
$
|
2,635,479
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
1,779,474
|
|
|
$
|
1,330,897
|
|
|
$
|
2,708,941
|
|
|
$
|
(3,274,436
|
)
|
Net investment income per share-basic and diluted
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
Net increase in net assets resulting from operations per
share-basic and diluted
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.32
|
|
|
$
|
(0.37
|
)
|
|
|
NOTE R
|
RELATED
PARTY TRANSACTIONS
|
We co-invested with MSC II in several existing portfolio
investments prior to the IPO, but did not co-invest with MSC
II
subsequent to the IPO and prior to June 2008.
In June 2008, we
received exemptive relief from the SEC to allow us to resume
co-investing with MSC II in accordance with the
terms of such
exemptive relief. MSC II is managed by the Investment Manager,
and the Investment Manager is wholly owned by MSCC. MSC II is an
SBIC fund with similar investment objectives to Main Street and
which began its investment operations in January 2006. The
co-investments among Main Street and MSC II had all been made at
the same time and on the same terms and conditions. The
co-investments were also made in accordance with the Investment
Managers conflicts policy and in accordance with the
applicable SBIC conflict of interest regulations.
As discussed further in Note D to the accompanying
consolidated financials statements, Main Street paid certain
management fees to the Investment Manager during the year ended
December 31, 2007. Subsequent to the completion of the
Formation Transactions, the Investment Manager is a wholly owned
portfolio company of Main Street. At December 31, 2008 and
2007, the Investment Manager had a receivable of $302,633 and a
payable of $207,783, respectively, with MSCC related to
recurring expenses required to support MSCCs business.
|
|
NOTE S
|
SUBSEQUENT
EVENTS
|
The recently enacted American Recovery and Reinvestment Act of
2009 (the 2009 Stimulus Bill) contains several
provisions applicable to SBIC funds, including the Fund,
Main
Streets wholly owned subsidiary. One of the key
SBIC-related provisions included in the 2009 Stimulus Bill
increases the maximum amount of combined SBIC leverage (or SBIC
leverage cap) to $225 million for affiliated SBIC funds.
The prior maximum amount of SBIC leverage available to
affiliated SBIC funds was approximately $137 million, as
adjusted annually based upon changes in the Consumer Price
Index. Due to the increase in the maximum
F-40
MAIN
STREET CAPITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amount of SBIC leverage available to affiliated SBIC funds, Main
Street, through the Fund, will now have access to incremental
SBIC leverage to support its future investment activities. Since
the increase in the SBIC leverage cap applies to affiliated SBIC
funds, Main Street will allocate such increased borrowing
capacity between the Fund and MSC II, an independently owned
SBIC that is managed by Main Street and therefore deemed to be
affiliated with the Fund for SBIC regulatory purposes. It is
currently estimated that at least $55 million to
$60 million of additional SBIC leverage is now accessible
by Main Street, through the Fund, for future investment
activities, subject to the required capitalization of the Fund.
Under the provisions of SFAS 159 and related guidance in
EITF 96-19,
Debtors Accounting for Modification or Exchange of Debt
Instruments, Main Street is analyzing whether the additional
SBIC leverage provisions under the 2009 Stimulus Bill meet the
definition of a significant modification of debt which would
automatically create an election date for the fair value option
under SFAS 159.
F-41
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Main Street Capital Corporation
We have audited in accordance with the standards of the Public Company Accounting Oversight
Board (United States) the consolidated financial statements of Main Street Capital Corporation and
the combined financial statements of Main Street Mezzanine Fund, LP and Main Street Mezzanine
Management, LLC referred to in our report dated March 12, 2009, which is included in Amendment No.
2 to the Registration Statement and Prospectus. Our report on the consolidated financial
statements includes an explanatory paragraph, which discusses the adoption of Statement of
Financial Accounting Standards No. 157, Fair Value Measurements in 2008 as discussed
in Note B to
the consolidated financial statements. Our audits of the basic financial statements include the
accompanying financial statement Schedule 12-14 which is the responsibility of the Companys
management. In our opinion, this financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ GRANT THORNTON LLP
Houston, Texas
March 12, 2009
Schedule 12-14
MAIN
STREET CAPITAL CORPORATION
Schedule
of Investments in and Advances to Affiliates
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credited to
|
|
|
December 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
December 31,
|
|
Company
|
|
Investments(1)
|
|
Income(2)
|
|
|
2007 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2008 Value
|
|
|
CONTROL INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Café Brazil, LLC
|
|
12% Secured Debt
|
|
$
|
389,182
|
|
|
$
|
2,702,931
|
|
|
$
|
47,069
|
|
|
$
|
|
|
|
$
|
2,750,000
|
|
|
|
Member Units
|
|
|
30,681
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
250,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBT Nuggets, LLC
|
|
Prime plus 2% Secured Debt
|
|
|
12,067
|
|
|
|
354,678
|
|
|
|
5,322
|
|
|
|
360,000
|
|
|
|
|
|
|
|
14% Secured Debt
|
|
|
272,276
|
|
|
|
1,805,275
|
|
|
|
54,725
|
|
|
|
180,000
|
|
|
|
1,680,000
|
|
|
|
10% Secured Debt
|
|
|
2,292
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
150,000
|
|
|
|
Member Units
|
|
|
225,000
|
|
|
|
1,145,000
|
|
|
|
480,000
|
|
|
|
|
|
|
|
1,625,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
345,000
|
|
|
|
155,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceres Management, LLC
|
|
14% Secured Debt
|
|
|
271,426
|
|
|
|
|
|
|
|
2,402,492
|
|
|
|
29,891
|
|
|
|
2,372,601
|
|
(Lambs)
|
|
Member Units
|
|
|
|
|
|
|
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condit Exhibits, LLC
|
|
13% Current/5% PIK Secured Debt
|
|
|
245,195
|
|
|
|
|
|
|
|
2,310,454
|
|
|
|
37,260
|
|
|
|
2,273,194
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Manufacturing, LLC
|
|
Prime plus 1% Secured Debt
|
|
|
77,870
|
|
|
|
1,188,636
|
|
|
|
11,364
|
|
|
|
|
|
|
|
1,200,000
|
|
|
|
13% Secured Debt
|
|
|
298,308
|
|
|
|
1,809,216
|
|
|
|
170,784
|
|
|
|
100,000
|
|
|
|
1,880,000
|
|
|
|
Member Units
|
|
|
281,837
|
|
|
|
472,000
|
|
|
|
628,000
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
250,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawthorne Customs &
|
|
13% Secured Debt
|
|
|
185,862
|
|
|
|
1,304,693
|
|
|
|
17,295
|
|
|
|
150,000
|
|
|
|
1,171,988
|
|
Dispatch Services, LLC
|
|
Member Units
|
|
|
18,200
|
|
|
|
435,000
|
|
|
|
|
|
|
|
|
|
|
|
435,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
230,000
|
|
|
|
|
|
|
|
|
|
|
|
230,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydratec Holdings, LLC
|
|
12.5% Secured Debt
|
|
|
734,496
|
|
|
|
5,588,729
|
|
|
|
22,600
|
|
|
|
300,000
|
|
|
|
5,311,329
|
|
|
|
Prime plus 1% Secured Debt
|
|
|
93,363
|
|
|
|
1,825,911
|
|
|
|
654,000
|
|
|
|
900,000
|
|
|
|
1,579,911
|
|
|
|
Member Units
|
|
|
|
|
|
|
1,800,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
2,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jensen Jewelers of
|
|
Prime plus 2% Secured Debt
|
|
|
90,543
|
|
|
|
1,180,509
|
|
|
|
19,491
|
|
|
|
156,000
|
|
|
|
1,044,000
|
|
Idaho, LLC
|
|
13% Current/6% PIK Secured Debt
|
|
|
213,914
|
|
|
|
1,044,190
|
|
|
|
90,401
|
|
|
|
130,000
|
|
|
|
1,004,591
|
|
|
|
Member Units
|
|
|
63,888
|
|
|
|
815,000
|
|
|
|
|
|
|
|
435,000
|
|
|
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magna Card, Inc.
|
|
12% Secured Debt
|
|
|
|
|
|
|
|
|
|
|
1,958,776
|
|
|
|
1,958,776
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAPCO Precast, LLC
|
|
Prime plus 2% Secured Debt
|
|
|
455,227
|
|
|
|
|
|
|
|
4,040,000
|
|
|
|
347,692
|
|
|
|
3,692,308
|
|
|
|
18% Secured Debt
|
|
|
1,424,035
|
|
|
|
|
|
|
|
7,140,000
|
|
|
|
678,462
|
|
|
|
6,461,538
|
|
|
|
Member Units
|
|
|
1,811,206
|
|
|
|
|
|
|
|
5,100,000
|
|
|
|
|
|
|
|
5,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OMi Holdings, Inc.
|
|
12% Secured Debt
|
|
|
898,992
|
|
|
|
|
|
|
|
7,536,600
|
|
|
|
933,200
|
|
|
|
6,603,400
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
900,000
|
|
|
|
330,000
|
|
|
|
570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quest Design &
|
|
10% Secured Debt
|
|
|
178,312
|
|
|
|
3,964,853
|
|
|
|
204,139
|
|
|
|
3,568,992
|
|
|
|
600,000
|
|
Production LLC
|
|
0% Secured Debt
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
600,000
|
|
|
|
1,400,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
1,595,858
|
|
|
|
1,595,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TA Acquisition Group, LP
|
|
12% Secured Debt
|
|
|
386,811
|
|
|
|
1,813,789
|
|
|
|
56,211
|
|
|
|
1,870,000
|
|
|
|
|
|
|
|
Partnership Interest
|
|
|
96,211
|
|
|
|
3,435,000
|
|
|
|
|
|
|
|
3,435,000
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
3,450,000
|
|
|
|
|
|
|
|
3,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Innovations, LLC
|
|
12% Secured Debt
|
|
|
|
|
|
|
748,716
|
|
|
|
|
|
|
|
748,716
|
|
|
|
|
|
|
|
Prime Secured Debt
|
|
|
|
|
|
|
249,572
|
|
|
|
|
|
|
|
249,572
|
|
|
|
|
|
|
|
Member Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule 12-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credited to
|
|
|
December 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
December 31,
|
|
Company
|
|
Investments(1)
|
|
Income(2)
|
|
|
2007 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2008 Value
|
|
|
Universal Scaffolding &
|
|
Prime plus 1% Secured Debt
|
|
|
89,538
|
|
|
|
1,111,741
|
|
|
|
3,831
|
|
|
|
240,500
|
|
|
|
875,072
|
|
Equipment, LLC
|
|
13% Current/5% PIK Secured Debt
|
|
|
607,672
|
|
|
|
3,136,274
|
|
|
|
175,235
|
|
|
|
151,509
|
|
|
|
3,160,000
|
|
|
|
Member Units
|
|
|
|
|
|
|
1,025,000
|
|
|
|
|
|
|
|
1,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uvalco Supply, LLC
|
|
Equity
|
|
|
100,000
|
|
|
|
|
|
|
|
1,575,000
|
|
|
|
|
|
|
|
1,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wicks Acquisition, LLC
|
|
8% Secured Debt
|
|
|
|
|
|
|
|
|
|
|
78,000
|
|
|
|
78,000
|
|
|
|
|
|
|
|
12% Secured Debt
|
|
|
300
|
|
|
|
1,685,444
|
|
|
|
1,770,000
|
|
|
|
3,455,444
|
|
|
|
|
|
|
|
8% Secured Debt
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
12% Secured Debt
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
Member Units
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
360,000
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
210,000
|
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zieglers NYPD, LLC
|
|
Prime plus 2% Secured Debt
|
|
|
33,838
|
|
|
|
|
|
|
|
600,239
|
|
|
|
6,000
|
|
|
|
594,239
|
|
|
|
13% Current/5% PIK Secured Debt
|
|
|
164,258
|
|
|
|
|
|
|
|
2,705,579
|
|
|
|
42,142
|
|
|
|
2,663,437
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Control Investments disposed of during the year
|
|
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total-Control
|
|
$
|
9,754,325
|
|
|
$
|
46,207,157
|
|
|
$
|
47,898,465
|
|
|
$
|
28,563,014
|
|
|
$
|
65,542,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Millwork Company, Inc.
|
|
12% Secured Debt
|
|
$
|
394,820
|
|
|
$
|
2,547,510
|
|
|
$
|
426,620
|
|
|
$
|
18,688
|
|
|
$
|
2,955,442
|
|
|
|
Warrants
|
|
|
|
|
|
|
87,120
|
|
|
|
10,688
|
|
|
|
97,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Sensor
|
|
Prime plus .5% Secured Debt
|
|
|
363,486
|
|
|
|
3,404,755
|
|
|
|
395,245
|
|
|
|
|
|
|
|
3,800,000
|
|
Technologies, Inc.
|
|
Warrants
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlton Global
|
|
13% PIK Secured Debt
|
|
|
|
|
|
|
2,618,421
|
|
|
|
104,166
|
|
|
|
2,722,587
|
|
|
|
|
|
Resources, LLC
|
|
Member Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHMB, Inc.
|
|
12% Secured Debt
|
|
|
55,140
|
|
|
|
|
|
|
|
1,415,906
|
|
|
|
274,200
|
|
|
|
1,141,706
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
390,000
|
|
|
|
|
|
|
|
390,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston Plating & Coatings, LLC
|
|
Prime Plus 2%
|
|
|
13,037
|
|
|
|
100,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
300,000
|
|
|
|
Member Units
|
|
|
410,550
|
|
|
|
2,450,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
2,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBK Industries, LLC
|
|
14% Secured Debt
|
|
|
618,065
|
|
|
|
3,730,881
|
|
|
|
206,619
|
|
|
|
|
|
|
|
3,937,500
|
|
|
|
8% Secured Debt
|
|
|
50,591
|
|
|
|
623,063
|
|
|
|
126,937
|
|
|
|
281,250
|
|
|
|
468,750
|
|
|
|
8% Secured Debt
|
|
|
27,617
|
|
|
|
|
|
|
|
712,500
|
|
|
|
262,500
|
|
|
|
450,000
|
|
|
|
Prime plus 2% Secured Debt
|
|
|
11,013
|
|
|
|
686,250
|
|
|
|
|
|
|
|
686,250
|
|
|
|
|
|
|
|
Member Units
|
|
|
43,436
|
|
|
|
700,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
775,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurus Healthcare, LP,
|
|
13% Secured Debt
|
|
|
415,285
|
|
|
|
2,934,625
|
|
|
|
75,375
|
|
|
|
735,000
|
|
|
|
2,275,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
715,000
|
|
|
|
1,785,000
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Trench Safety, LLC
|
|
10% PIK Debt
|
|
|
89,451
|
|
|
|
314,805
|
|
|
|
89,451
|
|
|
|
|
|
|
|
404,256
|
|
|
|
Member Units
|
|
|
|
|
|
|
1,792,308
|
|
|
|
|
|
|
|
|
|
|
|
1,792,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulse Systems, LLC
|
|
14% Secured Debt
|
|
|
331,010
|
|
|
|
2,260,420
|
|
|
|
47,078
|
|
|
|
476,224
|
|
|
|
1,831,274
|
|
|
|
Warrants
|
|
|
|
|
|
|
350,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schneider Sales Management, LLC
|
|
13% Secured Debt
|
|
|
97,026
|
|
|
|
|
|
|
|
1,981,656
|
|
|
|
71,684
|
|
|
|
1,909,972
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation General Inc.
|
|
13% Secured Debt
|
|
|
1,047,372
|
|
|
|
3,501,966
|
|
|
|
98,034
|
|
|
|
3,600,000
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
340,000
|
|
|
|
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Air Systems, Ltd.
|
|
12% Secured Debt
|
|
|
181,787
|
|
|
|
905,213
|
|
|
|
94,787
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credited to
|
|
|
December 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
December 31,
|
|
Company
|
|
Investments(1)
|
|
Income(2)
|
|
|
2007 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2008 Value
|
|
|
Vision Interests, Inc.
|
|
13% Secured Debt
|
|
|
534,401
|
|
|
|
3,541,662
|
|
|
|
37,455
|
|
|
|
|
|
|
|
3,579,117
|
|
|
|
Common Stock
|
|
|
|
|
|
|
372,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
420,000
|
|
|
|
Warrants
|
|
|
|
|
|
|
375,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
420,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walden Smokey Point, Inc.
|
|
14% Current / 4% PIK Secured
|
|
|
50,400
|
|
|
|
|
|
|
|
4,800,533
|
|
|
|
96,000
|
|
|
|
4,704,533
|
|
|
|
Debt Common Stock
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WorldCall, Inc.
|
|
13% Secured Debt
|
|
|
107,955
|
|
|
|
745,217
|
|
|
|
31,057
|
|
|
|
136,275
|
|
|
|
640,000
|
|
|
|
Common Stock
|
|
|
|
|
|
|
180,000
|
|
|
|
202,837
|
|
|
|
|
|
|
|
382,837
|
|
|
|
Warrants
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Affiliate Investments disposed of during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total-Affiliate Investments
|
|
$
|
4,842,442
|
|
|
$
|
36,176,216
|
|
|
$
|
14,684,944
|
|
|
$
|
11,448,465
|
|
|
$
|
39,412,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This schedule should be read in conjunction with Main
Streets Consolidated and Combined Financial Statements,
including the Consolidated and Combined Schedule of Investments
and Notes to the Consolidated Financial Statements. |
|
(1) |
|
The principal amount, the ownership detail for equity
investments and if the investment is income producing is shown
in the Consolidated and Combined Schedule of Investments. |
|
(2) |
|
Represents the total amount of interest, fees or dividends
credited to income for the portion of the year an investment was
included in Control or Affiliate categories, respectively. For
investments transferred between Control and Affiliate during the
year, the income related to the time period it was in the
category other than the one shown at year end is included in
Income from Investment disposed of during the year. |
|
(3) |
|
Gross additions include increases in the cost basis of
investments resulting from new portfolio investment , follow on
investments and accrued PIK interest, and the exchange of one or
more existing securities for one or more new securities. Gross
Additions also include net increases in unrealized appreciation
or net decreases in unrealized depreciation as well as the
movement of an existing portfolio company into this category and
out of a different category. |
|
(4) |
|
Gross reductions include decreases in the cost basis of
investments resulting from principal repayments or sales and the
exchange of one or more existing securities for one or more new
securities. Gross reductions also include net increases in
unrealized depreciation or net decreases in unrealized
appreciation as well as the movement of an existing portfolio
company out of this category and into a different category. |
Main Street Capital Corporation
Common Stock
PROSPECTUS
PART C
Other Information
Item 25. Financial Statements And Exhibits
(1) Financial Statements
The following financial statements of Main Street Capital Corporation (the
Registrant or the Company) are included in Part A of this Registration Statement:
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2008 and
2007 |
|
|
F-4 |
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December 31,
2008 and 2007 and Combined Statement of Operations for the Year Ended
December 31, 2006 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Changes in Net Assets for the Years Ended
December 31, 2008 and 2007 and Combined Statement of Changes in Net
Assets for the Year Ended December 31, 2006 |
|
|
F-6 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31,
2008 and 2007 and Combined Statement of Cash Flows for the Year Ended
December 31, 2006 |
|
|
F-7 |
|
|
|
|
|
|
Consolidated Schedules of Investments as of December 31, 2008 and 2007 |
|
|
F-8 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F-16 |
|
(2) Exhibits
|
|
|
(a)
|
|
Articles of Amendment and Restatement of the Registrant (previously filed as
Exhibit (a) to Main Street Capital Corporations Registration Statement on Form
N-2 (Reg. No. 333-142879)) |
|
|
|
(b)
|
|
Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 99.1 to
Main Street Capital Corporations Current report on Form 8-K dated May 1, 2008) |
|
|
|
(c)
|
|
Not Applicable |
|
|
|
(d)
|
|
Form of Common Stock Certificate (previously filed as Exhibit (d) to Main Street
Capital Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(e)
|
|
Form of Dividend Reinvestment Plan (previously filed as Exhibit 4.2 to Main Street
Capital Corporations Annual Report on Form 10-K for the year ended December 31,
2007) |
|
|
|
(f)
|
|
Debentures guaranteed by the SBA (previously filed as Exhibit (f)(1) to Main
Street Capital Corporations Registration Statement on Form N-2 (Reg. No.
333-142879)) |
|
|
|
(g)(1)
|
|
Form of Amended and Restated Advisory Agreement by and between Main Street Capital
Partners, LLC and Main Street Mezzanine Fund, LP (previously filed as Exhibit
(g)(1) to Main Street Capital Corporations Registration Statement on Form N-2
(Reg. No. 333-142879)) |
|
|
|
(g)(2)
|
|
Advisory Agreement by and between Main Street Capital Partners, LLC and Main
Street Capital II, LP (previously filed as Exhibit (g)(2) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
C-1
|
|
|
|
(h)
|
|
Form of Underwriting Agreement* |
|
|
|
|
(i)(1)
|
|
Main Street Capital Corporation 2008 Equity Incentive Plan (previously filed as
Exhibit 4.4 to Main Street Capital Corporations Registration Statement on Form
S-8 (Reg. No. 333-151799)) |
|
|
|
(i)(2)
|
|
Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan
(previously filed as Exhibit 4.5 to Main Street Capital Corporations Registration
Statement on Form S-8 (Reg. No. 333-151799)) |
|
|
|
(j)
|
|
Custodian Agreement (previously filed as Exhibit (j) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(1)
|
|
Form of Employment Agreement by and between the Registrant and Todd A. Reppert
(previously filed as Exhibit (k)(1) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(2)
|
|
Form of Employment Agreement by and between the Registrant and Rodger A. Stout
(previously filed as Exhibit (k)(2) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(3)
|
|
Form of Employment Agreement by and between the Registrant and Curtis A. Hartman
(previously filed as Exhibit (k)(3) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(4)
|
|
Form of Employment Agreement by and between the Registrant and Dwayne L. Hyzak
(previously filed as Exhibit (k)(4) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(5)
|
|
Form of Employment Agreement by and between the Registrant and David L. Magdol
(previously filed as Exhibit (k)(5) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(6)
|
|
Form of Confidentiality and Non-Compete Agreement by and between the Registrant
and Vincent D. Foster (previously filed as Exhibit (k)(12) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(7)
|
|
Form of Indemnification Agreement by and between the Registrant and each executive
officer and director (previously filed as Exhibit (k)(13) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(k)(8)
|
|
Treasury Secured Revolving Credit Agreement dated December 31, 2007 (previously
filed as Exhibit 10.1 to Main Street Capital Corporations Current Report on Form
8-K filed January 3, 2008 (File No. 1-33723)) |
|
|
|
|
(k)(9)
|
|
Security Agreement dated December 31, 2007 (previously filed as Exhibit 10.2 to
Main Street Capital Corporations Current Report on Form 8-K filed January 3, 2008
(File No. 1-33723)) |
|
|
|
|
|
(k)(10)
|
|
Control Agreement dated December 31, 2007 (previously filed as Exhibit 10.3 to
Main Street Capital Corporations Current Report on Form 8-K filed January 3, 2008
(File No. 1-33723)) |
|
|
|
|
|
(k)(11)
|
|
Custody Agreement dated December 31, 2007 (previously filed as Exhibit 10.4 to
Main Street Capital Corporations Current Report on Form 8-K filed January 3, 2008
(File No. 1-33723)) |
|
|
|
|
|
(k)(12)
|
|
Credit Agreement dated October 24, 2008 (previously filed as Exhibit 10.1 to Main
Street Capital Corporations Current Report on Form 8-K filed October 28, 2008
(File No. 1-33723)) |
|
|
|
|
|
(k)(13)
|
|
General Security Agreement dated October 24, 2008 (previously filed as Exhibit
10.2 to Main Streets Current Report on Form 8-K filed October 28, 2008 (File No.
1-33723)) |
|
|
|
|
|
(k)(14)
|
|
Custodial Agreement dated October 24, 2008 (previously filed as Exhibit 10.3 to
Main Streets Current Report on Form 8-K filed October 28, 2008 (File No.
1-33723)) |
|
|
|
|
|
(k)(15)
|
|
Equity Pledge Agreement dated October 24, 2008 (previously filed as Exhibit 10.4
to Main Streets Current Report on Form 8-K filed October 28, 2008 (File No.
1-33723)) |
|
|
|
|
|
(k)(16)
|
|
Support Services Agreement
effective as of October 2, 2007 by and between Main Street Capital
Corporation and Main Street Capital Partners, LLC*** |
|
|
|
|
|
(l)
|
|
Opinion and Consent of Counsel*** |
|
|
|
|
(m)
|
|
Not Applicable |
|
|
|
(n)(1)
|
|
Consent of Grant Thornton LLP** |
|
|
|
|
(n)(2)
|
|
Report of Grant Thornton LLP
regarding the senior security table contained herein** |
|
C-2
|
|
|
(r)
|
|
Code of Ethics (previously filed as Exhibit (r) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
|
|
|
(s)
|
|
Power of Attorney*** |
|
|
|
* |
|
To be filed by post-effective amendment, if applicable. |
|
** |
|
Filed herewith. |
|
*** |
|
Previously filed as an exhibit to this registration statement. |
Item 26. Marketing Arrangements
The information contained under the heading Plan of Distribution on this
Registration Statement is incorporated herein by reference and any information
concerning any underwriters will be contained in the accompanying prospectus
supplement, if any.
Item 27. Other Expenses Of Issuance And Distribution
|
|
|
|
|
SEC registration fee
|
|
$ |
11,790 |
|
Nasdaq Global Select Market additional listing fee
|
|
|
45,000 |
* |
FINRA filing fee
|
|
|
30,500 |
|
Accounting fees and expenses
|
|
|
75,000 |
* |
Legal fees and expenses
|
|
|
150,000 |
* |
Printing and engraving
|
|
|
100,000 |
* |
Miscellaneous fees and expenses
|
|
|
10,000 |
* |
Total
|
|
$ |
422,290 |
|
|
|
|
|
* |
|
Estimated for filing purposes. |
|
|
|
|
All of the expenses set forth above shall be borne by the Registrant. |
Item 28. Persons Controlled By Or Under Common Control
|
|
|
Main Street Mezzanine Fund, LP a Delaware limited partnership |
|
|
|
|
Main Street Mezzanine Management, LLC a Delaware limited liability company |
|
|
|
|
Main Street Capital Partners, LLC a Delaware limited liability company. |
|
|
|
|
Main Street Equity Interests, Inc. a Delaware corporation. |
In addition, Main Street Capital Corporation may be deemed to control certain
portfolio companies. For a more detailed discussion of these entities, see Portfolio
Companies in the prospectus.
Item 29. Number Of Holders Of Securities
The following table sets forth the number of record holders of the Registrants
capital stock at April 22, 2009.
|
|
|
|
|
Number of |
Title of Class |
|
Record Holders |
Common stock, $0.01 par value
|
|
120 |
C-3
Item 30. Indemnification
Maryland law permits a Maryland corporation to include in its articles of
incorporation a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability resulting from
(a) actual receipt of an improper benefit or profit in money, property or services or
(b) active and deliberate dishonesty established by a final judgment as being material
to the cause of action. Our articles of incorporation contain such a provision that
eliminates directors and officers liability to the maximum extent permitted by
Maryland law, subject to the requirements of the Investment Company Act of 1940, as
amended (the 1940 Act).
Our articles of incorporation require us, to the maximum extent permitted by
Maryland law and subject to the requirements of the 1940 Act, to indemnify any present
or former director or officer or any individual who, while a director or officer and at
our request, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee, from and against any claim or liability to which
such person may become subject or which such person may incur by reason of his or her
service in any such capacity, except with respect to any matter as to which such person
shall have been finally adjudicated in any proceeding not to have acted in good faith
in the reasonable belief that his or her action was in our best interest or to be
liable to us or our stockholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such persons
office.
Our bylaws obligate us, to the maximum extent permitted by Maryland law and
subject to the requirements of the 1940 Act, to indemnify any present or former
director or officer or any individual who, while a director or officer and at our
request, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee and who is made, or threatened to be made, a
party to a proceeding by reason of his or her service in any such capacity from and
against any claim or liability to which that person may become subject or which that
person may incur by reason of his or her service in any such capacity, except with
respect to any matter as to which such person shall have been finally adjudicated in
any proceeding not to have acted in good faith in the reasonable belief that his or her
action was in our best interest or to be liable to us or our stockholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such persons office. Our bylaws also require that, to the
maximum extent permitted by Maryland law, we may pay certain expenses incurred by any
such indemnified person in advance of the final disposition of a proceeding upon
receipt of an undertaking by or on behalf of such indemnified person to repay amounts
we have so paid if it is ultimately determined that indemnification of such expenses is
not authorized under our bylaws.
Maryland law requires a corporation (unless its articles of incorporation provide
otherwise, which our articles of incorporation do not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he or she is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any proceeding to
which they may be made, or threatened to be made, a party by reason of his or her
service in those or other capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to the
proceeding and (1) was committed in bad faith or (2) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act or
omission was unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the corporation or
for a judgment of liability on the basis that a personal benefit was improperly
received, unless in either case a court orders indemnification, and then only for
expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporations receipt of (a) a written affirmation by the
director or officer of his or her good faith belief that he or she has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by him or her or on his or her behalf to repay the amount paid or
reimbursed by the corporation if it is ultimately determined that the standard of
conduct was not met.
In addition, we have entered into Indemnity Agreements with our directors and
executive officers. The form of Indemnity Agreement entered into with each director and
officer was previously filed with the Commission as Exhibit (k)(13) to our Registration
Statement on Form N-2 (Reg. No. 333-142879). The Indemnity Agreements generally provide
that we will, to the extent specified in the agreements and to the fullest extent
permitted by the 1940 Act and Maryland law as in effect on the day the agreement is
executed , indemnify and advance expenses to each indemnitee that is, or is threatened
to be made, a party to or a witness in any civil, criminal or administrative
proceeding. We will indemnify the indemnitee against all expenses, judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred in connection
with any such proceeding unless it is established that (i) the act or omission of the
indemnitee was material to the matter giving rise to the proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate dishonesty, (ii)
the indemnitee actually received an improper personal benefit, or (iii) in the case of
a criminal proceeding, the indemnitee had reasonable cause to believe his conduct was
unlawful. Additionally, for so long as the we are subject to
C-4
the 1940 Act, no
advancement of expenses will be made until (i) the indemnitee provides a security for
his undertaking, (ii) we are insured against losses arising by reason of any lawful
advances, or (iii) the majority of a quorum of our disinterested directors, or
independent counsel in a written opinion, determine based on a review of readily
available facts that there is reason to believe that the indemnitee ultimately will be
found entitled to indemnification. The Indemnity Agreements also provide that if the
indemnification rights provided for therein are unavailable for any reason, we will
pay, in the first instance, the entire amount incurred by the indemnitee in connection
with any covered proceeding and waive and relinquish any right of contribution we may
have against the indemnitee. The rights provided by the Indemnity Agreements are in
addition to any other rights to indemnification or advancement of expenses to which the
indemnitee may be entitled under applicable law, our articles of incorporation, our
bylaws, any agreement, a vote of stockholders or a resolution of directors, or
otherwise. No amendment or repeal of the Indemnity Agreements will limit or restrict
any right of the indemnitee in respect of any action taken or omitted by the indemnitee
prior to such amendment or repeal. The Indemnity Agreements will terminate upon the
later of (i) ten years after the date the indemnitee has ceased to serve as our
director or officer, or (ii) one year after the final termination of any proceeding for
which the indemnitee is granted rights of indemnification or advancement of expenses or
which is brought by the indemnitee. The above description of the Indemnity Agreements
is subject to, and is qualified in its entirety by reference to, all the provisions of
the form of Indemnity Agreement, previously filed with the Commission as Exhibit
(k)(13) to our Registration Statement on Form N-2 (Reg. No. 333-142879).
We have obtained primary and excess insurance policies insuring our directors and
officers against certain liabilities they may incur in their capacity as directors and
officers. Under such policies, the insurer, on our behalf, may also pay amounts for
which we have granted indemnification to the directors or officers.
Item 31. Business And Other Connections Of Investment Manager
Not Applicable
Item 32. Location Of Accounts And Records
All accounts, books and other documents required to be maintained by Section 31(a)
of the Investment Company Act of 1940, and the rules thereunder are maintained at the
Registrants offices at 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
Item 33. Management Services
Not Applicable
Item 34. Undertakings
1. We hereby undertake to suspend any offering of shares until the prospectus is amended if (1) subsequent to the effective date of this
registration statement, our net asset value declines more than ten percent from our net asset value as of the effective date of this registration statement or (2) our
net asset value increases to an amount greater than our net proceeds (if applicable) as
stated in the prospectus.
2. We hereby undertake:
|
a. |
|
to file, during any period in which offers or sales are being made, a post-effective amendment to
this registration statement: |
|
(1) |
|
to include any prospectus required by Section 10(a)(3) of the 1933 Act; |
|
|
(2) |
|
to reflect in the prospectus or prospectus supplement any facts or events after the
effective date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in this registration statement; and |
|
|
(3) |
|
to include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to such
information in this registration statement. |
|
b. |
|
for the purpose of determining any liability under the 1933 Act, that each such post-effective
amendment to this registration statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of those securities at that time shall be deemed
to be the initial bona fide offering |
C-5
|
|
|
thereof. |
|
|
c. |
|
to remove from registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering. |
|
|
d. |
|
for the purpose of determining liability under the 1933 Act to any purchaser, that if we are subject
to Rule 430C under the 1933 Act, each prospectus filed pursuant to Rule 497(b), (c), (d) or (e)
under the 1933 Act as part of this registration statement relating to an offering shall be deemed to
be part of and included in the registration statement as of the date it is first used after
effectiveness, provided, however, that no statement made in a registration statement or prospectus
or prospectus supplement that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement or prospectus that
is part of the registration statement will, as to a purchaser with a time of contract of sale prior
to such first use, supercede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such document immediately
prior to such date of first use. |
|
|
e. |
|
for the purpose of determining liability of the Registrant under the 1933 Act to any purchaser in
the initial distribution of securities, that if the securities are offered or sold to such purchaser
by means of any of the following communications, we will be a seller to the purchaser and will be
considered to offer or sell such securities to the purchaser: |
|
(1) |
|
any preliminary prospectus or prospectus or prospectus supplement of us relating to
the offering required to be filed pursuant to Rule 497 under the 1933 Act; |
|
|
(2) |
|
the portion of any advertisement pursuant to Rule 482 under the 1933 Act relating to
the offering containing material information about us or our securities provided by
or on behalf of us; and |
|
|
(3) |
|
any other communication that is an offer in the offering made by us to the purchaser. |
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f. |
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to file a post-effective amendment to the registration statement, and to suspend any offers
or sales pursuant the registration statement until such post-effective amendment has been
declared effective under the 1933 Act, in the event our shares of common stock are
trading below our net asset value per share and either (i) we receive, or have been advised
by our independent registered accounting firm that we will receive, an audit report
reflecting substantial doubt regarding our ability to continue as a going concern or (ii) we
have concluded that a fundamental change has occurred in our financial position or
results of operations.
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C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of Texas, on
April 24,
2009.
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MAIN STREET CAPITAL CORPORATION
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By: |
/s/ Vincent D. Foster
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Vincent D. Foster |
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Chairman and Chief Executive Officer |
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Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-2 has been signed below by the following persons in the capacities
and on the dates indicated:
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Signature |
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Title |
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Date |
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/s/ Vincent D. Foster
Vincent D. Foster
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Chairman and Chief Executive Officer (principal
executive officer)
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April 24, 2009 |
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/s/ Todd A. Reppert
Todd A. Reppert
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President, Chief Financial Officer and
Director
(principal financial officer)
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April 24, 2009 |
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/s/
Michael S. Galvan
Michael S. Galvan
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Vice President and Chief Accounting
Officer
(principal accounting officer)
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April 24, 2009 |
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/s/
Rodger A. Stout
Rodger A. Stout
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Senior Vice President-Finance & Administration,
Chief Compliance
Officer and Treasurer
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April 24, 2009 |
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*
Michael Appling Jr.
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Director
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April 24, 2009 |
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*
Joseph E. Canon
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Director
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April 24, 2009 |
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*
William D. Gutermuth
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Director
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April 24, 2009 |
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*
Arthur L. French
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Director
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April 24, 2009 |
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* By: |
/s/ Vincent D. Foster
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Vincent D. Foster |
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Attorney-in-fact |
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C-7
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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(a)
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Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit (a)
to Main Street Capital Corporations Registration Statement on Form N-2 (Reg. No.
333-142879)) |
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(b)
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Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 99.1 to Main
Street Capital Corporations Current report on Form 8-K dated May 1, 2008) |
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(c)
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Not Applicable |
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(d)
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Form of Common Stock Certificate (previously filed as Exhibit (d) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(e)
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Form of Dividend Reinvestment Plan (previously filed as Exhibit 4.2 to Main Street
Capital Corporations Annual Report on Form 10-K for the year ended December 31, 2007) |
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(f)
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Debentures guaranteed by the SBA (previously filed as Exhibit (f)(1) to Main Street
Capital Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(g)(1)
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Form of Amended and Restated Advisory Agreement by and between Main Street Capital
Partners, LLC and Main Street Mezzanine Fund, LP (previously filed as Exhibit (g)(1) to
Main Street Capital Corporations Registration Statement on Form N-2 (Reg. No.
333-142879)) |
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(g)(2)
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Advisory Agreement by and between Main Street Capital Partners, LLC and Main Street
Capital II, LP (previously filed as Exhibit (g)(2) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(h)
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Form of Underwriting Agreement* |
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(i)(1)
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Main Street Capital Corporation 2008 Equity Incentive Plan (previously filed as Exhibit
4.4 to Main Street Capital Corporations Registration Statement on Form S-8 (Reg. No.
333-151799)) |
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(i)(2)
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Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan
(previously filed as Exhibit 4.5 to Main Street Capital Corporations Registration
Statement on Form S-8 (Reg. No. 333-151799)) |
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(j)
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Custodian Agreement (previously filed as Exhibit (j) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(1)
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Form of Employment Agreement by and between the Registrant and Todd A. Reppert
(previously filed as Exhibit (k)(1) to Main Street Capital Corporations Registration
Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(2)
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Form of Employment Agreement by and between the Registrant and Rodger A. Stout
(previously filed as Exhibit (k)(2) to Main Street Capital Corporations Registration
Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(3)
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Form of Employment Agreement by and between the Registrant and Curtis A. Hartman
(previously filed as Exhibit (k)(3) to Main Street Capital Corporations Registration
Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(4)
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Form of Employment Agreement by and between the Registrant and Dwayne L. Hyzak
(previously filed as Exhibit (k)(4) to Main Street Capital Corporations Registration
Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(5)
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Form of Employment Agreement by and between the Registrant and David L. Magdol
(previously filed as Exhibit (k)(5) to Main Street Capital Corporations Registration
Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(6)
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Form of Confidentiality and Non-Compete Agreement by and between the Registrant and
Vincent D. Foster (previously filed as Exhibit (k)(12) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(k)(7)
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Form of Indemnification Agreement by and between the Registrant and each executive
officer and director (previously filed as Exhibit (k)(13) to Main Street Capital
Corporations Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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Exhibit |
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Number |
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Description |
(k)(8)
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Treasury Secured Revolving Credit Agreement dated December 31, 2007 (previously filed as
Exhibit 10.1 to Main Street Capital Corporations Current Report on Form 8-K filed
January 3, 2008 (File No. 1-33723)) |
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(k)(9)
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Security Agreement dated December 31, 2007 (previously filed as Exhibit 10.2 to Main
Street Capital Corporations Current Report on Form 8-K filed January 3, 2008 (File No.
1-33723)) |
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(k)(10)
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Control Agreement dated December 31, 2007 (previously filed as Exhibit 10.3 to Main
Street Capital Corporations Current Report on Form 8-K filed January 3, 2008 (File No.
1-33723)) |
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(k)(11)
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Custody Agreement dated December 31, 2007 (previously filed as Exhibit 10.4 to Main
Street Capital Corporations Current Report on Form 8-K filed January 3, 2008 (File No.
1-33723)) |
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(k)(12)
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Credit Agreement dated October 24, 2008 (previously filed as Exhibit 10.1 to Main Street
Capital Corporations Current Report on Form 8-K filed October 28, 2008 (File No.
1-33723)) |
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(k)(13)
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General Security Agreement dated October 24, 2008 (previously filed as Exhibit 10.2 to
Main Streets Current Report on Form 8-K filed
October 28, 2008 (File No. 1-33723)) |
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(k)(14)
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Custodial Agreement dated October 24, 2008 (previously filed as Exhibit 10.3 to Main
Streets Current Report on Form 8-K filed October 28,
2008 (File No. 1-33723)) |
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(k)(15)
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Equity Pledge Agreement dated October 24, 2008 (previously filed as Exhibit 10.4 to Main
Streets Current Report on Form 8-K filed October 28,
2008 (File No. 1-33723)) |
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(k)(16)
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Support Services Agreement
effective as of October 2, 2007 by and between Main Street Capital
Corporation and Main Street Capital Partners, LLC*** |
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(l)
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Opinion and Consent of Counsel*** |
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(m)
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Not Applicable |
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(n)(1)
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Consent of Grant Thornton LLP** |
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(n)(2)
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Report of Grant Thornton LLP
regarding the senior security table contained herein** |
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(r)
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Code of Ethics (previously filed as Exhibit (r) to Main Street Capital Corporations
Registration Statement on Form N-2 (Reg. No. 333-142879)) |
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(s)
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Power of Attorney*** |
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* |
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To be filed by post-effective amendment, if applicable. |
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** |
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File herewith. |
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*** |
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Previously filed as an exhibit to this registration statement. |
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