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TABLE OF CONTENTS 1
TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell and are not soliciting offers to buy these securities in any state where such offer or sale is not permitted.
Filed pursuant to Rule 497
Registration Statement No. 333-155806
SUBJECT TO COMPLETION, DATED AUGUST 16, 2010
PRELIMINARY PROSPECTUS SUPPLEMENT
(to Prospectus dated June 17, 2010)
Shares
Main Street Capital Corporation
Common Stock
We are offering for sale shares of our common stock.
We are a principal investment firm primarily 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 more limited access to financing from commercial banks and other traditional sources. Our principal investment objective is to maximize our portfolio's total return by generating current income from our debt investments and capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company.
In addition to our core investment strategy of investing in lower middle market companies, we opportunistically pursue investments in privately placed debt securities. This private placement investment portfolio primarily consists of direct or secondary private placements of interest-bearing securities in companies that are generally larger in size than the lower middle market companies included in our core portfolio.
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 August 13, 2010, the last reported sale price of our common stock on the Nasdaq Global Select Market was $16.34 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 13 of the accompanying prospectus to read about factors you should consider, including the risk of leverage, before investing in our common stock.
This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our common stock. Please read this prospectus supplement and the accompanying prospectus 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, or SEC. 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 supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains such information.
|
Per Share | Total | ||
---|---|---|---|---|
Public offering price |
$ | $ | ||
Underwriting discount (4.75%) |
$ | $ | ||
Proceeds, before expenses, to us(1) |
$ | $ |
The
underwriters have the option to purchase up to an additional shares of common stock at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus supplement solely to cover any over-allotments. If the over-allotment option is exercised in full, the total public offering
price will be $ , and the total underwriting discount (4.75%) will be $ . The proceeds to us would be $ , before deducting estimated expenses
payable by us of
$200,000.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares on or about August , 2010.
Morgan Keegan & Company, Inc.
BB&T Capital Markets A Division of Scott & Stringfellow, LLC |
||||
Janney Montgomery Scott |
||||
Madison Williams and Company |
The date of this prospectus supplement is August , 2010
TABLE OF CONTENTS
This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which provides more information about the common stock we may offer from time to time. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information from that contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell, or a solicitation of an offer to buy, any shares of our common stock by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information contained in this prospectus supplement and the accompanying prospectus is complete and accurate only as of their respective dates, regardless of the time of their delivery or sale of our common stock. This prospectus supplement supersedes the accompanying prospectus to the extent it contains information different from or additional to the information in that prospectus.
Forward-Looking Statements
Information contained in this prospectus supplement and the accompanying prospectus may contain forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. The matters described in the section titled "Risk Factors" in the accompanying prospectus and certain other factors noted throughout this prospectus supplement and the accompanying prospectus constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We undertake no obligation to revise or update any forward-looking statements but advise you to consult any additional disclosures that we may make directly to you or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. We note that the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 does not apply to statements made in this prospectus supplement.
This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. To understand the terms of the common stock offered hereby, you should read the entire prospectus supplement and the accompanying prospectus carefully. Together, these documents describe the specific terms of the shares we are offering. You should carefully read the sections titled "Selected Financial Data," "Interim Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Interim Financial Statements" and the documents identified in the section titled "Available Information" in this prospectus supplement, as well as the section titled "Risk Factors" in the accompanying prospectus. Except as otherwise noted, all information in this prospectus supplement and the accompanying prospectus assumes no exercise of the underwriters' over-allotment option.
Organization
Main Street Capital Corporation ("MSCC") was formed on March 9, 2007 for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP ("MSMF") and its general partner, Main Street Mezzanine Management, LLC ("MSMF GP"), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the "Investment Manager"), (iii) raising capital in an initial public offering, which was completed in October 2007 (the "IPO"), and (iv) thereafter operating as an internally managed business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). MSMF is licensed as a Small Business Investment Company ("SBIC") by the United States Small Business Administration ("SBA") and the Investment Manager acts as MSMF's manager and investment adviser. The IPO and related transactions discussed above were consummated in October 2007 and are collectively termed the "Formation Transactions."
On January 7, 2010, MSCC consummated transactions (the "Exchange Offer") to exchange 1,239,695 shares of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP ("MSC II" and, together with MSMF, the "Funds"). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC ("MSC II GP"), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests, are collectively termed the "Exchange Offer Transactions." As of June 30, 2010, an approximately 12% minority ownership in the total dollar value of the MSC II limited partnership interests remains outstanding, including approximately 5% owned by affiliates of MSCC.
MSCC has direct or indirect subsidiaries that have elected to be taxable entities (the "Taxable Subsidiaries"). The primary purpose of these entities is to hold certain investments that generate "pass through" income for tax purposes. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income.
Unless otherwise noted or the context otherwise indicates, the terms "we," "us," "our" and "Main Street" refer to MSCC and its subsidiaries, including MSMF, MSC II, and the Taxable Subsidiaries.
Overview
We are a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market companies, which we generally define as companies with annual revenues between $10 million 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 portfolio's total return by generating current income from our debt investments and capital appreciation from our
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equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Our core portfolio investments generally range in size from $3 million to $20 million.
Our investments are generally made through MSCC and the Funds. MSCC and the Funds share the same investment strategies and criteria, although they are subject to different regulatory regimes. An investor's return in MSCC will depend, in part, on the Funds' investment returns as MSMF is a wholly owned subsidiary of MSCC and MSC II is a majority owned subsidiary of MSCC.
We seek to fill the current financing gap for lower middle market businesses, which, historically, have had more 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 company's 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.
As of June 30, 2010, we had debt and equity investments in 41 core portfolio companies with an aggregate fair value of $252.7 million and the weighted average effective yield on our debt investments was approximately 14.7%. Approximately 78% of our total core portfolio investments at cost were in the form of debt investments and 86% of such debt investments at cost were secured by first priority liens on the assets of our portfolio companies as of June 30, 2010. At June 30, 2010, we had equity ownership in approximately 90% of our core portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 35%.
In addition to our core investment strategy of investing in lower middle market companies, we opportunistically pursue investments in privately placed debt securities. This privately placed investment portfolio primarily consists of direct or secondary private placements of interest-bearing securities in companies that are generally larger in size than the lower middle market companies included in our core portfolio. At June 30, 2010, we had privately placed portfolio investments in 10 companies collectively totaling approximately $52.8 million in fair value with a total cost basis of approximately $52.4 million. The median revenues for the 10 privately placed portfolio company investments was approximately $239 million. All of our privately placed portfolio investments at cost were in the form of secured debt investments and 83% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average effective yield on our privately placed portfolio debt investments was approximately 13.5% as of June 30, 2010. Weighted average effective yields are computed using the effective interest rates for all debt investments at June 30, 2010, including amortization of deferred debt origination fees and accretion of original issue discount but excluding any debt investments on non-accrual status and any liquidation fees payable upon repayment.
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 supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus.
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Recent Developments
On July 1, 2010, our Board of Directors approved the issuance of 149,357 shares of restricted stock to our 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, 2010, a total of 7,920 shares of restricted stock was issued to our independent directors pursuant to the Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan. These shares will vest on the day immediately preceding the next annual meeting at which our stockholders elect directors, provided that these independent directors have been in continuous service as members of the Board through such date. As a result, these shares will be expensed over a one-year service period starting on the grant date.
On July 8, 2010, we exited our debt and equity investment in Advantage Millwork Company, Inc., one of the portfolio companies on non-accrual status as of June 30, 2010, at a price equal to such investment's fair value at June 30, 2010. For the third quarter of 2010, we recognized a realized loss of approximately $1.9 million on the exit of this investment.
On July 30, 2010, we exited our largest private placement debt investment in Apria Healthcare Group, Inc., at a price exceeding the portfolio company's fair value at June 30, 2010. Therefore, we recognized a $0.5 million realized gain in the third quarter of 2010 related to the exit of this investment. Subsequent to exiting this investment, we repaid all debt borrowed under our $30 million investment credit facility, and we currently have no outstanding debt under such facility.
The Offering
Common stock offered by us |
shares | |
Common stock outstanding prior to this offering |
15,387,474 shares |
|
Common stock to be outstanding after this offering |
shares |
|
Over-allotment option |
shares |
|
Use of proceeds |
The net proceeds from this offering (without exercise of the over-allotment option and before deducting estimated expenses payable by us of approximately $200,000) will be $ . |
|
|
We intend to use all of the net proceeds from this offering to make investments in accordance with our investment objective and strategies described in this prospectus supplement and the accompanying prospectus, pay our operating expenses and other cash obligations, and for general corporate purposes. Pending such uses, we currently intend to invest the net proceeds of this offering in marketable securities and idle funds investments, which may include investments in secured intermediate term bank debt, rated debt securities and other income producing investments, consistent with our business development company ("BDC") election and our election to be taxed as a regulated investment company ("RIC"). See "RegulationRegulation as a Business Development CompanyMarketable Securities and Idle Funds Investments" in the accompanying prospectus. |
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Dividends and distributions |
Our dividends and other distributions, if any, will be determined by our Board of Directors from time to time. |
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|
Our ability to declare dividends depends on our earnings, our overall financial condition (including our liquidity position), maintenance of our RIC status and such other factors as our Board of Directors may deem relevant from time to time. From our IPO through the third quarter of 2008 we paid quarterly dividends, but in the fourth quarter of 2008 we began paying, and we intend to continue paying, monthly dividends to our stockholders. |
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|
In June 2010, we declared monthly dividends of $0.125 per share for each of July, August and September 2010. These monthly dividends equate to a total of $0.375 per share for the third quarter of 2010 representing an annualized dividend yield of approximately 9.2% based on the closing price of our common stock on the Nasdaq Global Select Market on August 13, 2010. Because the record date for the September 2010 dividend is on or after the date of this offering, investors who purchase shares of our common stock in this offering will be entitled to receive such dividend. |
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Taxation |
MSCC has elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Internal Revenue Code (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% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. |
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|
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 undistributed 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" in the accompanying prospectus. |
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Risk factors |
See "Risk Factors" beginning on page 13 of the accompanying prospectus for a discussion of risks you should carefully consider before deciding to invest in shares of our common stock. |
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Nasdaq Global Select Market symbol |
"MAIN" |
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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 supplement 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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|
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Stockholder Transaction Expenses: |
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Sales load (as a percentage of offering price) |
4.75% | (1) | ||
Offering expenses (as a percentage of offering price) |
% | (2) | ||
Dividend reinvestment plan expenses |
| (3) | ||
Total stockholder transaction expenses (as a percentage of offering price) |
% | |||
Annual Expenses (as a percentage of net assets attributable to common stock): |
||||
Operating expenses |
3.90% | (4) | ||
Interest payments on borrowed funds |
4.08% | (5) | ||
Total annual expenses |
7.98% | (6) |
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, and that you would pay a sales load of 4.75% (the underwriting discount to be paid by us with respect to common stock sold by us in this offering).
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1 Year | 3 Years | 5 Years | 10 Years | |||||||||
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You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return |
$ | 135 | $ | 291 | $ | 437 | $ | 763 |
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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" in the accompanying prospectus for additional information regarding our dividend reinvestment plan.
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The net proceeds from the sale of the shares of common stock in this offering are $ , and $ if the underwriter's over-allotment option is exercised in full, after deducting the underwriting discount and estimated offering expenses of approximately $200,000 payable by us.
We intend to use all of the net proceeds from this offering to make investments in accordance with our investment objective and strategies described in this prospectus supplement and the accompanying prospectus, pay our operating expenses and other cash obligations, and for general corporate purposes. Pending such uses, we currently intend to invest the net proceeds of this offering in marketable securities and idle funds investments, which may include investments in secured intermediate term bank debt, rated debt securities and other income producing investments, consistent with our BDC election and our election to be taxed as a RIC. See "RegulationRegulation as a Business Development CompanyMarketable Securities and Idle Funds Investments" in the accompanying prospectus.
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The following table sets forth our capitalization:
This table should be read in conjunction with "Interim Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Interim Financial Statements" in this prospectus supplement.
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As of June 30, 2010 | |||||||
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Actual | As-adjusted for this Offering |
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|
(Unaudited) |
|||||||
Cash and cash equivalents |
$ | 4,730,165 | $ | |||||
Marketable securities and idle funds investments |
14,900,228 | 14,900,228 | ||||||
Total cash and cash equivalents, marketable securities and idle funds investments |
$ | 19,630,393 | $ | |||||
SBIC debentures (par: $145,000,000; of which $61,139,538 is recorded at fair value) |
$ | 126,139,538 | $ | 126,139,538 | ||||
Net asset value: |
||||||||
Common stock, $0.01 par value per share (150,000,000 shares authorized; 15,213,053 and issued and outstanding, actual and as adjusted for this offering, respectively) |
152,130 | |||||||
Additional paid-in capital |
174,375,323 | |||||||
Accumulated net investment income |
8,791,262 | 8,791,262 | ||||||
Accumulated net realized gain (loss) from investments |
(18,677,108 | ) | (18,677,108 | ) | ||||
Net unrealized appreciation from investments, net of income taxes |
21,151,217 | 21,151,217 | ||||||
Total net asset value |
185,792,824 | |||||||
Total capitalization(1) |
$ | 311,932,362 | $ | |||||
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The selected financial data below reflects the combined operations of MSMF and MSMF GP for the years ended December 31, 2005 and 2006 and the consolidated operations of Main Street and its subsidiaries for the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2009 and 2010. The selected financial data at December 31, 2005, 2006, 2007, 2008 and 2009, and for the years ended December 31, 2005, 2006, 2007, 2008 and 2009, 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 for the six months ended June 30, 2009 and 2010, and as of June 30, 2010, have been derived from unaudited financial data but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results for such interim periods. Interim results as of and for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. You should read this selected financial data in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Senior Securities" and the financial statements and related notes thereto in the accompanying prospectus and "Interim Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Interim Financial Statements" in this prospectus supplement.
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Years Ended December 31, | Six Months Ended June 30, |
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2005 | 2006 | 2007 | 2008 | 2009 | 2009 | 2010 | |||||||||||||||||
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(dollars in thousands) |
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(Unaudited) |
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Statement of operations data: |
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Investment income: |
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Total interest, fee and dividend income |
$ | 7,338 | $ | 9,013 | $ | 11,312 | $ | 16,123 | $ | 13,830 | $ | 6,565 | $ | 14,439 | ||||||||||
Interest from idle funds and other |
222 | 749 | 1,163 | 1,172 | 2,172 | 627 | 1,386 | |||||||||||||||||
Total investment income |
7,560 | 9,762 | 12,475 | 17,295 | 16,002 | 7,192 | 15,825 | |||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Interest |
(2,064 | ) | (2,717 | ) | (3,246 | ) | (3,778 | ) | (3,791 | ) | (1,873 | ) | (4,105 | ) | ||||||||||
General and administrative |
(197 | ) | (198 | ) | (512 | ) | (1,684 | ) | (1,351 | ) | (745 | ) | (672 | ) | ||||||||||
Expenses reimbursed to Investment Manager |
| | | (1,007 | ) | (570 | ) | (80 | ) | (2,483 | ) | |||||||||||||
Share-based compensation |
| | | (511 | ) | (1,068 | ) | (391 | ) | (603 | ) | |||||||||||||
Management fees to affiliate |
(1,929 | ) | (1,942 | ) | (1,500 | ) | | | | | ||||||||||||||
Professional costs related to initial public offering |
| | (695 | ) | | | | | ||||||||||||||||
Total expenses |
(4,190 | ) | (4,857 | ) | (5,953 | ) | (6,980 | ) | (6,780 | ) | (3,089 | ) | (7,863 | ) | ||||||||||
Net investment income |
3,370 | 4,905 | 6,522 | 10,315 | 9,222 | 4,103 | 7,962 | |||||||||||||||||
Total net realized gain (loss) from investments |
1,488 | 2,430 | 4,692 | 1,398 | (7,798 | ) | 1,321 | (1,405 | ) | |||||||||||||||
Net realized income |
4,858 | 7,335 | 11,214 | 11,713 | 1,424 | 5,424 | 6,557 | |||||||||||||||||
Total net change in unrealized appreciation (depreciation) from investments |
3,032 | 8,488 | (5,406 | ) | (3,961 | ) | 8,242 | (1,570 | ) | 7,312 | ||||||||||||||
Income tax benefit (provision) |
| | (3,263 | ) | 3,182 | 2,290 | (583 | ) | (421 | ) | ||||||||||||||
Bargain purchase gain |
| | | | | | 4,890 | |||||||||||||||||
Net increase (decrease) in net assets resulting from operations |
7,890 | 15,823 | 2,545 | 10,934 | 11,956 | 3,271 | 18,338 | |||||||||||||||||
Noncontrolling interest |
| | | | | | (409 | ) | ||||||||||||||||
Net increase (decrease) in net assets resulting from operations attributable to common stock |
$ | 7,890 | $ | 15,823 | $ | 2,545 | $ | 10,934 | $ | 11,956 | $ | 3,271 | $ | 17,929 | ||||||||||
Net investment income per sharebasic and diluted |
N/A | N/A | $ | 0.76 | $ | 1.13 | $ | 0.92 | $ | 0.44 | $ | 0.53 | ||||||||||||
Net realized income per sharebasic and diluted |
N/A | N/A | $ | 1.31 | $ | 1.29 | $ | 0.14 | $ | 0.58 | $ | 0.44 | ||||||||||||
Net increase (decrease) in net assets resulting from operations attributable to common stock per sharebasic and diluted |
N/A | N/A | $ | 0.30 | $ | 1.20 | $ | 1.19 | $ | 0.35 | $ | 1.22 | ||||||||||||
Weighted average shares outstandingbasic and diluted |
N/A | N/A | 8,587,701 | 9,095,904 | 10,042,639 | 9,323,968 | 14,754,121 |
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As of December 31, | As of June 30, | |||||||||||||||||||
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2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||
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(dollars in thousands) |
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Balance sheet data: |
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Assets: |
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Total portfolio investments at fair value |
$ | 51,192 | $ | 73,711 | $ | 105,650 | $ | 127,007 | $ | 156,740 | $ | 307,489 | |||||||||
Marketable securities and idle funds investments |
| | 24,063 | 4,390 | 3,253 | 14,900 | |||||||||||||||
Cash and cash equivalents |
26,261 | 13,769 | 41,889 | 35,375 | 30,620 | 4,730 | |||||||||||||||
Deferred tax asset |
| | | 1,121 | 2,716 | 2,634 | |||||||||||||||
Other assets |
439 | 630 | 1,576 | 1,101 | 1,510 | 3,311 | |||||||||||||||
Deferred financing costs, net of accumulated amortization |
1,442 | 1,333 | 1,670 | 1,635 | 1,611 | 1,426 | |||||||||||||||
Total assets |
$ | 79,334 | $ | 89,443 | $ | 174,848 | $ | 170,629 | $ | 196,450 | $ | 334,490 | |||||||||
Liabilities and net assets: |
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SBIC debentures |
$ | 45,100 | $ | 45,100 | $ | 55,000 | $ | 55,000 | $ | 65,000 | $ | 126,139 | |||||||||
Line of credit |
| | | | | 12,500 | |||||||||||||||
Deferred tax liability |
| | 3,026 | | | | |||||||||||||||
Interest payable |
771 | 855 | 1,063 | 1,108 | 1,069 | 2,646 | |||||||||||||||
Dividend payable |
| | | 726 | | 1,902 | |||||||||||||||
Accounts payable and other liabilities |
194 | 216 | 610 | 1,439 | 721 | 1,864 | |||||||||||||||
Total liabilities |
46,065 | 46,171 | 59,699 | 58,273 | 66,790 | 145,051 | |||||||||||||||
Total net asset value |
33,269 | 43,272 | 115,149 | 112,356 | 129,660 | 185,793 | |||||||||||||||
Noncontrolling interest |
| | | | | 3,646 | |||||||||||||||
Total liabilities and net assets |
$ | 79,334 | $ | 89,443 | $ | 174,848 | $ | 170,629 | $ | 196,450 | $ | 334,490 | |||||||||
Other data: |
|||||||||||||||||||||
Weighted average effective yield on debt investments(1) |
15.3 | % | 15.0 | % | 14.3 | % | 14.0 | % | 14.3 | % | 14.7 | % | |||||||||
Number of core portfolio companies(2) |
19 | 24 | 27 | 31 | 35 | 41 | |||||||||||||||
Expense ratios (as percentage of average net assets): |
|||||||||||||||||||||
Operating expenses(3) |
9.0 | % | 5.5 | % | 4.8 | % | 2.8 | % | 2.5 | % | 2.2 | %(4) | |||||||||
Interest expense |
8.8 | % | 7.0 | % | 5.7 | % | 3.3 | % | 3.1 | % | 2.4 | %(4) |
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ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
As described more fully in the accompanying prospectus, we have elected to be taxed as a RIC under Subchapter M of the Code and the applicable Treasury Regulations, which set forth the requirements for qualification as a RIC. The following discussion, which supplements and updates the discussion under the heading "Material U.S. Federal Income Tax Considerations" in the accompanying prospectus, is a summary of certain additional material U.S. federal income tax considerations. You are urged to consult your own tax advisor regarding the specific tax consequences of the purchase, ownership and sale of our common stock.
Sunset of Reduced Tax Rate Provisions
Several of the tax considerations described under the heading "Material U.S. Federal Income Tax Considerations" in the accompanying prospectus are subject to sunset provisions. These sunset provisions generally provide that for taxable years beginning after December 31, 2010, certain provisions in the Code that are currently applicable will revert back to earlier versions of such provisions. As a result, the federal income tax rates applicable to ordinary income, long-term capital gain and qualified dividend income for taxpayers taxed at individual rates will increase beginning January 1, 2011, absent congressional action. Consequently, prospective investors should consult their own tax advisors regarding the effect of the sunset provisions on an investment in our common stock.
Recent Tax Legislation
On March 18, 2010, the President signed into law the Hiring Incentives to Restore Employment Act of 2010, or the HIRE Act. The HIRE Act will require, after December 31, 2012, withholding at a rate of 30% on dividends in respect of, and gross proceeds from the sale or other disposition of, shares of our common stock held by "foreign financial institutions" (including foreign investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information about equity and debt interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons or by certain non-U.S. entities that are wholly or partially owned by U.S. persons. Similarly, after December 31, 2012, dividends in respect of, and gross proceeds from the sale or other disposition of, shares of our common stock held by an investor that is a non-financial foreign entity will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any "substantial United States owners" or (ii) provides certain information regarding the entity's "substantial United States owners," which we will in turn provide to the Secretary of the Treasury.
On March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, or the Reconciliation Act. The Reconciliation Act will require that certain U.S. stockholders who are individuals, estates or trusts to pay a 3.8% Medicare tax on, among other things, dividends on and capital gains from the sale or other disposition of stock, subject to certain exceptions. This tax will apply for taxable years beginning after December 31, 2012.
Prospective investors are encouraged to consult with their tax advisors regarding the possible implications of the recent legislation described herein on an investment in our common stock.
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Under the terms and subject to the conditions contained in an underwriting agreement dated , 2010, the underwriters named below, for whom Morgan Keegan & Company, Inc. is acting as representative, have severally agreed to purchase, and we have agreed to sell to them, the number of shares of common stock indicated below:
Underwriter
|
Number of Shares |
|
---|---|---|
Morgan Keegan & Company, Inc. |
||
BB&T Capital Markets, a division of Scott & Stringfellow, LLC |
||
Janney Montgomery Scott LLC |
||
Madison Williams and Company LLC |
||
Total |
The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are severally obligated to take and pay for all shares of common stock offered hereby (other than those covered by the underwriters' over-allotment option described below) if any such shares are taken. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
Our common stock is listed on the Nasdaq Global Select Market under the symbol "MAIN."
Over-Allotment Option
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to an aggregate of additional shares of common stock at the public offering price set forth on the cover page hereof, less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the preceding table bears to the total number of shares set forth next to the names of all underwriters in the preceding table.
Lock-Up Agreements
We, and certain of our executive officers and directors, have agreed, subject to certain exceptions, not to issue, sell, offer to sell, contract or agree to sell, hypothecate, pledge, transfer, grant any option to purchase, establish an open put equivalent position or otherwise dispose of or agree to dispose of directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock, for 60 days from the date of this prospectus supplement, subject to extension upon material announcements or earnings releases. The representative, at any time and without notice, may release all or any portion of the common stock subject to the foregoing lock-up agreements.
Underwriting Discounts
The underwriters initially propose to offer the shares directly to the public at the public offering price set forth on the cover page of this prospectus supplement and to certain dealers at a price that represents a concession not in excess of $ per share below the public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters.
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The following table provides information regarding the per share and total underwriting discount that we are to pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to additional shares from us.
|
Per Share | Total without Exercise of Over-allotment |
Total with Full Exercise of Over-allotment |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Underwriting discount payable by us on shares sold to the public |
$ | $ | $ |
We will pay all expenses incident to the offering and sale of shares of our common stock by us in this offering. We estimate that the total expenses of the offering, excluding the underwriting discount will be approximately $200,000.
A prospectus supplement in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of shares to underwriters and selling group members for the sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet distributions on the same basis as other allocations. The representative may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders.
Price Stabilization, Short Positions and Penalty Bids
In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. An over-allotment involves syndicate sales of shares in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of some bids or purchases of shares of our common stock made for the purpose of preventing or slowing a decline in the market price of the shares while the offering is in progress.
In addition, the underwriters may impose penalty bids, under which they may reclaim the selling concession from a syndicate member when the shares of our common stock originally sold by that syndicate member are purchased in a stabilizing transaction or syndicate covering transaction to cover syndicate short positions.
Similar to other purchase transactions, these activities may have the effect of raising or maintaining the market price of the common stock or preventing or slowing a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. Except for the sale of shares of our common stock in this offering, the underwriters may carry out these transactions on the Nasdaq Global Select Market, in the over-the-counter market or otherwise.
Neither the underwriters nor we make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the shares. In addition, neither the underwriters nor we make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
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Passive Market Making Pursuant to Regulation M
In connection with this transaction, the underwriters may engage in passive market making transactions in our common stock on the Nasdaq Global Select Market, prior to the pricing and completion of this offering. Passive market making is permitted by SEC Regulation M and consists of displaying bids on the Nasdaq Global Select Market no higher than the bid prices of independent market makers and making purchases at prices no higher than these independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in our common stock during a specified period and must be discontinued when such limit is reached. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions.
Conflicts of Interest
Affiliates of BB&T Capital Markets, an underwriter in this offering, act as lenders and/or agents under our $30 million investment credit facility.
The underwriters and/or their affiliates from time to time provide and may in the future provide investment banking, commercial banking and financial advisory services to us, for which they have received and may receive customary compensation.
In addition, the underwriters and/or their affiliates may from time to time refer investment banking clients to us as potential portfolio investments. If we invest in those clients, we may utilize net proceeds from this offering to fund such investments, and the referring underwriter or its affiliate may receive placement fees from its client in connection with such financing, which placement fees may be paid out of the amount funded by us.
The addresses of the underwriters are: Morgan Keegan & Company, Inc., 50 N. Front St., 19th Floor, Memphis, Tennessee 38103; BB&T Capital Markets, 901 East Byrd Street, Suite 410, Richmond, Virginia 23219; Janney Montgomery Scott LLC, 1801 Market Street, Philadelphia, Pennsylvania 19103; and Madison Williams and Company LLC, 527 Madison Ave, New York, New York 10022.
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., and certain legal matters in connection with this offering will be passed upon for the underwriters by Bass, Berry & Sims PLC, Memphis, Tennessee.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The consolidated financial statements, Schedule 12-14 and the schedule of Senior Securities of Main Street Capital Corporation, included in this prospectus supplement and the accompanying prospectus 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. Grant Thornton LLP's principal business address is 333 Clay Street, 2700 Three Allen Center, Houston, Texas 77002.
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 supplement. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus supplement.
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We file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934. 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 SEC's 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 SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
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INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Interim Financial Statements" in this prospectus supplement.
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 the accompanying 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 ("MSMF") and its general partner, Main Street Mezzanine Management, LLC ("MSMF GP"), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the "Investment Manager"), (iii) raising capital in an initial public offering, which was completed in October 2007 (the "IPO"), and (iv) thereafter operating as an internally managed business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). MSMF is licensed as a Small Business Investment Company ("SBIC") by the United States Small Business Administration ("SBA") and the Investment Manager acts as MSMF's manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by us, we do not pay any external investment advisory fees, but instead we incur the net operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The IPO and related transactions discussed above were consummated in October 2007 and are collectively termed the "Formation Transactions."
On January 7, 2010, MSCC consummated transactions (the "Exchange Offer") to exchange 1,239,695 shares of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP ("MSC II" and, together with MSMF, the "Funds"). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC ("MSC II GP"), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests, are collectively termed the "Exchange Offer Transactions" (see Note I to the consolidated financial statements). As of June 30, 2010, an approximately 12% minority ownership in the total dollar value of the MSC II limited partnership interests remains outstanding, including approximately 5% owned by affiliates of MSCC.
MSCC has direct or indirect subsidiaries that have elected to be taxable entities (the "Taxable Subsidiaries"). The primary purpose of these entities is to hold certain investments that generate "pass through" income for tax purposes. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income.
Unless otherwise noted or the context otherwise indicates, the terms "we," "us," "our" and "Main Street" refer to MSCC and its subsidiaries, including MSMF, MSC II, and the Taxable Subsidiaries.
OVERVIEW
We are a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market companies, which we generally define as companies with annual
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revenues between $10 million 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 portfolio's total return by generating current income from our debt investments and capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Our core portfolio investments generally range in size from $3 million to $20 million.
Our investments are generally made through MSCC and the Funds. MSCC and the Funds share the same investment strategies and criteria, although they are subject to different regulatory regimes. An investor's return in MSCC will depend, in part, on the Funds' investment returns as MSMF is a wholly owned subsidiary of MSCC and MSC II is a majority owned subsidiary of MSCC.
We seek to fill the current financing gap for lower middle market businesses, which, historically, have had more 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 company's 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.
In addition to our core investment strategy of investing in lower middle market companies, we opportunistically pursue investments in privately placed debt securities. This private placement investment portfolio primarily consists of direct or secondary private placements of interest-bearing securities in companies that are generally larger in size than the lower middle market companies included in our core portfolio. At June 30, 2010, we had privately placed portfolio investments in 10 companies collectively totaling approximately $52.8 million in fair value with a total cost basis of approximately $52.4 million. The median revenues for the 10 privately placed portfolio company investments was approximately $239 million. All of our total privately placed portfolio investments at cost were in the form of secured debt investments and 83% of such debt investments at cost were secured by first priority liens on portfolio company assets. The weighted average effective yield on our privately placed portfolio debt investments was approximately 13.5% as of June 30, 2010.
The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
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For the six months ended June 30, 2010, we paid dividends on a monthly basis totaling $0.75 per share, or $10.8 million. In June 2010, we declared monthly dividends for the third quarter of 2010 totaling $0.375 per share. During 2009, we paid monthly dividends of $0.125 per share, or $1.50 per share for the entire year. We generated undistributed taxable income (or "spillover income") of approximately $0.8 million, or $0.08 per share, during 2009 that was carried forward toward distributions paid in 2010. Including the dividends declared for the third quarter of 2010, we will have paid approximately $4.38 per share in cumulative dividends since our October 2007 initial public offering.
At June 30, 2010, we had $19.6 million in cash and cash equivalents, marketable securities, and idle funds investments. In January 2010, we completed a follow-on public stock offering in which we sold 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share (or approximately 121% of the latest reported Net Asset Value per share), resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs. Due to our existing cash, cash equivalents, marketable securities and idle funds investments, and available leverage, we expect to have sufficient cash resources to support our investment and operational activities through the remainder of calendar year 2010. However, this projection will be impacted by, among other things, the pace of new and follow-on investments, debt repayments and investment redemptions, the level of cash flow from operations and cash flow from realized gains, proceeds from future equity offerings, and the level of dividends we pay in cash.
The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") contains several provisions applicable to SBIC funds, including the Funds. One of the key SBIC-related provisions included in the Stimulus Bill increased 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. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between the Funds. Main Street has access to an incremental $80 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $145 million of existing SBIC leverage at the Funds.
A recently proposed bill, the Small Business Financing and Investment Act of 2009, or HR 3854, would increase the total SBIC leverage capacity for affiliated SBIC funds from $225 million to $350 million. If enacted, this bill would increase Main Street's SBIC leverage capacity through the Funds by an additional $125 million. While Main Street is positioned to benefit from the full congressional passage of HR 3854, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted.
In our view, the SBIC leverage, including the increased capacity, remains a strategic advantage due to its long-term, flexible structure and its low fixed cost. The SBIC leverage also provides proper matching of duration and cost compared with our core portfolio investments. As of June 30, 2010, the weighted average duration of our core portfolio debt investments was approximately 3.3 years compared to a weighted average duration of 6.9 years for our SBIC leverage. As of June 30, 2010, approximately 94% of core 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.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). For the three and six months ended June 30, 2010, our consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries, including MSMF
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and MSC II. For the three and six months ended June 30, 2009, our consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries, including MSMF. To allow for more relevant disclosure of our "core" investment portfolio, "core" portfolio investments, as used herein, refers to all of our portfolio investments in lower middle market companies, excluding the Investment Manager. Private placement portfolio investments include investments made through direct or secondary private placements of interest-bearing securities in companies that are generally larger in size than the lower middle market companies included in our core portfolio. "Marketable securities and idle funds investments" are classified as financial instruments and are reported separately on our Consolidated Balance Sheets and Consolidated Schedule of Investments due to the nature of such investments. Our results of operations and cash flows for the three and six months ended June 30, 2010 and 2009, and financial position as of June 30, 2010 and December 31, 2009, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its consolidated subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to prior period balances to conform with the current financial statement presentation, including the reclassification of private placement portfolio investments which were formerly classified as "Marketable securities and idle funds investments" and are now classified as portfolio investments in the "Non-Control/Non-Affiliate investments" category due to our current intent to hold such investments until their maturity and the fact that their terms adhere more to our portfolio investment strategy.
The accompanying unaudited consolidated financial statements of Main Street are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements of Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2009. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Audit and Accounting Guide for Investment Companies issued by the American Institute of Certified Public Accountants (the "AICPA Guide"), 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 exited, 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 consolidated financial statements is the valuation of our portfolio investments and the related amounts of unrealized appreciation and
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depreciation. As of June 30, 2010 and December 31, 2009, approximately 92% and 80%, 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 Accounting Standards Codification ("Codification" or "ASC") 820, Fair Value Measurements and Disclosures in the first quarter of 2008. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.
Our core portfolio strategy calls for us to invest primarily in illiquid securities issued by private companies. These core portfolio 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 ASC 820 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 and process are 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 company's board of directors. Market quotations are generally not readily available for our control investments. As a result, we determine the fair value of control 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 company's 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 core portfolio 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 company's board of directors. Market quotations for non-control investments are generally not readily available. For our non-control core portfolio investments, we use a combination of the market and income approaches to value our equity investments and the income approach to value our debt 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
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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.
Our private placement portfolio investments primarily consist of direct or secondary purchases of interest-bearing securities in companies that are generally larger in size than the lower middle market companies included in our core portfolio. For valuation purposes, all of our private placement portfolio investments are non-control investments and are composed of debt securities for which we do not have a controlling interest in the portfolio company, or the ability to nominate a majority of the portfolio company's board of directors. We primarily use observable inputs to determine the fair value of these investments through obtaining third party quotes or independent pricing.
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 materially different than the valuations currently assigned. We estimate the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.
Revenue Recognition
Interest and Dividend Income
We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policy, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security's status significantly improves regarding ability to service the debt or other obligations, or if a loan or debt security is fully impaired, sold or written off, we will remove it from non-accrual status.
Fee Income
We may periodically provide services, including structuring and advisory services, to our portfolio companies. 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.
Payment-in-Kind ("PIK") Interest
While not significant to its total portfolio, we hold debt and preferred equity instruments in our investment portfolio that contain payment-in-kind ("PIK") interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded
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as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of dividends in arrears may be deferred until such time as the preferred equity is redeemed. To maintain regulated investment company ("RIC") tax treatment (as discussed below), these non-cash sources of income will need to be paid out to stockholders in the form of distributions, even though we may not have collected the PIK interest and cumulative dividends in cash. We will stop accruing PIK interest and cumulative dividends and will write off any accrued and uncollected interest and dividends in arrears when it is determined that such PIK interest and dividends in arrears are no longer collectible.
Share-Based Compensation
We account for our share-based compensation plans using the fair value method, as prescribed by ASC 718, CompensationStock Compensation. Accordingly, for restricted stock awards, we measured the grant date fair value based upon the market price of our common stock on the date of the grant and will amortize this fair value to share-based compensation expense over the requisite service period or vesting term.
Income Taxes
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 its stockholders as specified therein. In order to qualify as a RIC, MSCC is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, each year. Depending on the level of taxable income earned in a tax year, MSCC may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. 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.
The Taxable Subsidiaries hold certain core portfolio investments of Main Street. The Taxable Subsidiaries are consolidated for U.S. GAAP reporting purposes, and the core portfolio investments held by them are included in Main Street's consolidated financial statements. The Taxable Subsidiaries 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 provisions. The Taxable Subsidiaries are not consolidated with Main Street for income tax purposes and may generate income tax expense as a result of their ownership of certain core portfolio investments. This income tax expense, or benefit, is reflected in Main Street's Consolidated Statement of Operations.
The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
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CORE PORTFOLIO COMPOSITION
Core portfolio investments principally consist of secured debt, equity warrants and direct equity investments in privately held companies. The core 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. In most core portfolio companies, we also receive nominally priced equity warrants and/or make direct equity investments, usually in connection with a debt investment.
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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 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 core portfolio investments are shown in the following table:
Cost:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
First lien debt |
66.9 | % | 69.3 | % | |||
Equity |
16.4 | % | 13.4 | % | |||
Second lien debt |
10.9 | % | 10.7 | % | |||
Equity warrants |
5.8 | % | 6.6 | % | |||
|
100.0 | % | 100.0 | % | |||
Fair Value:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
First lien debt |
60.3 | % | 57.4 | % | |||
Equity |
19.1 | % | 19.5 | % | |||
Second lien debt |
10.4 | % | 9.6 | % | |||
Equity warrants |
10.2 | % | 13.5 | % | |||
|
100.0 | % | 100.0 | % | |||
The following table shows the core portfolio composition by geographic region of the United States at cost and fair value as a percentage of total core portfolio investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company:
Cost:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
Southwest |
48.7 | % | 50.1 | % | |||
West |
29.2 | % | 28.6 | % | |||
Southeast |
10.3 | % | 9.0 | % | |||
Northeast |
6.8 | % | 5.4 | % | |||
Midwest |
5.0 | % | 6.9 | % | |||
|
100.0 | % | 100.0 | % | |||
Fair Value:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
Southwest |
48.3 | % | 51.1 | % | |||
West |
28.8 | % | 28.4 | % | |||
Southeast |
10.8 | % | 8.4 | % | |||
Northeast |
6.9 | % | 5.8 | % | |||
Midwest |
5.2 | % | 6.3 | % | |||
|
100.0 | % | 100.0 | % | |||
Main Street's core 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
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Main Street's core portfolio by industry at cost and fair value as of June 30, 2010 and December 31, 2009:
Cost:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
Professional services |
11.9 | % | 10.1 | % | |||
Equipment rental |
8.9 | % | 3.6 | % | |||
Retail |
8.0 | % | 7.5 | % | |||
Industrial equipment |
7.9 | % | 6.4 | % | |||
Metal fabrication |
7.1 | % | 2.5 | % | |||
Electronics manufacturing |
5.6 | % | 7.1 | % | |||
Information services |
5.6 | % | 5.1 | % | |||
Transportation/Logistics |
5.0 | % | 6.1 | % | |||
Manufacturing |
4.8 | % | 4.1 | % | |||
Precast concrete manufacturing |
4.8 | % | 9.7 | % | |||
Health care services |
4.6 | % | 4.7 | % | |||
Industrial services |
3.8 | % | 5.0 | % | |||
Restaurant |
3.7 | % | 5.6 | % | |||
Agricultural services |
3.2 | % | 6.6 | % | |||
Media/Marketing |
3.1 | % | | ||||
Custom wood products |
2.9 | % | 6.7 | % | |||
Consumer products |
2.7 | % | | ||||
Governmental services |
2.1 | % | 2.0 | % | |||
Tradeshow |
2.1 | % | 2.6 | % | |||
Health care products |
1.4 | % | 3.0 | % | |||
Infrastructure products |
0.8 | % | 1.6 | % | |||
|
100.0 | % | 100.0 | % | |||
Fair Value:
|
June 30, 2010 | December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
Professional services |
12.0 | % | 10.1 | % | |||
Equipment rental |
7.6 | % | 2.3 | % | |||
Retail |
7.5 | % | 6.6 | % | |||
Metal fabrication |
6.9 | % | 4.5 | % | |||
Industrial equipment |
6.9 | % | 5.2 | % | |||
Health care services |
6.6 | % | 9.1 | % | |||
Information services |
6.1 | % | 4.4 | % | |||
Precast concrete manufacturing |
5.6 | % | 11.5 | % | |||
Electronics manufacturing |
5.2 | % | 6.2 | % | |||
Transportation/Logistics |
5.1 | % | 6.3 | % | |||
Industrial services |
4.9 | % | 7.0 | % | |||
Manufacturing |
4.1 | % | 3.9 | % | |||
Restaurant |
4.1 | % | 6.2 | % | |||
Agricultural services |
3.8 | % | 7.9 | % | |||
Custom wood products |
2.9 | % | 1.6 | % | |||
Media/Marketing |
2.9 | % | | ||||
Consumer products |
2.5 | % | | ||||
Governmental services |
2.1 | % | 2.1 | % | |||
Tradeshow |
1.8 | % | 2.1 | % | |||
Health care products |
1.3 | % | 2.9 | % | |||
Infrastructure products |
0.1 | % | 0.1 | % | |||
|
100.0 | % | 100.0 | % | |||
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Our core portfolio investments carry a number of risks including, but not limited to: (1) investing primarily in lower middle market companies which may 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, lower middle market companies.
PORTFOLIO ASSET QUALITY
We utilize an internally developed investment rating system to rate the performance of each portfolio company. Investment Rating 1 represents a portfolio company that is performing in a manner which significantly exceeds expectations and projections. Investment Rating 2 represents a portfolio company that, in general, is performing above expectations. Investment Rating 3 represents a portfolio company that is generally performing in accordance with expectations. Investment Rating 4 represents a portfolio company that is underperforming expectations. Investments with such a rating require increased monitoring and scrutiny by us. Investment Rating 5 represents a portfolio company that is significantly underperforming. Investments with such a rating require heightened levels of monitoring and scrutiny by us and involve the recognition of significant unrealized depreciation on such investment. All new portfolio investments receive an initial 3 rating.
The following table shows the distribution of our portfolio investments (excluding the investment in the Investment Manager) on our 1 to 5 investment rating scale at fair value as of June 30, 2010 and December 31, 2009:
|
June 30, 2010 | December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Investment Rating
|
Investments at Fair Value |
Percentage of Total Portfolio |
Investments at Fair Value |
Percentage of Total Portfolio |
||||||||||
|
(Unaudited) (dollars in thousands) |
|||||||||||||
1 |
$ | 43,959 | 14.4 | % | $ | 14,509 | 10.3 | % | ||||||
2 |
107,525 | 35.2 | % | 59,116 | 42.0 | % | ||||||||
3 |
134,288 | 43.9 | % | 57,578 | 40.9 | % | ||||||||
4 |
16,382 | 5.4 | % | 9,000 | 6.4 | % | ||||||||
5 |
3,300 | 1.1 | % | 500 | 0.4 | % | ||||||||
Totals |
$ | 305,454 | 100.0 | % | $ | 140,703 | 100.0 | % | ||||||
Based upon our investment rating system, the weighted average rating of our portfolio as of June 30, 2010 and December 31, 2009 was approximately 2.4. As of June 30, 2010, we had three investments on non-accrual status, which comprised approximately 3.7% of the investment portfolio at fair value. On July 8, 2010, we exited our debt and equity investment in Advantage Millwork Company, Inc., one of the portfolio companies on non-accrual status as of June 30, 2010, at a price equal to the portfolio company's fair value at June 30, 2010. At December 31, 2009, we had three investments on non-accrual status, which comprised approximately 1.1% of the investment portfolio at fair value.
The broader fundamentals of the United States economy remain mixed, and unemployment remains elevated. In the event that the United States economy contracts, it is likely that the financial results of small- to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults. In addition, the end markets for certain of our portfolio companies' products and services have experienced negative economic trends over the last few years. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by these economic or other conditions, which could also have a negative impact on our future results.
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DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2010 and June 30, 2009
|
Three Months Ended June 30, |
Net Change | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Amount | % | |||||||||
|
(dollars in millions) |
||||||||||||
Total investment income |
$ | 8.7 | $ | 3.6 | $ | 5.1 | 143 | % | |||||
Total expenses |
(4.0 | ) | (1.6 | ) | (2.4 | ) | 147 | % | |||||
Net investment income |
4.7 | 2.0 | 2.7 | 139 | % | ||||||||
Net realized gain from investments |
2.7 | 0.4 | 2.3 | NM | |||||||||
Net realized income |
7.4 | 2.4 | 5.0 | 207 | % | ||||||||
Net change in unrealized appreciation from investments |
1.8 | 1.8 | | NM | |||||||||
Income tax benefit (provision) |
| (0.5 | ) | 0.5 | NM | ||||||||
Noncontrolling interest |
(0.3 | ) | | (0.3 | ) | NM | |||||||
Net increase in net assets resulting from operations attributable to common stock |
$ | 8.9 | $ | 3.7 | $ | 5.2 | 137 | % | |||||
|
Three Months Ended June 30, |
Net Change | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Amount | % | |||||||||
|
(dollars in millions) |
||||||||||||
Net investment income |
$ | 4.7 | $ | 2.0 | $ | 2.7 | 139 | % | |||||
Share-based compensation expense |
0.3 | 0.2 | 0.1 | 54 | % | ||||||||
Distributable net investment income(a) |
5.0 | 2.2 | 2.8 | 131 | % | ||||||||
Net realized gain from investments |
2.7 | 0.4 | 2.3 | NM | |||||||||
Distributable net realized income(a) |
$ | 7.7 | $ | 2.6 | $ | 5.1 | 195 | % | |||||
Distributable net investment income per shareBasic and diluted(a) |
$ | 0.33 | $ | 0.23 | $ | 0.10 | 43 | % | |||||
Distributable net realized income per shareBasic and diluted(a) |
$ | 0.51 | $ | 0.27 | $ | 0.24 | 89 | % | |||||
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Investment Income
For the three months ended June 30, 2010, total investment income was $8.7 million, a $5.1 million, or 143%, increase over the $3.6 million in the corresponding period of 2009. This comparable period increase was principally attributable to (i) $2.5 million of total investment income from the MSC II portfolio investments acquired in the Exchange Offer, (ii) a $1.8 million increase in interest income from higher average levels of both portfolio debt investments and interest-bearing marketable securities or idle funds investments, (iii) a $0.6 million increase in fee income due to higher levels of transaction activity, and (iv) a $0.3 million increase in dividend income from portfolio equity investments.
Expenses
For the three months ended June 30, 2010, total expenses increased by approximately $2.4 million to $4.0 million from $1.6 million in the corresponding period of 2009. This comparable period increase in expenses was principally attributable to (i) $1.9 million in interest expense and other operating expenses related to MSC II subsequent to the Exchange Offer, (ii) higher share-based compensation expense of $0.1 million related to non-cash amortization for restricted share grants, and (iii) higher personnel costs and other operating expenses compared with the three months ended June 30, 2009.
Distributable Net Investment Income
Distributable net investment income for the three months ended June 30, 2010 increased 131% to $5.0 million, or $0.33 per share, compared with $2.2 million, or $0.23 per share, in the corresponding period of 2009. The increase in distributable net investment income was primarily due to higher levels of total investment income, partially offset by higher interest and other operating expenses, due to the changes discussed above. Distributable net investment income on a per share basis for the three months ended June 30, 2010 reflects a greater number of average shares outstanding compared to the corresponding period in 2009 due to the June 2009 and January 2010 follow-on stock offerings, as well as the shares issued to consummate the Exchange Offer.
Net Investment Income
Net investment income for the three months ended June 30, 2010 was $4.7 million, or a 139% increase, compared to net investment income of $2.0 million during the corresponding period of 2009. The increase in net investment income was principally attributable to the increase in total investment income partially offset by higher interest and other operating expenses as discussed above.
Distributable Net Realized Income
For the three months ended June 30, 2010, the net realized gain from investments was $2.7 million, representing a $2.3 million increase over the net realized gain of $0.4 million for the comparable period in 2009. The net realized gain from investments during the second quarter of 2010 was primarily attributable to (i) $2.3 million of total realized gains on the partial exits of equity investments in Laurus Healthcare, LP and Gulf Manufacturing, LLC and on the full exit of an equity investment in Pulse Systems, LLC and (ii) $0.4 million of net realized gain related to marketable securities and idle funds investments. The net realized gain during the second quarter of 2009 was primarily attributable to marketable securities and idle funds investments.
Distributable net realized income increased $5.1 million, or 195%, to $7.7 million, or $0.51 per share, in the second quarter of 2010 compared with distributable net realized income of $2.6 million, or $0.27 per share, in the corresponding period of 2009 due to the higher levels of distributable net investment income and net realized gain from investments as discussed above.
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Net Realized Income
The higher levels of net investment income and net realized gain from investments during the three months ended June 30, 2010 resulted in a $5.0 million increase in net realized income compared with the corresponding period of 2009.
Net Increase in Net Assets Resulting from Operations Attributable to Common Stock
For the three months ended June 30, 2010, the $1.8 million net change in unrealized appreciation from investments was principally attributable to (i) $3.0 million in accounting reversals of net unrealized appreciation attributable to the net realized gain recognized in the second quarter of 2010 as discussed above, (ii) unrealized appreciation on eleven portfolio investments totaling $6.1 million, offset by unrealized depreciation on nine portfolio investments totaling $2.5 million, and (iii) $1.5 million in unrealized appreciation attributable to our SBIC debentures. The noncontrolling interest of $0.3 million recognized in the second quarter of 2010 reflects the pro rata portion of MSC II net earnings attributable to the limited partnership interests in MSC II not owned by Main Street.
As a result of these events, our net increase in net assets resulting from operations attributable to common stock during the three months ended June 30, 2010 was $8.9 million, or $0.59 per share, compared with a net increase in net assets resulting from operations attributable to common stock of $3.7 million, or $0.39 per share, in the corresponding period of 2009.
Comparison of the six months ended June 30, 2010 and June 30, 2009
|
Six Months Ended June 30, |
Net Change | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Amount | % | |||||||||
|
(dollars in millions) |
||||||||||||
Total investment income |
$ | 15.8 | $ | 7.2 | $ | 8.6 | 120 | % | |||||
Total expenses |
(7.9 | ) | (3.1 | ) | (4.8 | ) | 155 | % | |||||
Net investment income |
7.9 | 4.1 | 3.8 | 94 | % | ||||||||
Net realized gain (loss) from investments |
(1.4 | ) | 1.3 | (2.7 | ) | NM | |||||||
Net realized income |
6.5 | 5.4 | 1.1 | 21 | % | ||||||||
Net change in unrealized appreciation (depreciation) from investments |
7.3 | (1.5 | ) | 8.8 | NM | ||||||||
Income tax benefit (provision) |
(0.4 | ) | (0.6 | ) | 0.2 | -28 | % | ||||||
Bargain purchase gain |
4.9 | | 4.9 | NM | |||||||||
Noncontrolling interest |
(0.4 | ) | | (0.4 | ) | NM | |||||||
Net increase in net assets resulting from operations attributable to common stock |
$ | 17.9 | $ | 3.3 | $ | 14.6 | 448 | % | |||||
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|
Six Months Ended June 30, |
Net Change | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | Amount | % | |||||||||
|
(dollars in millions) |
||||||||||||
Net investment income |
$ | 7.9 | $ | 4.1 | $ | 3.8 | 94 | % | |||||
Share-based compensation expense |
0.6 | 0.4 | 0.2 | 54 | % | ||||||||
Distributable net investment income(a) |
8.5 | 4.5 | 4.0 | 91 | % | ||||||||
Net realized gain (loss) from investments |
(1.4 | ) | 1.3 | (2.7 | ) | NM | |||||||
Distributable net realized income(a) |
$ | 7.1 | $ | 5.8 | $ | 1.3 | 23 | % | |||||
Distributable net investment income per shareBasic and diluted(a) |
$ | 0.57 | $ | 0.48 | $ | 0.09 | 19 | % | |||||
Distributable net realized income per shareBasic and diluted(a) |
$ | 0.48 | $ | 0.62 | $ | (0.14 | ) | -23 | % | ||||
Investment Income
For the six months ended June 30, 2010, total investment income was $15.8 million, an $8.6 million, or 120%, increase over the $7.2 million in the corresponding period of 2009. This comparable period increase was principally attributable to (i) $5.0 million of total investment income from the MSC II portfolio investments acquired in the Exchange Offer, (ii) a $3.0 million increase in interest income from higher average levels of both portfolio debt investments and interest-bearing marketable securities or idle funds investments, (iii) a $0.4 million increase in fee income due to higher levels of transaction activity, and (iv) a $0.3 million increase in dividend income from portfolio equity investments.
Expenses
For the six months ended June 30, 2010, total expenses increased by approximately $4.8 million to $7.9 million from $3.1 million in the corresponding period of 2009. This comparable period increase in expenses was principally attributable to (i) $3.9 million in interest expense and other operating expenses related to MSC II subsequent to the Exchange Offer, (ii) higher share-based compensation expense of $0.2 million related to non-cash amortization for restricted share grants, and (iii) higher personnel costs and other operating expenses.
S-30
Distributable Net Investment Income
Distributable net investment income for the six months ended June 30, 2010 increased 91% to $8.5 million, or $0.57 per share, compared with $4.5 million, or $0.48 per share, in the corresponding period of 2009. The increase in distributable net investment income was primarily due to higher levels of total investment income, partially offset by higher interest and other operating expenses, due to the changes discussed above. Distributable net investment income on a per share basis for the six months ended June 30, 2010 reflects a greater number of average shares outstanding compared to the corresponding period in 2009 due to the June 2009 and January 2010 follow-on stock offerings, as well as the shares issued to consummate the Exchange Offer.
Net Investment Income
Net investment income for the six months ended June 30, 2010 was $7.9 million, or a 94% increase, compared to net investment income of $4.1 million during the corresponding period of the prior year. The increase in net investment income was principally attributable to the increase in total investment income, partially offset by higher interest and other operating expenses as discussed above.
Distributable Net Realized Income
For the six months ended June 30, 2010, the net realized loss from investments was $1.4 million, representing a $2.7 million decrease over the net realized gain of $1.3 million for the comparable period in 2009. The net realized loss from investments for the first six months of 2010 was primarily attributable to $4.0 million of realized loss on our debt and equity investment in Quest Design and Production, LLC in the first quarter of 2010, partially offset during the second quarter of 2010 by (i) $2.3 million of realized gains on the partial exits of equity investments in Laurus Healthcare, LP and Gulf Manufacturing, LLC and on the full exit of our equity investment in Pulse Systems, LLC and (ii) $0.4 million of net realized gain related to marketable securities and idle funds investments. The net realized gain during the first six months of 2009 was primarily attributable to marketable securities and idle funds investments.
Distributable net realized income increased $1.3 million, or 23%, to $7.1 million, or $0.48 per share, for the first six months of 2010 compared with distributable net realized income of $5.8 million, or $0.62 per share, in the corresponding period of 2009 due to the higher levels of distributable net investment income, partially offset by the decrease in total net realized gain (loss) from investments.
Net Realized Income
The higher levels of net investment income during the six months ended June 30, 2010, partially offset by the decrease from total net realized gain (loss) during that period resulted in a $1.1 million, or 21%, increase in net realized income compared with the corresponding period of 2009.
Net Increase in Net Assets Resulting from Operations Attributable to Common Stock
For the six months ended June 30, 2010, the $7.3 million net change in unrealized appreciation from investments was principally attributable to (i) $1.1 million in accounting reversals of net unrealized depreciation attributable to the net realized loss recognized during the first six months of 2010 as discussed above, (ii) unrealized appreciation on seventeen portfolio investments totaling $9.5 million, offset by unrealized depreciation on fourteen portfolio investments totaling $4.7 million, (iii) $1.8 million in unrealized appreciation attributable to our SBIC debentures, and (iv) $0.3 million in unrealized depreciation attributable to our investment in the affiliated Investment Manager. The noncontrolling interest of $0.4 million recognized during the first six months of 2010 reflected the pro rata portion of MSC II net earnings attributable to the limited partnership interests in MSC II not owned by Main Street. During the first quarter of 2010, we also recognized a $4.9 million bargain
S-31
purchase gain related to the consummation of the Exchange Offer. The bargain purchase gain recognized during the first quarter of 2010 is a non-recurring gain which was solely generated by the acquisition accounting related to the Exchange Offer. For the six months ended June 30, 2010, we also recognized a net income tax provision of $0.4 million principally related to deferred taxes on unrealized appreciation of equity investments held in our taxable subsidiary.
As a result of these events, our net increase in net assets resulting from operations attributable to common stock during the six months ended June 30, 2010 was $17.9 million, or $1.22 per share, compared with a net increase in net assets resulting from operations attributable to common stock of $3.3 million, or $0.35 per share, in the corresponding period of 2009.
Liquidity and Capital Resources
Cash Flows
For the six months ended June 30, 2010, we experienced a net decrease in cash and cash equivalents in the amount of $25.9 million. During that period, we generated $6.7 million of cash from our operating activities, primarily from distributable net investment income partially offset by accretion of unearned income and increases in interest receivable and other assets. We used $87.9 million in net cash from investing activities for the six months ended June 30, 2010, principally including the funding of $85.0 million for core and private placement portfolio investments and the funding of $30.7 million for marketable securities and idle funds investments, partially offset by (i) $19.5 million of cash proceeds from the sale of marketable securities and idle funds investments, (ii) $2.5 million in cash acquired as part of the Exchange Offer, (iii) $3.2 million from the full and partial exits of equity investments and (iv) $2.7 million in cash proceeds from the repayment of core and private placement portfolio debt investments. For the first six months of 2010, $55.4 million in cash was provided by financing activities, which principally consisted of (i) $40.1 million in net cash proceeds from a January 2010 public stock offering, (ii) $9.7 million in net cash proceeds from the issuance of SBIC debentures, and (iii) $12.5 million in net borrowings under our $30 million investment credit facility, partially offset by $7.0 million in cash dividends paid to stockholders.
For the six months ended June 30, 2009, we experienced a net decrease in cash and cash equivalents in the amount of $1.0 million. During that period, we generated $3.0 million of cash from our operating activities, primarily from distributable net investment income partially offset by decreases in accounts payable and increases in other assets. We used $13.2 million in net cash from investing activities, principally including the funding of $31.8 million for idle funds investments and the funding of $6.6 million for new portfolio company investments, partially offset by $20.5 million of cash proceeds from the sale of marketable securities and idle funds investments and $4.8 million in cash proceeds from the repayment of debt investments. During the first six months of 2009, $9.2 million in cash was provided by financing activities, which principally consisted of $16.3 million in cash proceeds from a public stock offering, partially offset by $5.8 million in cash dividends to stockholders and $1.6 million in purchases of shares of our common stock as part of our share repurchase program.
Capital Resources
As of June 30, 2010, we had $19.6 million in cash and cash equivalents, marketable securities, and idle funds investments, and our net asset value totaled $185.8 million, or $12.21 per share. In January 2010, we completed a follow-on public stock offering in which we sold 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share (or approximately 121% of the latest reported Net Asset Value per share), resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs.
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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 Street's 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 pays unused commitment fees of 0.375% per annum on the average unused lender commitments under the Investment Facility. 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 2.0 to 1.0, and (iii) maintaining a minimum tangible net worth. At June 30, 2010, Main Street had $12.5 million in borrowings outstanding under the Investment Facility, and Main Street was in compliance with all financial covenants of the Investment Facility.
Due to each of the Funds' status as a licensed SBIC, we have the ability to issue, through the Funds, debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, an SBIC can have outstanding debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which effectively approximates the amount of its equity capital. Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time. 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 June 30, 2010, we, through the Funds, had $145 million of outstanding indebtedness guaranteed by the SBA, which carried an average fixed interest rate of approximately 5.5%. The first maturity related to the SBIC debentures does not occur until 2013, and the weighted average duration is 6.9 years as of June 30, 2010.
The Stimulus Bill contains several provisions applicable to SBIC funds, including the Funds. One of the key SBIC-related provisions included in the Stimulus Bill increased 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. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between the Funds. Subsequent to the Exchange Offer, Main Street now has access to an incremental $80 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $80 million of existing MSC II SBIC leverage and the $65 million of MSMF SBIC leverage.
A recently proposed bill, the Small Business Financing and Investment Act of 2009, or HR 3854, would increase the total SBIC leverage capacity for affiliated SBIC funds from $225 million to $350 million. If enacted, this bill would increase Main Street's SBIC leverage capacity through the Funds by an additional $125 million. While Main Street is positioned to benefit from the full congressional passage of HR 3854, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted.
Due to our existing cash and cash equivalents, marketable securities, and idle funds investments and the available borrowing capacity through both the SBIC program and the Investment Facility, we project that we will have sufficient liquidity to fund our investment and operational activities through the remainder of calendar year 2010. However, this projection will be impacted by, among other things, the pace of new and follow-on investments, debt repayments and investment redemptions, the level of cash flow from operations and cash flow from realized gains, and the level of dividends we pay in cash.
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We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, the liquidation of marketable securities and idle funds investments, and a combination of future debt and equity capital. Our primary uses of funds will be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.
We periodically invest excess cash balances into marketable securities and idle funds investments. The investment objective of marketable securities and idle funds investments is to generate incremental cash returns on excess cash balances prior to utilizing those funds for investment in our core and private placement portfolio investment strategy. Marketable securities and idle funds investments generally consist of secured debt investments, independently rated debt investments, certificates of deposit with financial institutions, and diversified bond funds. The composition of marketable securities and idle funds investments will vary in a given period based upon, among other things, changes in market conditions, the underlying fundamentals in our marketable securities and idle funds investments, our outlook regarding future core and private placement portfolio investment needs, and any regulatory requirements applicable to Main Street.
If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price unless our stockholders approve such a sale and our Board of Directors makes certain determinations. A proposal, approved by our stockholders at our June 2010 annual meeting of stockholders, authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for a period of one year ending on June 9, 2011. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval.
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. In January 2008, we received exemptive relief from the SEC that permits us to exclude SBA-guaranteed debt issued by our wholly owned SBIC subsidiary, MSMF, from our asset coverage ratio, which, in turn, enables us to fund more investments with debt capital. We expect to obtain similar relief from the SEC with respect to SBIC debt securities issued by MSC II, including the $80 million of currently outstanding debt related to its participation in the SBIC program.
Current Market Conditions
Although we have been able to secure access to additional liquidity, including our recent public stock offering, the $30 million Investment Facility, and the increase in available leverage through the SBIC program as part of the Stimulus Bill, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board ("FASB") issued ASC 810, Amendments to FASB Interpretation No. 46(R) ("ASC 810"), which amends the guidance in FASB Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities. It requires reporting entities to evaluate former qualifying special-purpose entities ("QSPEs") for consolidation, changes the approach to determining the primary beneficiary of a variable interest entity (a "VIE") from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of
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a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. ASC 810 requires additional year-end and interim disclosures for public and non-public companies. ASC 810 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2009 and for subsequent interim and annual reporting periods. Main Street adopted ASC 810 on January 1, 2010. The FASB agreed at its January 27, 2010 meeting to issue an Accounting Standards Update ("ASU") to finalize its proposal to indefinitely defer ASC 810 for reporting enterprises' interests in entities that either have all of the characteristics of investment companies or for which it is industry practice to apply measurement principles for financial reporting purposes consistent with those that apply to investment companies. The provisions of ASC 810 will not have any impact on Main Street's financial condition or results of operations.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures About Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 adds new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, inputs and valuation techniques. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Adoption of ASU 2010-06 is not expected to have a significant impact on Main Street's financial condition and results of operations.
In December 2007, the FASB issued ASC 805, Business Combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, replacing the previous cost-allocation process. ASC 805 also includes a substantial number of new disclosure requirements. ASC 805 is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Main Street adopted ASC 805 on January 1, 2009. Main Street accounted for the Exchange Offer under ASC 805 with the impact on the financial statements discussed in Note I to the consolidated financial statements.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, and may in the future experience, the impacts of inflation on their operating results, including periodic escalations in their costs for raw materials and required energy consumption.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At June 30, 2010, we had two outstanding commitments to fund unused revolving loans for up to $1.5 million in total.
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Contractual Obligations
As of June 30, 2010, our future fixed commitments for cash payments on contractual obligations for each of the next five years and thereafter are as follows:
|
Total | July 1 through December 31, 2010 |
2011 | 2012 | 2013 | 2014 | 2015 and thereafter |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||||||||||||||
SBIC debentures |
$ | 145,000 | $ | | $ | | $ | | $ | 4,000 | $ | 18,000 | $ | 123,000 | ||||||||
Interest due on SBIC debentures |
55,151 | 3,990 | 7,993 | 8,011 | 7,989 | 7,683 | 19,485 | |||||||||||||||
Total |
$ | 200,151 | $ | 3,990 | $ | 7,993 | $ | 8,011 | $ | 11,989 | $ | 25,683 | $ | 142,485 | ||||||||
MSC II is obligated to make payments under an investment advisory agreement with the Investment Manager, MSCC's wholly owned subsidiary. The payments due under the investment advisory agreement are fixed for the first five years at $3.3 million per year, paid quarterly, until December 31, 2010. Subsequent to December 31, 2010, under the investment advisory agreement, MSC II will be obligated to pay a 2% annualized management fee based upon MSC II assets under management.
MSCC is obligated to make payments under a support services agreement with the Investment Manager. The Investment Manager is reimbursed for its excess cash expenses associated with providing investment management and other services to MSCC and its subsidiaries, as well as MSC II and third parties. Each quarter, as part of the support services agreement, MSCC makes payments to cover all cash 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 from third parties for providing external services. For the six months ended June 30, 2010 and 2009, the expenses reimbursed by MSCC to the Investment Manager were $820,198 and $79,938, respectively.
Related Party Transactions
As discussed further in Note D to the accompanying consolidated financial statements, subsequent to the completion of the Formation Transactions, the Investment Manager is a wholly owned portfolio company of MSCC. At June 30, 2010 and December 31, 2009, the Investment Manager had a receivable of $601,853 and $217,422, respectively, with MSCC related to net cash expenses incurred by the Investment Manager required to support Main Street's business.
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MAIN STREET CAPITAL CORPORATION
Consolidated Balance Sheets
|
June 30, 2010 | December 31, 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Unaudited) |
|
||||||||
ASSETS |
||||||||||
Portfolio investments at fair value: |
||||||||||
Control investments (cost: $162,917,430 and $59,544,719 as of June 30, 2010 and December 31, 2009, respectively) |
$ | 172,397,494 | $ | 66,400,667 | ||||||
Affiliate investments (cost: $56,781,172 and $39,252,445 as of June 30, 2010 and December 31, 2009, respectively) |
68,844,498 | 46,886,202 | ||||||||
Non-Control/Non-Affiliate investments (cost: $65,260,055 and $27,482,826 as of June 30, 2010 and December 31, 2009, respectively) |
64,211,930 | 27,416,287 | ||||||||
Investment in affiliated Investment Manager (cost: $4,284,042 and $18,000,000 as of June 30, 2010 and December 31, 2009, respectively) |
2,034,684 | 16,036,838 | ||||||||
Total portfolio investments (cost: $289,242,699 and $144,279,990 as of June 30, 2010 and December 31, 2009, respectively) |
307,488,606 | 156,739,994 | ||||||||
Marketable securities and idle funds investments (cost: $15,131,509 and $3,252,954 as of June 30, 2010 and December 31, 2009, respectively) |
14,900,228 | 3,252,954 | ||||||||
Total investments (cost: $304,374,208 and $147,532,944 as of June 30, 2010 and December 31, 2009, respectively) |
322,388,834 | 159,992,948 | ||||||||
Cash and cash equivalents |
4,730,165 | 30,619,998 | ||||||||
Deferred tax asset |
2,633,758 | 2,716,400 | ||||||||
Interest receivable and other assets |
3,311,579 | 1,509,608 | ||||||||
Deferred financing costs (net of accumulated amortization of $1,267,546 and $1,071,676 as of June 30, 2010 and December 31, 2009, respectively) |
1,425,950 | 1,611,508 | ||||||||
Total assets |
$ | 334,490,286 | $ | 196,450,462 | ||||||
LIABILITIES |
||||||||||
SBIC debentures (par: $145,000,000 and $65,000,000 as of June 30, 2010 and December 31, 2009, respectively; of which $61,139,538 is recorded at fair value as of June 30, 2010) |
$ | 126,139,538 | $ | 65,000,000 | ||||||
Line of credit |
12,500,000 | | ||||||||
Interest payable |
2,646,143 | 1,069,148 | ||||||||
Dividend payable |
1,901,630 | | ||||||||
Payable to affiliated Investment Manager |
601,853 | 217,422 | ||||||||
Accounts payable and other liabilities |
1,262,193 | 503,761 | ||||||||
Total liabilities |
145,051,357 | 66,790,331 | ||||||||
Commitments and contingencies |
||||||||||
NET ASSETS |
||||||||||
Common stock, $0.01 par value per share (150,000,000 shares authorized; 15,213,053 and 10,842,447 issued and outstanding as of June 30, 2010 and December 31, 2009, respectively) |
152,130 | 108,425 | ||||||||
Additional paid-in capital |
174,375,323 | 123,534,156 | ||||||||
Accumulated net investment income |
8,791,262 | 7,269,866 | ||||||||
Accumulated net realized gain (loss) from investments |
(18,677,108 | ) | (15,922,020 | ) | ||||||
Net unrealized appreciation from investments, net of income taxes |
21,151,217 | 14,669,704 | ||||||||
Total Net Asset Value |
185,792,824 | 129,660,131 | ||||||||
Noncontrolling interest |
3,646,105 | | ||||||||
Total net assets including noncontrolling interests |
189,438,929 | 129,660,131 | ||||||||
Total liabilities and net assets |
$ | 334,490,286 | $ | 196,450,462 | ||||||
NET ASSET VALUE PER SHARE |
$ | 12.21 | $ | 11.96 | ||||||
The accompanying notes are an integral part of these financial statements
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MAIN STREET CAPITAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||||
INVESTMENT INCOME: |
||||||||||||||||
Interest, fee and dividend income: |
||||||||||||||||
Control investments |
$ | 4,532,343 | $ | 1,831,201 | $ | 8,127,651 | $ | 3,833,821 | ||||||||
Affiliate investments |
1,953,832 | 1,166,501 | 3,762,445 | 2,335,557 | ||||||||||||
Non-Control/Non-Affiliate investments |
1,686,032 | 258,218 | 2,549,428 | 396,173 | ||||||||||||
Total interest, fee and dividend income |
8,172,207 | 3,255,920 | 14,439,524 | 6,565,551 | ||||||||||||
Interest from marketable securities, idle funds and other |
560,012 | 344,150 | 1,385,534 | 626,944 | ||||||||||||
Total investment income |
8,732,219 | 3,600,070 | 15,825,058 | 7,192,495 | ||||||||||||
EXPENSES: |
||||||||||||||||
Interest |
(2,111,868 | ) | (941,577 | ) | (4,105,105 | ) | (1,872,912 | ) | ||||||||
General and administrative |
(246,194 | ) | (430,114 | ) | (671,898 | ) | (744,787 | ) | ||||||||
Expenses reimbursed to affiliated Investment Manager |
(1,330,611 | ) | (45,513 | ) | (2,482,798 | ) | (79,938 | ) | ||||||||
Share-based compensation |
(301,458 | ) | (195,726 | ) | (602,916 | ) | (391,452 | ) | ||||||||
Total expenses |
(3,990,131 | ) | (1,612,930 | ) | (7,862,717 | ) | (3,089,089 | ) | ||||||||
NET INVESTMENT INCOME |
4,742,088 | 1,987,140 | 7,962,341 | 4,103,406 | ||||||||||||
NET REALIZED GAIN (LOSS) FROM INVESTMENTS: |
||||||||||||||||
Control investments |
2,301,745 | 98,050 | (1,719,173 | ) | 865,651 | |||||||||||
Marketable securities and idle funds investments |
353,487 | 328,220 | 313,948 | 454,843 | ||||||||||||
Total net realized gain (loss) from investments |
2,655,232 | 426,270 | (1,405,225 | ) | 1,320,494 | |||||||||||
NET REALIZED INCOME |
7,397,320 | 2,413,410 | 6,557,116 | 5,423,900 | ||||||||||||
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): |
||||||||||||||||
Portfolio investments |
957,432 | 1,951,647 | 6,072,091 | (1,453,901 | ) | |||||||||||
Marketable securities and idle funds investments |
(484,585 | ) | 182,969 | (231,281 | ) | (171,091 | ) | |||||||||
SBIC debentures |
1,475,861 | | 1,757,054 | | ||||||||||||
Investment in affiliated Investment Manager |
(141,117 | ) | (283,277 | ) | (286,196 | ) | 55,318 | |||||||||
Total net change in unrealized appreciation (depreciation) |
1,807,591 | 1,851,339 | 7,311,668 | (1,569,674 | ) | |||||||||||
Income tax provision |
(36,686 | ) | (525,612 | ) | (421,260 | ) | (582,887 | ) | ||||||||
Bargain purchase gain |
| | 4,890,582 | | ||||||||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
9,168,225 | 3,739,137 | 18,338,106 | 3,271,339 | ||||||||||||
Noncontrolling interest |
(295,559 | ) | | (408,895 | ) | | ||||||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCK |
$ | 8,872,666 | $ | 3,739,137 | $ | 17,929,211 | $ | 3,271,339 | ||||||||
NET INVESTMENT INCOME PER SHAREBASIC AND DILUTED |
$ | 0.31 | $ | 0.21 | $ | 0.53 | $ | 0.44 | ||||||||
NET REALIZED INCOME PER SHAREBASIC AND DILUTED |
$ | 0.49 | $ | 0.25 | $ | 0.44 | $ | 0.58 | ||||||||
DIVIDENDS PAID PER SHARE |
$ | 0.38 | $ | 0.38 | $ | 0.75 | $ | 0.75 | ||||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCK PER SHAREBASIC AND DILUTED |
$ | 0.59 | $ | 0.39 | $ | 1.22 | $ | 0.35 | ||||||||
WEIGHTED AVERAGE SHARES OUTSTANDINGBASIC AND DILUTED |
15,147,091 | 9,520,314 | 14,754,121 | 9,323,968 | ||||||||||||
The accompanying notes are an integral part of these financial statements
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MAIN STREET CAPITAL CORPORATION
Consolidated Statements of Changes in Net Assets
(Unaudited)
|
|
|
|
|
|
Net Unrealized Appreciation from Investments, Net of Income Taxes |
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common Stock | |
|
Accumulated Net Realized Gain (Loss) From Investments |
|
|
Total Net Assets Including Noncontrolling Interest |
|||||||||||||||||||||
|
|
Accumulated Net Investment Income |
|
|
||||||||||||||||||||||||
|
Number of Shares |
Par Value |
Additional Paid-In Capital |
Total Net Asset Value |
Noncontrolling Interest |
|||||||||||||||||||||||
Balances at December 31, 2008 |
9,206,483 | $ | 92,065 | $ | 104,467,740 | $ | 10,155,593 | $ | (6,497,098 | ) | $ | 4,137,756 | $ | 112,356,056 | $ | | $ | 112,356,056 | ||||||||||
Dividend reinvestment |
79,193 | 791 | 979,785 | | | | 980,576 | | 980,576 | |||||||||||||||||||
Public offering of common stock, net of offering costs |
1,437,500 | 14,375 | 16,200,919 | | | | 16,215,294 | | 16,215,294 | |||||||||||||||||||
Share repurchase program |
(164,544 | ) | (1,645 | ) | (1,615,461 | ) | | | | (1,617,106 | ) | | (1,617,106 | ) | ||||||||||||||
Share-based compensation |
| | 391,452 | | | | 391,452 | | 391,452 | |||||||||||||||||||
Dividends to stockholders |
| | | (6,304,083 | ) | (712,843 | ) | | (7,016,926 | ) | | (7,016,926 | ) | |||||||||||||||
Net increase resulting from operations |
| | | 4,103,406 | 1,320,494 | (2,152,561 | ) | 3,271,339 | | 3,271,339 | ||||||||||||||||||
Balances at June 30, 2009 |
10,558,632 | $ | 105,586 | $ | 120,424,435 | $ | 7,954,916 | $ | (5,889,447 | ) | $ | 1,985,195 | $ | 124,580,685 | $ | | $ | 124,580,685 | ||||||||||
Balances at December 31, 2009 |
10,842,447 | $ | 108,425 | $ | 123,534,156 | $ | 7,269,866 | $ | (15,922,020 | ) | $ | 14,669,704 | $ | 129,660,131 | $ | | $ | 129,660,131 | ||||||||||
MSC II exchange offer and related transactions |
1,246,803 | 12,468 | 20,080,623 | 4,890,582 | | | 24,983,673 | 3,237,210 | 28,220,883 | |||||||||||||||||||
Public offering of common stock, net of offering costs |
2,875,000 | 28,750 | 40,079,845 | | | | 40,108,595 | | 40,108,595 | |||||||||||||||||||
Share-based compensation |
| | 602,916 | | | | 602,916 | | 602,916 | |||||||||||||||||||
Dividend reinvestment |
248,803 | 2,487 | 3,793,741 | | | | 3,796,228 | | 3,796,228 | |||||||||||||||||||
Adjustment to investment in Investment Manager related to the MSC II Exchange Offer |
| | (13,715,958 | ) | | | | (13,715,958 | ) | | (13,715,958 | ) | ||||||||||||||||
Dividends to stockholders |
| | | (11,331,527 | ) | (1,349,863 | ) | | (12,681,390 | ) | | (12,681,390 | ) | |||||||||||||||
Net increase resulting from operations |
| | | 7,962,341 | (1,405,225 | ) | 6,890,408 | 13,447,524 | | 13,447,524 | ||||||||||||||||||
Noncontrolling interest |
| | | | | (408,895 | ) | (408,895 | ) | 408,895 | | |||||||||||||||||
Balances at June 30, 2010 |
15,213,053 | $ | 152,130 | $ | 174,375,323 | $ | 8,791,262 | $ | (18,677,108 | ) | $ | 21,151,217 | $ | 185,792,824 | $ | 3,646,105 | $ | 189,438,929 | ||||||||||
The accompanying notes are an integral part of these financial statements
S-39
MAIN STREET CAPITAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
|
Six Months Ended June 30, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|||||||||||
Net increase in net assets resulting from operations: |
$ | 18,338,106 | $ | 3,271,339 | |||||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |
|||||||||||
Net change in unrealized (appreciation) depreciation |
(7,311,668 | ) | 1,569,674 | ||||||||
Net realized (gain) loss from investments |
1,405,225 | (1,320,494 | ) | ||||||||
Bargain purchase gain |
(4,890,582 | ) | | ||||||||
Accretion of unearned income |
(1,092,705 | ) | (309,996 | ) | |||||||
Net payment-in-kind interest accrual |
(429,153 | ) | (291,475 | ) | |||||||
Share-based compensation expense |
602,916 | 391,452 | |||||||||
Amortization of deferred financing costs |
195,868 | 202,054 | |||||||||
Deferred taxes |
(185 | ) | 743,676 | ||||||||
Changes in other assets and liabilities: |
|||||||||||
Interest receivable and other assets |
(1,204,605 | ) | (527,092 | ) | |||||||
Interest payable |
233,897 | 1,875 | |||||||||
Accounts payable to investment manager |
384,431 | | |||||||||
Accounts payable and other liabilities |
431,922 | (707,916 | ) | ||||||||
Net cash provided by operating activities |
6,663,467 | 3,023,097 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|||||||||||
Investments in portfolio companies |
(85,049,545 | ) | (6,613,657 | ) | |||||||
Investments in marketable securities and idle funds investments |
(30,734,400 | ) | (31,842,149 | ) | |||||||
Cash acquired in MSC II exchange offer |
2,489,920 | | |||||||||
Proceeds from marketable securities and idle funds investments |
19,546,235 | 20,517,609 | |||||||||
Principal payments received on loans and debt securities |
2,670,737 | 4,778,280 | |||||||||
Proceeds from sale of equity securities and related notes |
3,151,500 | | |||||||||
Net cash used in investing activities |
(87,925,553 | ) | (13,159,917 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|||||||||||
Share repurchase program |
| (1,617,106 | ) | ||||||||
Proceeds from public offering of common stock, net of offering costs |
40,108,595 | 16,345,401 | |||||||||
Dividends paid to stockholders |
(6,983,532 | ) | (5,842,991 | ) | |||||||
Net change in DRIP deposit |
| 400,000 | |||||||||
Proceeds from issuance of SBIC debentures |
10,000,000 | | |||||||||
Proceeds from line of credit |
30,650,000 | | |||||||||
Repayments on line of credit |
(18,150,000 | ) | | ||||||||
Payment of deferred loan costs and SBIC debenture fees |
(252,810 | ) | (110,423 | ) | |||||||
Net cash provided by financing activities |
55,372,253 | 9,174,881 | |||||||||
Net decrease in cash and cash equivalents |
(25,889,833 | ) | (961,939 | ) | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
30,619,998 | 35,374,826 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 4,730,165 | $ | 34,412,887 | |||||||
The accompanying notes are an integral part of these financial statements
S-40
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Control Investments(3) |
|||||||||||||
PPL RVs, Inc. |
RV Aftermarket | ||||||||||||
18% Secured Debt (MaturityJune 10, 2015) |
Consignment/Parts | 6,250,000 | 6,159,249 | 6,159,249 | |||||||||
Member Units (Fully diluted 53.3%) |
2,150,000 | 2,150,000 | |||||||||||
|
8,309,249 | 8,309,249 | |||||||||||
Advantage Millwork Company, Inc. |
Manufacturer/Distributor of |
||||||||||||
12% Secured Debt (MaturityFebruary 5, 2012) |
Wood Doors | 7,666,667 | 4,770,657 | 3,000,000 | |||||||||
Warrants (Fully diluted 30.5%) |
97,808 | | |||||||||||
|
4,868,465 | 3,000,000 | |||||||||||
Café Brazil, LLC |
Casual Restaurant Group |
||||||||||||
12% Secured Debt (MaturityApril 20, 2011) |
2,350,000 | 2,342,702 | 2,350,597 | ||||||||||
Member Units(7) (Fully diluted 41.0%) |
41,837 | 1,770,000 | |||||||||||
|
2,384,539 | 4,120,597 | |||||||||||
California Healthcare Medical Billing, Inc. |
Healthcare Billing and |
||||||||||||
12% Secured Debt (MaturityOctober 17, 2013) |
Records Management | 2,410,000 | 2,366,342 | 2,366,342 | |||||||||
12% Current / 6% PIK Secured Debt (MaturityOctober 17, 2013) |
2,303,000 | 2,058,223 | 2,129,333 | ||||||||||
Common Stock (Fully diluted 9.8%) |
1,176,667 | 1,460,000 | |||||||||||
Warrants (Fully diluted 19.6%) |
1,093,333 | 3,410,333 | |||||||||||
|
6,694,565 | 9,366,008 | |||||||||||
CBT Nuggets, LLC |
Produces and Sells IT |
||||||||||||
14% Secured Debt (MaturityDecember 31, 2013) |
Certification Training Videos | 2,800,000 | 2,784,162 | 2,800,000 | |||||||||
10% Secured Debt (MaturityMarch 31, 2012) |
1,175,000 | 1,175,000 | 1,175,000 | ||||||||||
Member Units(7) (Fully diluted 39.9%) |
1,299,520 | 3,110,000 | |||||||||||
|
5,258,682 | 7,085,000 | |||||||||||
Ceres Management, LLC (Lambs) |
Aftermarket Automotive |
||||||||||||
14% Secured Debt (MaturityMay 31, 2013) |
Services Chain | 4,000,000 | 3,958,653 | 3,958,653 | |||||||||
Member Units (Fully diluted 70%) |
1,813,333 | 1,970,000 | |||||||||||
Class B Member Units (15% cumulative compounding quarterly) (Non-voting) |
922,076 | 922,076 | |||||||||||
9.5% Secured Debt (Lamb's Real Estate Investment I, LLC) (MaturityAugust 31, 2014) |
1,125,000 | 1,125,000 | 1,125,000 | ||||||||||
Member Units(7) (Lamb's Real Estate Investment I, LLC) (Fully diluted 100%) |
625,000 | 625,000 | |||||||||||
|
8,444,062 | 8,600,729 | |||||||||||
Condit Exhibits, LLC |
Tradeshow Exhibits/Custom |
||||||||||||
9% current / 9% PIK Secured Debt (MaturityJuly 1, 2013) |
Displays | 4,452,182 | 4,404,678 | 4,404,678 | |||||||||
Warrants (Fully diluted 46.9%) |
320,000 | 50,000 | |||||||||||
|
4,724,678 | 4,454,678 |
S-41
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Currie Acquisitions, LLC |
Manufacturer of Electric |
||||||||||||
12% Secured Debt (MaturityMarch 1, 2015) |
Bicycles/Scooters | 4,750,000 | 3,909,638 | 3,909,638 | |||||||||
Warrants (Fully diluted 47.3%) |
2,566,204 | 2,566,204 | |||||||||||
|
6,475,842 | 6,475,842 | |||||||||||
Gulf Manufacturing, LLC |
Industrial Metal Fabrication |
||||||||||||
8% Secured Debt (MaturityAugust 31, 2014) |
4,300,000 | 4,300,000 | 4,300,000 | ||||||||||
13% Secured Debt (MaturityAugust 31, 2012) |
2,000,000 | 1,956,075 | 1,995,238 | ||||||||||
9% PIK Secured Debt (MaturityJune 30, 2017) |
1,420,784 | 1,420,784 | 1,420,784 | ||||||||||
Member Units(7) (Fully diluted 34.2%) |
2,979,813 | 4,382,078 | |||||||||||
|
10,656,672 | 12,098,100 | |||||||||||
Harrison Hydra-Gen, Ltd. |
Manufacturer of Hydraulic |
||||||||||||
12% Secured Debt (MaturityJune 4, 2015) |
Generators | 6,000,000 | 5,199,216 | 5,199,216 | |||||||||
Warrants (Fully diluted 35.2%) |
717,640 | 717,640 | |||||||||||
Mandatorily Redeemable Preferred Stock |
1,000,000 | 1,000,000 | |||||||||||
|
6,916,856 | 6,916,856 | |||||||||||
Hawthorne Customs & Dispatch Services, LLC |
Transportation/ Logistics |
||||||||||||
Member Units(7) (Fully diluted 59.2%) |
692,500 | 990,000 | |||||||||||
Member Units (Wallisville Real Estate, LLC)(7) (Fully diluted 59.2%) |
1,214,784 | 1,214,784 | |||||||||||
|
1,907,284 | 2,204,784 | |||||||||||
Hydratec Holdings, LLC |
Agricultural Services |
||||||||||||
12.5% Secured Debt (MaturityOctober 31, 2012) |
2,995,244 | 2,963,459 | 2,963,459 | ||||||||||
Prime plus 1% Secured Debt (MaturityOctober 31, 2012) |
350,000 | 339,667 | 339,667 | ||||||||||
Member Units (Fully diluted 85.1%) |
4,100,000 | 6,190,000 | |||||||||||
|
7,403,126 | 9,493,126 | |||||||||||
Indianapolis Aviation Partners, LLC |
FBO / Aviation Support |
||||||||||||
12% Secured Debt (MaturitySeptember 15, 2014) |
Services | 4,500,000 | 4,104,892 | 4,350,000 | |||||||||
Warrants (Fully diluted 30.2%) |
1,129,286 | 1,480,286 | |||||||||||
|
5,234,178 | 5,830,286 | |||||||||||
Jensen Jewelers of Idaho, LLC |
Retail Jewelry |
||||||||||||
Prime Plus 2% Secured Debt (MaturityNovember 14, 2011) |
2,610,000 | 2,603,599 | 2,610,000 | ||||||||||
13% current / 6% PIK Secured Debt (MaturityNovember 14, 2011) |
2,694,896 | 2,685,700 | 2,694,896 | ||||||||||
Member Units(7) (Fully diluted 60.8%) |
811,000 | 1,010,000 | |||||||||||
|
6,100,299 | 6,314,896 |
S-42
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mid-Columbia Lumber Products, LLC |
Specialized Lumber Products |
||||||||||||
Prime Plus 1% Secured Debt (MaturityOctober 1, 2010) |
375,000 | 373,333 | 373,333 | ||||||||||
12% Secured Debt (MaturityDecember 18, 2011) |
3,900,000 | 3,757,475 | 3,798,418 | ||||||||||
Member Units (Fully diluted 26.7%) |
500,000 | 610,000 | |||||||||||
Warrants (Fully diluted 25.5%) |
250,000 | 580,000 | |||||||||||
9.5% Secured Debt (MidColumbia Real Estate, LLC) (MaturityMay 13, 2025) |
1,130,000 | 1,130,000 | 1,130,000 | ||||||||||
Member Units (MidColumbia Real Estate, LLC) (Fully diluted 50.0%) |
250,000 | 250,000 | |||||||||||
|
6,260,808 | 6,741,751 | |||||||||||
NAPCO Precast, LLC |
Precast Concrete |
||||||||||||
18% Secured Debt (MaturityFebruary 1, 2013) |
Manufacturing | 5,923,077 | 5,848,516 | 5,923,077 | |||||||||
Prime Plus 2% Secured Debt (MaturityFebruary 1, 2013)(8) |
3,384,615 | 3,365,193 | 3,384,615 | ||||||||||
Member Units(7) (Fully diluted 35.3%) |
2,020,000 | 4,740,000 | |||||||||||
|
11,233,709 | 14,047,692 | |||||||||||
NTS Holdings, Inc. |
Trench & Traffic Safety |
||||||||||||
12% Secured Debt (MaturityApril 30, 2015) |
Equipment | 6,000,000 | 5,960,861 | 5,960,861 | |||||||||
Member Units(7) (Fully diluted 72.3%) |
1,688,451 | 144,641 | |||||||||||
Preferred stock(7) (12% cumulative, compounded quarterly) |
10,046,571 | 10,046,571 | |||||||||||
|
17,695,883 | 16,152,073 | |||||||||||
OMi Holdings, Inc. |
Manufacturer of Overhead |
||||||||||||
12% Secured Debt (MaturityApril 1, 2013) |
Cranes | 10,370,000 | 10,305,433 | 10,305,433 | |||||||||
Common Stock (Fully diluted 48%) |
1,080,000 | 270,000 | |||||||||||
|
11,385,433 | 10,575,433 | |||||||||||
The MPI Group, LLC |
Manufacturer of Custom |
||||||||||||
9% Secured Debt (MaturityOctober 2, 2013) |
Hollow Metal Doors, Frames | 200,000 | 198,701 | 198,701 | |||||||||
12% Secured Debt (MaturityOctober 2, 2013) |
and Accessories | 5,000,000 | 4,809,686 | 4,809,686 | |||||||||
Warrants (Fully diluted 47.1%) |
895,943 | 400,000 | |||||||||||
|
5,904,330 | 5,408,387 | |||||||||||
Thermal & Mechanical Equipment, LLC |
Heat Exchange / Filtration |
||||||||||||
13% current / 5% PIK Secured Debt (MaturitySeptember 25, 2014) |
Products and Services | 5,575,220 | 5,494,570 | 5,575,220 | |||||||||
Prime plus 2% Secured Debt (MaturitySeptember 25, 2014)(8) |
1,750,000 | 1,737,968 | 1,737,968 | ||||||||||
Warrants (Fully diluted 50.0%) |
1,000,000 | 1,890,000 | |||||||||||
|
8,232,538 | 9,203,188 | |||||||||||
Uvalco Supply, LLC |
Farm and Ranch Supply |
||||||||||||
Member Units (Fully diluted 39.6%)(7) |
1,113,243 | 1,150,000 | |||||||||||
S-43
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Vision Interests, Inc. |
Manufacturer/Installer of |
||||||||||||
2.6% current /10.4% PIK Secured Debt (MaturityJune 6, 2016) |
Commercial Signage | 9,400,000 | 8,424,811 | 8,022,651 | |||||||||
2.6% current /10.4% PIK Secured Debt (MaturityJune 5, 2012) |
560,000 | 538,630 | 538,630 | ||||||||||
Common Stock (Fully diluted 22.3%) |
372,000 | | |||||||||||
Warrants (Fully diluted 38.2%) |
160,010 | | |||||||||||
|
9,495,451 | 8,561,281 | |||||||||||
Ziegler's NYPD, LLC |
Casual Restaurant Group |
||||||||||||
Prime plus 2% Secured Debt (MaturityOctober 1, 2013)(8) |
1,000,000 | 992,990 | 992,990 | ||||||||||
13% current / 5% PIK Secured Debt (MaturityOctober 1, 2013) |
4,680,906 | 4,624,548 | 4,624,548 | ||||||||||
Warrants (Fully diluted 47.6%) |
600,000 | 670,000 | |||||||||||
|
6,217,538 | 6,287,538 | |||||||||||
Subtotal Control Investments |
162,917,430 |
172,397,494 |
|||||||||||
Affiliate Investments(4) |
|||||||||||||
American Sensor Technologies, Inc. |
Manufacturer of | ||||||||||||
9% current / 2% PIK Secured Debt (MaturityMay 31, 2012) |
Commercial/Industrial Sensors | 3,606,322 | 3,571,609 | 3,571,609 | |||||||||
Warrants (Fully diluted 19.6%) |
49,990 | 1,010,000 | |||||||||||
|
3,621,599 | 4,581,609 | |||||||||||
Audio Messaging Solutions, LLC |
Audio Messaging Services |
||||||||||||
12% Secured Debt (MaturityMay 8, 2014) |
5,516,000 | 5,153,823 | 5,264,000 | ||||||||||
Warrants (Fully diluted 8.4%) |
468,373 | 1,120,000 | |||||||||||
|
5,622,196 | 6,384,000 | |||||||||||
Compact Power Equipment Centers, LLC |
Light to Medium Duty |
||||||||||||
12% Secured Debt (MaturitySeptember 23, 2014) |
Equipment Rental | 3,000,000 | 2,964,615 | 2,964,615 | |||||||||
Member Units (Fully diluted 11.5%) |
1,147 | 1,147 | |||||||||||
|
2,965,762 | 2,965,762 | |||||||||||
DrillingInfo, Inc. |
Information Services for the Oil |
||||||||||||
12% Secured Debt (MaturityNovember 20, 2014) |
and Gas Industry | 8,000,000 | 6,729,411 | 7,770,000 | |||||||||
Member Units (Fully diluted 2.1%) |
1,085,325 | 1,230,325 | |||||||||||
Warrants (Fully diluted 5.0%) |
1,250,000 | 2,930,000 | |||||||||||
|
9,064,736 | 11,930,325 | |||||||||||
East Teak Fine Hardwoods, Inc. |
Hardwood Products |
||||||||||||
Common Stock (Fully diluted 5.0%) |
480,318 | 500,000 | |||||||||||
Houston Plating & Coatings, LLC |
Plating & Industrial Coating |
||||||||||||
Prime plus 2% Secured Debt (MaturityJuly 18, 2013) |
Services | 300,000 | 300,000 | 300,000 | |||||||||
Member Units(7) (Fully diluted 11.1%) |
335,000 | 2,835,000 | |||||||||||
|
635,000 | 3,135,000 |
S-44
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
KBK Industries, LLC |
Specialty Manufacturer of Oilfield |
||||||||||||
14% Secured Debt (MaturityJanuary 23, 2011) |
and Industrial Products | 5,250,000 | 5,186,647 | 5,186,647 | |||||||||
10% Secured Debt (MaturityMarch 31, 2011) |
764,940 | 764,940 | 764,940 | ||||||||||
Member Units(7) (Fully diluted 19.3%) |
340,833 | 1,340,333 | |||||||||||
|
6,292,420 | 7,291,920 | |||||||||||
Laurus Healthcare, LP |
Healthcare Facilities / Services |
||||||||||||
13% Secured Debt (MaturityMay 7, 2012) |
3,325,000 | 3,325,000 | 3,325,000 | ||||||||||
Warrants (Fully diluted 14.1%) |
79,505 | 3,350,000 | |||||||||||
|
3,404,505 | 6,675,000 | |||||||||||
Lighting Unlimited, LLC |
Commercial and Residential |
||||||||||||
Prime Plus 1% Secured Debt (MaturityAugust 22, 2012)(8) |
Lighting Products and Design Services | 1,083,331 | 1,078,334 | 1,078,334 | |||||||||
12% current / 2% PIK Secured Debt (MaturityAugust 22, 2012) |
1,751,136 | 1,704,973 | 1,704,973 | ||||||||||
Warrants (Fully diluted 17.0%) |
54,000 | 54,000 | |||||||||||
|
2,837,307 | 2,837,307 | |||||||||||
Merrick Systems, Inc. |
Software and Information |
||||||||||||
13% Secured Debt (MaturityMay 6, 2015) |
Technology | 3,000,000 | 2,506,500 | 2,506,500 | |||||||||
Warrants (Fully diluted 6.5%) |
450,000 | 450,000 | |||||||||||
|
2,956,500 | 2,956,500 | |||||||||||
Olympus Building Services, Inc. |
Custodial/Facilities Services |
||||||||||||
12% Secured Debt (MaturityMarch 27, 2014) |
3,150,000 | 2,961,161 | 3,050,000 | ||||||||||
12% Current / 3% PIK Secured Debt (MaturityMarch 27, 2014) |
1,444,495 | 1,444,495 | 1,444,495 | ||||||||||
Warrants (Fully diluted 22.5%) |
470,000 | 930,000 | |||||||||||
|
4,875,656 | 5,424,495 | |||||||||||
Schneider Sales Management, LLC |
Sales Consulting and Training |
||||||||||||
13% Secured Debt (MaturityOctober 15, 2013) |
3,333,323 | 3,244,295 | 2,720,000 | ||||||||||
Warrants (Fully diluted 13.3%) |
45,000 | | |||||||||||
|
3,289,295 | 2,720,000 | |||||||||||
Walden Smokey Point, Inc. |
Specialty Transportation/Logistics |
||||||||||||
14% current / 4% PIK Secured Debt (MaturityDecember 30, 2013) |
8,492,765 | 8,366,355 | 8,366,355 | ||||||||||
Common Stock (Fully diluted 12.6%) |
1,426,667 | 2,430,000 | |||||||||||
|
9,793,022 | 10,796,355 | |||||||||||
WorldCall, Inc. |
Telecommunication/Information | ||||||||||||
13% Secured Debt (MaturityApril 22, 2011) |
Services | 646,225 | 646,225 | 646,225 | |||||||||
Common Stock (Fully diluted 9.9%) |
296,631 | | |||||||||||
|
942,856 | 646,225 | |||||||||||
Subtotal Affiliate Investments |
56,781,172 |
68,844,498 |
|||||||||||
S-45
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Non-Control/Non-Affiliate Investments(5): |
|||||||||||||
Brand Connections, LLC |
Venue-Based Marketing and | ||||||||||||
14% Secured Debt (MaturityApril 30, 2015) |
Media | 7,500,000 | 7,321,441 | 7,321,441 | |||||||||
Hayden Acquisition, LLC |
Manufacturer of Utility |
||||||||||||
8% Secured Debt (MaturityAugust 9, 2010) |
Structures | 1,800,000 | 1,781,303 | 300,000 | |||||||||
Support Systems Homes, Inc. |
Manages Substance Abuse |
||||||||||||
15% Secured Debt (MaturityAugust 21, 2018) |
Treatment Centers | 576,600 | 576,600 | 576,600 | |||||||||
Technical Innovations, LLC |
Manufacturer of Specialty |
||||||||||||
13.5% Secured Debt (MaturityJanuary 16, 2015) |
Cutting Tools and Punches | 3,250,000 | 3,212,977 | 3,250,000 | |||||||||
Apria Healthcare Group Inc.(9) |
Healthcare Services |
||||||||||||
11.25% Secured Debt (MaturityNovember 1, 2014) |
12,000,000 | 12,621,023 | 12,740,240 | ||||||||||
Fairway Group Acquisition(9) |
Retail Grocery |
||||||||||||
LIBOR plus 9.5% Secured Debt (MaturityOctober 1, 2014)(8) |
4,975,000 | 4,858,518 | 4,975,000 | ||||||||||
Rentech, Inc.(9) |
Manufacturer of Fertilizer |
||||||||||||
LIBOR plus 10% Secured Debt (MaturityJuly 29, 2014)(8) |
4,787,029 | 4,656,888 | 4,656,888 | ||||||||||
Managed Healthcare(9) |
Healthcare Products |
||||||||||||
LIBOR plus 3.25% Secured Debt (MaturityAugust 31, 2014) |
1,987,606 | 1,499,195 | 1,659,651 | ||||||||||
Shearer's Foods, Inc.(9) |
Manufacturer of Food / Snacks |
||||||||||||
LIBOR plus 9% / 3% PIK Secured Debt (MaturityMarch 21, 2016)(8) |
4,000,000 | 3,932,765 | 3,932,765 | ||||||||||
Alon Refining Krots(9) |
Petroleum Products/Refining |
||||||||||||
13.5% Secured Debt (MaturityOctober 15, 2014) |
4,000,000 | 3,813,452 | 3,813,452 | ||||||||||
Full Spectrum Holdings LLC(9) |
Professional Services |
||||||||||||
LIBOR Plus 6.0% Secured Debt (Maturity December 12, 2012)(8) |
1,980,074 | 1,508,237 | 1,508,237 | ||||||||||
Warrants (Fully diluted 0.28%) |
412,523 | 412,523 | |||||||||||
|
1,920,760 | 1,920,760 | |||||||||||
Standard Steel, LLC(9) |
Manufacturer of Steel Wheels |
||||||||||||
12.0% Secured Debt (MaturityApril 30, 2015) |
and Axles | 3,000,000 | 2,894,693 | 2,894,693 | |||||||||
Hoffmaster Group, Inc.(9) |
Manufacturer of Specialty |
||||||||||||
LIBOR Plus 9.00% Secured Debt (MaturityJune 3, 2017)(8) |
Tabletop Products | 5,000,000 | 4,875,866 | 4,875,866 | |||||||||
LIBOR Plus 4.25% Secured Debt (MaturityJune 13, 2016)(8) |
1,528,846 | 1,468,349 | 1,468,349 | ||||||||||
|
6,344,215 | 6,344,215 |
S-46
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2010
(Unaudited)
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
The Tennis Channel, Inc.(9) |
Television-Based Sports |
||||||||||||
LIBOR plus 6% / 4% PIK Secured Debt (MaturityJanuary 1, 2013)(8) |
Broadcasting | 10,014,444 | 9,590,738 | 9,590,738 | |||||||||
Warrants (Fully diluted 0.11%) |
235,487 | 235,487 | |||||||||||
|
9,826,225 | 9,826,225 | |||||||||||
Subtotal Non-Control/Non-Affiliate Investments |
65,260,055 | 64,211,930 | |||||||||||
Main Street Capital Partners, LLC (Investment |
|||||||||||||
Manager) |
Asset Management | ||||||||||||
100% of Membership Interests |
4,284,042 | 2,034,684 | |||||||||||
Total Portfolio Investments, June 30, 2010 |
289,242,699 | 307,488,606 | |||||||||||
Marketable Securities and Idle Funds Investments |
|||||||||||||
Western Refining Inc. |
Investments in Secured and | ||||||||||||
LIBOR plus 7.5% Secured Debt (MaturityAugust 1, 2014)(8) |
Rated Debt Investments, Certificates of Deposit, and Diversified Bond Funds | 1,757,629 | 1,700,121 | 1,700,121 | |||||||||
Booz Allen Hamilton Inc. |
|||||||||||||
13% Debt (MaturityJuly 5, 2016)(8) |
4,250,000 | 4,422,531 | 4,356,250 | ||||||||||
Terex Corporation |
|||||||||||||
7.4% Bond (MaturityJanuary 15, 2014) |
2,000,000 | 2,034,046 | 2,034,046 | ||||||||||
Rite Aid Corporation |
|||||||||||||
7.5% Bond (MaturityMarch 1, 2017) |
2,000,000 | 1,882,660 | 1,775,160 | ||||||||||
Frontier Communications Corporation |
|||||||||||||
6.6% Bond (MaturityMarch 15, 2015) |
2,000,000 | 1,988,308 | 1,930,808 | ||||||||||
Other Marketable Securities and Idle Funds Investments(10) |
3,338,000 |
3,103,843 |
3,103,843 |
||||||||||
Total Marketable Securities and Idle Funds Investments, June 30, 2010 |
15,131,509 | 14,900,228 | |||||||||||
Total Investments, June 30, 2010 |
$ | 304,374,208 | $ | 322,388,834 | |||||||||
S-47
MAIN STREET CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2009
Portfolio Company/Type of Investment(1)(2)
|
Industry | Principal(6) | Cost(6) | Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Control Investments(3) |
|||||||||||||
Café Brazil, LLC |
Casual Restaurant Group | ||||||||||||
12% Secured Debt (MaturityApril 20, 2011) |
$ | 2,500,000 | $ | 2,487,947< |