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8-K - FORM 8-K - Main Street Capital CORPc94467e8vk.htm
EX-99.1 - EXHIBIT 99.1 - Main Street Capital CORPc94467exv99w1.htm
EX-99.3 - EXHIBIT 99.3 - Main Street Capital CORPc94467exv99w3.htm
Exhibit 99.2
MAIN STREET CAPITAL II, LP
TABLE OF CONTENTS
         
Report of Independent Certified Public Accountants
    1  
 
       
Combined Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008 and 2007
    2  
 
       
Combined Statements of Operations for the Nine Months Ended September 30, 2009 and 2008 (unaudited) and for the Years Ended December 31, 2008 and 2007
    3  
 
       
Combined Statements of Changes in Members’ Equity and Partners’ Capital for the Nine Months Ended September 30, 2009 (unaudited) and for the Years Ended December 31, 2008 and 2007
    4  
 
       
Combined Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited) and for the Years Ended December 31, 2008 and 2007
    5  
 
       
Combined Schedules of Investments as of September 30, 2009 (unaudited) and December 31, 2008 and 2007
    6  
 
       
Notes to Combined Financial Statements
    16  

 

 


 

Report of Independent Certified Public Accountants
To the General Partner of
Main Street Capital II, LP
We have audited the combined balance sheets of Main Street Capital II, LP (a Delaware limited partnership) and Main Street Capital II GP, LLC (a Delaware limited liability company) including the combined schedules of investments as of December 31, 2008 and 2007, and the related combined statements of operations, changes in members’ equity and partners’ capital, cash flows, and the combined financial highlights (see Note 10) for the years then ended. These combined financial statements and combined financial highlights are the responsibility of Main Street Capital II GP, LLC’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements and financial highlights referred to above present fairly, in all material respects, the combined financial position of Main Street Capital II, LP and Main Street Capital II GP, LLC as of December 31, 2008 and 2007, and the combined results of their operations, changes in members’ equity and partners’ capital, cash flows and financial highlights for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the combined financial statements, Main Street Capital II, LP adopted Accounting Standards Codification 820, Fair Value Measurements and Disclosures, effective January 1, 2008.
/s/ GRANT THORNTON LLP
Houston, Texas
January 7, 2010

 

1


 

MAIN STREET CAPITAL II, LP
Combined Balance Sheets
                         
    September 30,     December 31,  
    2009     2008     2007  
    (Unaudited)                  
ASSETS
                       
 
                       
Investments at fair value:
                       
Control investments (cost: $38,182,778, $40,761,836, and $38,061,598 as of September 30, 2009, December 31, 2008 and 2007, respectively)
  $ 31,588,348     $ 41,002,450     $ 39,192,926  
Affiliate investments (cost: $39,395,499, $30,782,718, and $24,910,609 as of September 30, 2009, December 31, 2008 and 2007, respectively)
    31,840,792       22,957,869       19,955,498  
Non-Control/Non-Affiliate investments (cost: $4,421,893, $2,044,879, and $5,846,444 as of September 30, 2009, December 31, 2008 and 2007, respectively)
    4,688,598       2,491,269       6,414,873  
 
                 
 
                       
Total investments (cost: $82,000,170, $73,589,433, and $68,818,651 as of September 30, 2009, December 31, 2008 and 2007, respectively)
    68,117,738       66,451,588       65,563,297  
Marketable securities and idle funds investments (cost: $8,143,707 as of September 30, 2009)
    8,271,411              
Cash and cash equivalents
    5,420,353       2,211,813       617,277  
Other assets
    695,312       810,867       674,371  
Deferred financing costs (net of accumulated amortization of $418,102, $249,893, and $84,715 as of September 30, 2009, December 31, 2008 and 2007, respectively)
    2,076,898       1,760,107       1,377,935  
 
                 
 
                       
Total assets
  $ 84,581,712     $ 71,234,375     $ 68,232,880  
 
                 
 
                       
LIABILITIES, MEMBERS’ EQUITY AND PARTNERS’ CAPITAL
                       
 
                       
SBIC debentures
  $ 70,000,000     $ 50,000,000     $ 39,800,000  
Bank line of credit
                3,000,000  
Interest payable
    285,037       1,074,330       735,225  
Accounts payable and other liabilities
    168,722       201,237       72,083  
 
                 
 
                       
Total liabilities
    70,453,759       51,275,567       43,607,308  
Commitments and contingencies
                       
 
                       
Members’ equity (General Partner)
    (496,341 )     (496,341 )     (368,290 )
Limited Partners’ capital
    14,624,294       20,455,149       24,993,862  
 
                 
 
                       
Total members’ equity and partners’ capital
    14,127,953       19,958,808       24,625,572  
 
                 
 
                       
Total liabilities, members’ equity and partners’ capital
  $ 84,581,712     $ 71,234,375     $ 68,232,880  
 
                 
The accompanying notes are an integral part of these financial statements

 

2


 

MAIN STREET CAPITAL II, LP
Combined Statements of Operations
                                 
    Nine Months Ended        
    September 30,     Years Ended December 31,  
    2009     2008     2008     2007  
    (Unaudited)                
INVESTMENT INCOME:
                               
Interest, fee and dividend income
  $ 6,487,873     $ 6,598,918     $ 8,962,776     $ 6,490,402  
Interest from marketable securities, idle funds and other
    200,186       105,354       139,801       177,186  
 
                       
Total investment income
    6,688,059       6,704,272       9,102,577       6,667,588  
EXPENSES:
                               
Management fees to affiliate
    (2,493,900 )     (2,493,900 )     (3,325,200 )     (2,556,300 )
Interest
    (2,924,791 )     (2,461,549 )     (3,319,480 )     (1,483,282 )
General and administrative
    (118,219 )     (134,627 )     (178,198 )     (152,977 )
 
                       
Total expenses
    (5,536,910 )     (5,090,076 )     (6,822,878 )     (4,192,559 )
 
                       
NET INVESTMENT INCOME (LOSS)
    1,151,149       1,614,196       2,279,699       2,475,029  
 
                               
NET REALIZED GAIN (LOSS) FROM INVESTMENTS:
    474,880       787,750       (1,973,970 )     953,334  
 
                       
NET REALIZED INCOME (LOSS)
    1,626,029       2,401,946       305,729       3,428,363  
 
                               
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM INVESTMENTS:
    (6,616,884 )     (3,347,699 )     (3,882,491 )     (4,005,154 )
 
                       
 
                               
NET INCREASE (DECREASE) IN MEMBERS’ EQUITY AND PARTNERS’ CAPITAL RESULTING FROM OPERATIONS
  $ (4,990,855 )   $ (945,753 )   $ (3,576,762 )   $ (576,791 )
 
                       
The accompanying notes are an integral part of these financial statements

 

3


 

MAIN STREET CAPITAL II, LP
COMBINED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY AND PARTNERS’ CAPITAL
                         
    Members’ Equity     Limited Partners’        
    (General Partner)     Capital     Total  
Balances at December 31, 2006
  $ 242,103     $ 22,007,347     $ 22,249,450  
Capital contributions
          6,142,668       6,142,668  
Distributions
    (492,792 )     (2,696,963 )     (3,189,755 )
Net decrease resulting from operations:
                       
Net investment income
    503,788       1,971,241       2,475,029  
Net realized gain from investments
    194,111       759,223       953,334  
Net change in unrealized depreciation from investments
    (815,500 )     (3,189,654 )     (4,005,154 )
 
                 
Balances at December 31, 2007
    (368,290 )     24,993,862       24,625,572  
Distributions
    (3,066 )     (1,086,936 )     (1,090,002 )
Net decrease resulting from operations:
                       
Net investment income
    462,192       1,817,507       2,279,699  
Net realized loss from investments
    (400,488 )     (1,573,482 )     (1,973,970 )
Net change in unrealized depreciation from investments
    (186,689 )     (3,695,802 )     (3,882,491 )
 
                 
Balances at December 31, 2008
    (496,341 )     20,455,149       19,958,808  
Distributions (unaudited)
    (3,894 )     (836,106 )     (840,000 )
Net decrease resulting from operations:
                       
Net investment income (unaudited)
    233,360       917,789       1,151,149  
Net realized loss from investments (unaudited)
    96,346       378,534       474,880  
Net change in unrealized depreciation from investments (unaudited)
    (325,812 )     (6,291,072 )     (6,616,884 )
 
                 
Balances at September 30, 2009 (Unaudited)
  $ (496,341 )   $ 14,624,294     $ 14,127,953  
 
                 
The accompanying notes are an integral part of these financial statements

 

4


 

MAIN STREET CAPITAL II, LP
Combined Statements of Cash Flows
                                 
    Nine Months Ended        
    September 30,     Years Ended December 31,  
    2009       2008   2008     2007  
    (Unaudited)            
CASH FLOWS FROM OPERATING ACTIVITIES
                               
Net decrease in net assets resulting from operations:
  $ (4,990,855 )   $ (945,753 )   $ (3,576,762 )   $ (576,791 )
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating activities:
                               
Net change in unrealized depreciation from investments
    6,616,884       3,347,699       3,882,491       4,005,154  
Net realized (gain) loss from investments
    (474,880 )     (787,750 )     1,973,970       (953,334 )
Accretion of unearned income
    (434,251 )     (884,212 )     (996,918 )     (388,406 )
Net payment-in-kind interest accrual
    (343,972 )     (335,176 )     (310,345 )     (353,154 )
Amortization of deferred financing costs
    168,209       122,428       165,178       44,455  
Deferred debt origination fees received and other
    (143,976 )     131,049       282,909       885,346  
Changes in other assets and liabilities:
                               
Other assets
    75,555       165,749       (96,497 )     (445,081 )
Interest payable
    (789,293 )     (469,762 )     339,105       646,466  
Accounts payable and other liabilities
    (32,515 )     29,016       129,154       (28,203 )
 
                       
Net cash provided by (used in) operating activities
    (349,094 )     373,288       1,792,285       2,836,452  
 
                               
CASH FLOWS FROM INVESTING ACTIVITIES
                               
Investments in portfolio companies
    (10,134,167 )     (11,138,061 )     (20,338,062 )     (48,143,082 )
Investments in marketable securities and idle funds investments
    (16,646,000 )                  
Proceeds from marketable securities and idle funds investments
    8,500,000                    
Principal payments received on loans and debt securities
    3,162,801       13,610,251       13,993,665       2,474,446  
Proceeds from sale of equity securities and related notes
          287,000       584,000       1,195,000  
 
                       
Net cash provided by (used in) investing activities
    (15,117,366 )     2,759,190       (5,760,397 )     (44,473,636 )
 
                               
CASH FLOWS FROM FINANCING ACTIVITIES
                               
Proceeds from partner’s capital contributions
                      6,140,611  
Distributions to members and partners
    (840,000 )     (849,999 )     (1,090,002 )     (3,187,698 )
Proceeds from issuance of SBIC debentures
    20,000,000       10,200,000       10,200,000       33,200,000  
Proceeds from bank line of credit
                      3,000,000  
Payment of bank line of credit
          (3,000,000 )     (3,000,000 )      
Payment of deferred loan costs and SBIC debenture fees
    (485,000 )     (547,350 )     (547,350 )     (1,105,100 )
 
                       
Net cash provided by financing activities
    18,675,000       5,802,651       5,562,648       38,047,813  
 
                       
 
                               
Net increase (decrease) in cash and cash equivalents
    3,208,540       8,935,129       1,594,536       (3,589,371 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    2,211,813       617,277       617,277       4,206,648  
 
                       
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 5,420,353     $ 9,552,406     $ 2,211,813     $ 617,277  
 
                       
The accompanying notes are an integral part of these financial statements

 

5


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
September 30, 2009
(Unaudited)
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Control Investments (2)
                           
 
                           
Ceres Management, LLC (Lambs)
  Aftermarket Automotive                        
14% Secured Debt (Maturity — May 31, 2013)
 
Services Chain
  $ 1,600,000     $ 1,574,413     $ 1,574,413  
Class B Member Units (Non-voting)
                105,001       105,001  
Member Units (Fully diluted 28.0%)
                800,000       740,000  
 
                       
 
                2,479,414       2,419,414  
 
                           
Gulf Manufacturing, LLC
  Industrial Metal                        
Prime plus 1% Secured Debt (Maturity — August 31, 2012)
 
Fabrication
    1,800,000       1,788,798       1,800,000  
13% Secured Debt (Maturity — August 31, 2012)
        1,800,000       1,679,261       1,770,000  
Member Units (6) (Fully diluted 27.6%)
                708,000       3,540,000  
Warrants (Fully diluted 12.6%)
                240,000       1,620,000  
 
                       
 
                4,416,059       8,730,000  
 
                           
Jensen Jewelers of Idaho, LLC
  Retail Jewelry                        
Prime Plus 2% Secured Debt (Maturity — November 14, 2011)
        1,566,000       1,557,004       1,566,000  
13% current / 6% PIK Secured Debt (Maturity — November 14, 2011)
        1,576,852       1,547,968       1,576,852  
Member Units (6) (Fully diluted 36.5%)
                564,000       435,000  
 
                       
 
                3,668,972       3,577,852  
 
                           
Mid-Columbia Lumber Products, LLC
                           
Prime Plus 1% Secured Debt (Maturity — June 30, 2010)
  Specialized Lumber Products     375,000       372,500       372,500  
12% Secured Debt (Maturity — December 18, 2011)
        3,900,000       3,690,378       3,690,378  
Member Units (Fully diluted 26.7%)
                500,000       300,000  
Warrants (Fully diluted 25.5%)
                250,000       290,000  
 
                       
 
                4,812,878       4,652,878  
 
                           
The MPI Group, LLC
  Manufacturer of Custom                        
9% Secured Debt (Maturity — October 2, 2013)
 
Hollow Metal Doors,
    200,000       198,459       198,459  
12% Secured Debt (Maturity — October 2, 2013)
 
Frames and Accessories
    5,000,000       4,775,870       4,775,870  
Warrants (Fully diluted 47.1%)
                895,943       623,000  
 
                       
 
                5,870,272       5,597,329  
 
                           
Universal Scaffolding & Equipment, LLC
  Manufacturer of Scaffolding                        
Prime plus 1% Secured Debt (Maturity — August 17, 2012) (7)
 
and Shoring Equipment
    1,748,250       1,736,715       1,736,715  
13% current / 5% PIK Secured Debt (Maturity — August 17, 2012)
        7,014,135       6,923,783       44,160  
Member Units (Fully diluted 38.2%)
                2,060,438        
 
                       
 
                10,720,936       1,780,875  
 
                           
Vision Interests, Inc.
  Manufacturer/                        
13% Secured Debt (Maturity — June 5, 2012)
 
Installer of Commercial
    5,640,000       5,416,247       4,830,000  
Common Stock (Fully diluted 13.4%)
 
Signage
            558,000        
Warrants (Fully diluted 16.8%)
                240,000        
 
                       
 
                6,214,247       4,830,000  
 
                       
 
                           
Subtotal Control Investments
                38,182,778       31,588,348  
 
                       

 

6


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
September 30, 2009
(Unaudited)
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Affiliate Investments (3)
                           
 
                           
Advantage Millwork Company, Inc.
  Manufacturer/Distributor                        
12% Secured Debt (Maturity — February 5, 2012)
 
of Wood Doors
    4,600,000       4,431,899       2,910,000  
Warrants (Fully diluted 18.3%)
                146,752        
 
                       
 
                4,578,651       2,910,000  
 
                           
Carlton Global Resources, LLC
  Processor of                        
13% PIK Secured Debt (Maturity — November 15, 2011)
 
Industrial Minerals
    7,187,915       6,942,264        
Member Units (Fully diluted 12.8%)
                600,000        
 
                       
 
                7,542,264        
 
                           
California Healthcare Medical Billing, Inc.
  Healthcare Billing and Records                        
12% Secured Debt (Maturity — October 17, 2013)
 
Management
    893,000       741,028       805,808  
Common Stock (Fully diluted 3.8%)
                247,000       475,000  
Warrants (Fully diluted 7.6%)
                152,000       715,667  
 
                       
 
                1,140,028       1,996,475  
 
                           
CBT Nuggets, LLC
  Produces and Sells                        
14% Secured Debt (Maturity — December 31, 2013)
 
IT Certification
    1,120,000       1,082,793       1,120,000  
10% Secured Debt (Maturity — March 31, 2012)
 
Training Videos
    610,000       610,000       610,000  
10% Secured Debt (Maturity — March 31, 2010)
        40,000       40,000       40,000  
Member Units (6) (Fully diluted 16.3%)
                199,680       926,667  
 
                       
 
                1,932,473       2,696,667  
 
                           
Condit Exhibits, LLC
  Tradeshow Exhibits/                        
13% current / 5% PIK Secured Debt (Maturity — July 1, 2013)
 
Custom Displays
    1,649,230       1,624,362       1,624,362  
Warrants (Fully diluted 18.8%)
                200,000       20,000  
 
                       
 
                1,824,362       1,644,362  
 
                           
Hawthorne Customs & Dispatch Services, LLC
  Transportation/                        
13% Secured Debt (Maturity — January 31, 2011)
 
Logistics
    275,000       264,465       264,465  
Member Units (6) (Fully diluted 14.8%)
                137,500       280,000  
 
                       
 
                401,965       544,465  
 
                           
Indianapolis Aviation Partners, LLC
  FBO / Aviation Support Services                        
12% Secured Debt (Maturity — September 15, 2014)
        1,880,000       1,692,838       1,692,838  
Warrants (Fully diluted 12.1%)
                451,714       451,714  
 
                       
 
                2,144,552       2,144,552  
 
                           
Lighting Unlimited, LLC
  Commercial and Residential                        
Prime Plus 1% Secured Debt (Maturity — August 22, 2012) (7)
 
Lighting Products and
    1,233,333       1,225,742       1,225,742  
14% Secured Debt (Maturity — August 22, 2012)
 
Design Services
    1,600,000       1,545,081       1,545,081  
Warrants (Fully diluted 15.0%)
                50,000       50,000  
 
                       
 
                2,820,823       2,820,823  

 

7


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
September 30, 2009
(Unaudited)
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Affiliate Investments (3)
                           
 
                           
Olympus Building Services, Inc.
  Custodial/Facilities                        
12% Secured Debt (Maturity — March 27, 2014)
 
Services
    1,260,000       1,143,600       1,220,000  
Warrants (Fully diluted 9.0%)
                100,000       266,667  
 
                       
 
                1,243,600       1,486,667  
 
                           
OMi Holdings, Inc.
  Manufacturer of                        
12% Secured Debt (Maturity — April 1, 2013)
 
Overhead Cranes
    4,228,000       4,193,827       4,193,827  
Common Stock (Fully diluted 19.2%)
                600,000       260,000  
 
                       
 
                4,793,827       4,453,827  
 
                           
Schneider Sales Management, LLC
  Sales Consulting                        
13% Secured Debt (Maturity — October 15, 2013)
 
and Training
    1,320,000       1,271,131       1,271,131  
Warrants (Fully diluted 8.0%)
                30,000        
 
                       
 
                1,301,131       1,271,131  
 
                           
Thermal & Mechanical Equipment, LLC
  Heat Exchange / Filtration                        
13% current / 5% PIK Secured Debt (Maturity — September 25, 2014)
 
Products and Services
    2,201,833       2,158,268       2,158,268  
Prime plus 2% Secured Debt (Maturity — September 25, 2014) (7)
        700,000       693,090       693,090  
Warrants (Fully diluted 20.0%)
                400,000       400,000  
 
                       
 
                3,251,358       3,251,358  
 
                           
Walden Smokey Point, Inc.
  Specialty Transportation/                        
14% current / 4% PIK Secured Debt (Maturity — December 30, 2013)
 
Logistics
    3,297,422       3,238,590       3,238,590  
Common Stock (Fully diluted 5.0%)
                400,000       600,000  
 
                       
 
                3,638,590       3,838,590  
 
                           
Ziegler’s NYPD, LLC
  Casual Restaurant Group                        
Prime plus 2% Secured Debt (Maturity — October 1, 2013) (7)
        400,000       396,660       396,660  
13% current / 5% PIK Secured Debt (Maturity — October 1, 2013)
        1,872,362       1,841,519       1,841,519  
Warrants (Fully diluted 19.0%)
                240,000       240,000  
 
                       
 
                2,478,179       2,478,179  
 
                           
Other
                303,696       303,696  
 
                       
 
                           
Subtotal Affiliate Investments
                39,395,499       31,840,792  
 
                       

 

8


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
September 30, 2009
(Unaudited)
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Non-Control/Non-Affiliate Investments(4):
                           
 
                           
Audio Messaging Solutions, LLC
  Audio Messaging                        
12% Secured Debt (Maturity — May 8, 2014)
 
Services
    2,273,600       2,096,995       2,096,995  
Warrants (Fully diluted 3.4%)
                143,360       253,334  
 
                       
 
                2,240,355       2,350,329  
 
                           
Compact Power Equipment Centers, LLC
  Light to Medium Duty                        
12% Secured Debt (Maturity — September 23, 2014)
 
Equipment Rental
    211,765       211,765       211,765  
Member Units (Fully diluted 4.6%)
                458       458  
 
                       
 
                212,223       212,223  
 
                           
East Teak Fine Hardwoods, Inc.
  Hardwood Products                        
Common Stock (Fully diluted 1.8%)
                70,000       199,231  
 
                       
 
                           
KBK Industries, LLC
  Specialty Manufacturer                        
14% Secured Debt (Maturity — January 23, 2011)
 
of Oilfield and
    1,312,500       1,274,176       1,274,176  
8% Secured Debt (Maturity — March 1, 2010)
 
Industrial Products
    62,500       62,500       62,500  
8% Secured Debt (Maturity — March 31, 2010)
        150,000       150,000       150,000  
Member Units (6) (Fully diluted 4.8%)
                62,500       90,000  
 
                       
 
                1,549,176       1,576,676  
 
                           
Support Systems Homes, Inc.
  Manages Substance                        
15% Secured Debt (Maturity — August 21, 2018)
 
Abuse Treatment Centers
    350,139       350,139       350,139  
 
                       
 
                           
Subtotal Non-Control/Non-Affiliate Investments
                4,421,893       4,688,598  
 
                       
 
                           
Total Portfolio Investments, September 30, 2009
              $ 82,000,170     $ 68,117,738  
 
                       
 
                           
Marketable Securities and Idle Funds Investments
  Investments in Secured                        
Apria Healthcare Group Inc. Senior Secured Notes
 
Debt Investments and
  $ 4,800,000     $ 4,893,707     $ 5,021,411  
11.25% (Maturity — November 1, 2014)
 
Certificates of Deposit
                       
1.65% Certificate of Deposit (Maturity — December 11, 2009)
        1,000,000       1,000,000       1,000,000  
1.15% Certificate of Deposit (Maturity — December 7, 2009)
        2,250,000       2,250,000       2,250,000  
 
                       
 
                           
 
              $ 8,143,707     $ 8,271,411  
 
                       
     
(1)   Debt investments are generally income producing. Equity and warrants are non-income producing, unless otherwise noted.
 
(2)   Controlled investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”) as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
 
(3)   Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.
 
(4)   Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
 
(5)   Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.
 
(6)   Income producing through payment of dividends or distributions.
 
(7)   Subject to contractual minimum interest rates.

 

9


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2008
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Control Investments (2)
                           
 
                           
CBT Nuggets, LLC
  Produces and Sells                        
14% Secured Debt (Maturity — June 1, 2011)
 
IT Certification
  $ 1,120,000     $ 1,068,861     $ 1,120,000  
10% Secured Debt (Maturity — December 31, 2009)
 
Training Videos
    100,000       100,000       100,000  
Member Units (6) (Fully diluted 19.4%)
                288,000       1,083,333  
Warrants (Fully diluted 7.0%)
                48,000       333,333  
 
                       
 
                1,504,861       2,636,666  
 
                           
Ceres Management, LLC (Lambs)
  Aftermarket Automotive                        
14% Secured Debt (Maturity — May 31, 2013)
 
Services Chain
    1,600,000       1,570,654       1,570,654  
Member Units (Fully diluted 28.0%)
                800,000       866,667  
 
                       
 
                2,370,654       2,437,321  
 
                           
Gulf Manufacturing, LLC
  Industrial Metal                        
Prime plus 1% Secured Debt (Maturity — August 31, 2012)
 
Fabrication
    1,800,000       1,786,146       1,800,000  
13% Secured Debt (Maturity — August 31, 2012)
        2,850,000       2,621,665       2,820,000  
Member Units (6) (Fully diluted 27.6%)
                708,000       1,650,000  
Warrants (Fully diluted 12.6%)
                240,000       825,000  
 
                       
 
                5,355,811       7,095,000  
 
                           
Jensen Jewelers of Idaho, LLC
  Retail Jewelry                        
Prime Plus 2% Secured Debt (Maturity — November 14, 2011)
        1,566,000       1,551,604       1,566,000  
13% current / 6% PIK Secured Debt (Maturity — November 14, 2011)
        1,506,886       1,470,595       1,506,886  
Member Units (6) (Fully diluted 36.5%)
                564,000       570,000  
 
                       
 
                3,586,199       3,642,886  
 
                           
Mid-Columbia Lumber Products, LLC
                           
Prime Plus 1% Secured Debt (Maturity — June 30, 2010)
  Specialized Lumber Products     1,000,000       995,000       995,000  
12% Secured Debt (Maturity — December 18, 2011)
        3,900,000       3,630,919       3,280,000  
Member Units (Fully diluted 26.7%)
                500,000        
Warrants (Fully diluted 25.5%)
                250,000        
 
                       
 
                5,375,919       4,275,000  
 
                           
The MPI Group, LLC
  Manufacturer of Custom                        
9% Secured Debt (Maturity — October 2, 2013)
 
Hollow Metal Doors,
    200,000       198,233       198,233  
12% Secured Debt (Maturity — October 2, 2013)
 
Frames and Accessories
    5,000,000       4,745,134       4,745,134  
Warrants (Fully diluted 45.0%)
                700,000       963,000  
 
                       
 
                5,643,367       5,906,367  
 
                           
Universal Scaffolding & Equipment, LLC
  Manufacturer of Scaffolding                        
Prime plus 1% Secured Debt (Maturity — August 17, 2012) (7)
 
and Shoring Equipment
    1,831,500       1,817,457       1,817,457  
13% current / 5% PIK Secured Debt (Maturity — August 17, 2012)
        6,984,065       6,880,454       6,563,078  
Member Units (Fully diluted 38.2%)
                2,060,439        
 
                       
 
                10,758,350       8,380,535  
 
                           
Vision Interests, Inc.
  Manufacturer/                        
13% Secured Debt (Maturity — June 5, 2012)
 
Installer of Commercial
    5,640,000       5,368,675       5,368,675  
Common Stock (Fully diluted 13.4%)
 
Signage
            558,000       630,000  
Warrants (Fully diluted 16.8%)
                240,000       630,000  
 
                       
 
                6,166,675       6,628,675  
 
                       
 
                           
Subtotal Control Investments
                40,761,836       41,002,450  
 
                       

 

10


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2008
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Affiliate Investments (3)
                           
 
                           
Advantage Millwork Company, Inc.
  Manufacturer/Distributor                        
12% Secured Debt (Maturity — February 5, 2012)
  of Wood Doors     4,600,000       4,400,427       4,400,427  
Warrants (Fully diluted 18.3%)
                146,752        
 
                       
 
                4,547,179       4,400,427  
 
                           
Carlton Global Resources, LLC
  Processor of                        
13% PIK Secured Debt (Maturity — November 15, 2011)
  Industrial Minerals     7,187,915       6,942,264        
Member Units (Fully diluted 12.8%)
                600,000        
 
                       
 
                7,542,264        
 
                           
California Healthcare Medical Billing, Inc.
  Healthcare                        
12% Secured Debt (Maturity — October 17, 2013)
  Services     893,000       722,887       722,887  
Common Stock (Fully diluted 3.8%)
                247,000       247,000  
Warrants (Fully diluted 7.6%)
                152,000       152,000  
 
                       
 
                1,121,887       1,121,887  
 
                           
Condit Exhibits, LLC
  Tradeshow Exhibits/                        
13% current / 5% PIK Secured Debt (Maturity — July 1, 2013)
  Custom Displays     1,538,716       1,510,627       1,510,627  
Warrants (Fully diluted 18.8%)
                200,000       200,000  
 
                       
 
                1,710,627       1,710,627  
 
                           
Hawthorne Customs & Dispatch Services, LLC
  Transportation/                        
13% Secured Debt (Maturity — January 31, 2011)
  Logistics     400,000       383,175       383,175  
Member Units (6) (Fully diluted 9.3%)
                125,000       145,000  
Warrants (Fully diluted 5.5%)
                12,500       76,667  
 
                       
 
                520,675       604,842  
 
                           
Lighting Unlimited, LLC
  Commercial and Residential                        
Prime Plus 1% Secured Debt (Maturity — August 22, 2012) (7)
  Lighting Products and     1,533,333       1,521,905       1,521,905  
14% Secured Debt (Maturity — August 22, 2012)
  Design Services     1,600,000       1,534,366       1,534,366  
Warrants (Fully diluted 15.0%)
                50,000       50,000  
 
                       
 
                3,106,271       3,106,271  
 
                           
OMi Holdings, Inc.
  Manufacturer of                        
12% Secured Debt (Maturity — April 1, 2013)
  Overhead Cranes     4,440,000       4,398,049       4,398,049  
Common Stock (Fully diluted 19.2%)
                600,000       380,000  
 
                       
 
                4,998,049       4,778,049  
 
                           
Schneider Sales Management, LLC
  Sales Consulting                        
13% Secured Debt (Maturity — October 15, 2013)
  and Training     1,320,000       1,264,901       1,264,901  
Warrants (Fully diluted 8.0%)
                30,000       30,000  
 
                       
 
                1,294,901       1,294,901  
 
                           
Walden Smokey Point, Inc.
  Specialty Transportation/                        
14% current / 4% PIK Secured Debt (Maturity — December 30, 2013)
  Logistics     3,200,355       3,136,356       3,136,356  
Common Stock (Fully diluted 5.0%)
                400,000       400,000  
 
                       
 
                3,536,356       3,536,356  
 
                           
Ziegler’s NYPD, LLC
  Casual Restaurant                        
Prime plus 2% Secured Debt (Maturity — October 1, 2013) (7)
  Group     600,000       396,159       396,159  
13% current / 5% PIK Secured Debt (Maturity — October 1, 2013)
        2,704,262       1,768,350       1,768,350  
Warrants (Fully diluted 19.0%)
                240,000       240,000  
 
                       
 
                2,404,509       2,404,509  
 
                       
 
                           
Subtotal Affiliate Investments
                30,782,718       22,957,869  
 
                       

 

11


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2008
                             
Portfolio Company/Type of Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Non-Control/Non-Affiliate Investments(4):
                           
 
                           
East Teak Fine Hardwoods, Inc.
  Hardwood Products                        
Common Stock (Fully diluted 1.8%)
                70,000       263,846  
 
                       
 
                           
KBK Industries, LLC
  Specialty Manufacturer                        
14% Secured Debt (Maturity — January 23, 2011)
  of Oilfield and     1,312,500       1,255,789       1,312,500  
8% Secured Debt (Maturity — March 1, 2010)
  Industrial Products     156,250       156,250       156,250  
8% Secured Debt (Maturity — March 31, 2009)
        150,000       150,000       150,000  
Member Units (6) (Fully diluted 4.8%)
                62,500       258,333  
 
                       
 
                1,624,539       1,877,083  
 
                           
Support Systems Homes, Inc.
  Manages Substance                        
15% Secured Debt (Maturity — August 21, 2018)
  Abuse Treatment Centers     350,340       350,340       350,340  
 
                       
 
                           
Subtotal Non-Control/Non-Affiliate Investments
                2,044,879       2,491,269  
 
                       
 
                           
Total Portfolio Investments, December 31, 2008
              $ 73,589,433     $ 66,451,588  
 
                       
     
(1)   Debt investments are generally income producing. Equity and warrants are non-income producing, unless otherwise noted.
 
(2)   Controlled investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
 
(3)   Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.
 
(4)   Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
 
(5)   Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.
 
(6)   Income producing through payment of dividends or distributions.
 
(7)   Subject to contractual minimum interest rates.

 

12


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2007
                             
Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Control Investments (2)
                           
 
                           
CBT Nuggets, LLC
  Produces and Sells                        
Prime plus 2% Secured Debt (Maturity — June 1, 2011)
  IT Certification   $ 240,000     $ 222,995     $ 222,995  
14% Secured Debt (Maturity — June 1, 2011)
  Training Videos     1,240,000       1,165,343       1,165,343  
Member Units (Fully diluted 19.4%)
                288,000       763,333  
Warrants (Fully diluted 7.0%)
                48,000       230,000  
 
                       
 
                1,724,338       2,381,671  
 
                           
Gulf Manufacturing, LLC
  Industrial Metal                        
Prime plus 1% Secured Debt (Maturity — August 31, 2012)
  Fabrication     1,800,000       1,782,954       1,782,954  
13% Secured Debt (Maturity — August 31, 2012)
        3,000,000       2,713,824       2,713,824  
Member Units (Fully diluted 27.6%)
                708,000       708,000  
Warrants (Fully diluted 12.6%)
                240,000       375,000  
 
                       
 
                5,444,778       5,579,778  
 
                           
Jensen Jewelers of Idaho, LLC
  Retail Jewelry                        
Prime Plus 2% Secured Debt (Maturity — November 14, 2011)
        1,800,000       1,771,200       1,771,200  
13% current / 6% PIK Secured Debt (Maturity — November 14, 2011)
        1,604,186       1,552,233       1,552,233  
Member Units (6) (Fully diluted 37.6%)
                564,000       1,222,500  
 
                       
 
                3,887,433       4,545,933  
 
                           
Mid-Columbia Lumber Products, LLC
  Specialized Lumber                        
Prime Plus 1% Secured Debt (Maturity — June 30, 2010)
  Products     500,000       491,667       491,667  
12% Secured Debt (Maturity — December 18, 2011)
        3,900,000       3,560,413       3,400,000  
Member Units (Fully diluted 19.44%)
                300,000        
Warrants (Fully diluted 28.0%)
                250,000        
 
                       
 
                4,602,080       3,891,667  
 
                           
The MPI Group, LLC
  Manufacturer of Custom                        
12% Secured Debt (Maturity — October 2, 2013)
  Hollow Metal Doors,     5,000,000       4,708,461       4,708,461  
Warrants (Fully diluted 25.0%)
  Frames and Accessories             500,000       500,000  
Warrants (Fully diluted 20.0%)
                200,000       200,000  
 
                       
 
                5,408,461       5,408,461  
 
                           
Universal Scaffolding & Equipment, LLC
  Manufacturer of Scaffolding                        
Prime plus 1% Secured Debt (Maturity — August 16, 2012) (7)
  and Shoring Equipment     2,330,999       2,309,001       2,309,001  
13% current / 5% PIK Secured Debt (Maturity — August 16, 2012)
        6,638,627       6,514,576       6,514,576  
Member Units (Fully Diluted 38.1%)
                2,060,438       2,128,846  
 
                       
 
                10,884,015       10,952,423  
 
                           
Vision Interests, Inc.
  Manufacturer/                        
13% Secured Debt (Maturity — June 5, 2012)
  Installer of Commercial     5,640,000       5,312,493       5,312,493  
Common stock (Fully diluted 13.4%)
  Signage             558,000       558,000  
Warrants (Fully diluted 16.8%)
                240,000       562,500  
 
                       
 
                6,110,493       6,432,993  
 
                       
 
                           
Subtotal Control Investments
                38,061,598       39,192,926  
 
                       

 

13


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2007
                             
Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Affiliate Investments (3)
                           
 
                           
Advantage Millwork Company, Inc.
  Manufacturer/Distributor                        
12% Secured Debt (Maturity — February 5, 2012)
  of Wood Doors     4,000,000       3,781,013       3,781,013  
Warrants (Fully diluted 16.3%)
                130,720       130,720  
 
                       
 
                3,911,733       3,911,733  
 
                           
Carlton Global Resources, LLC
  Processor of                        
13% PIK Secured Debt (Maturity — November 15, 2011)
  Industrial Minerals     7,031,666       6,792,264       3,903,786  
Member Units (Fully diluted 12.8%)
                600,000        
 
                       
 
                7,392,264       3,903,786  
 
                           
Hawthorne Customs & Dispatch Services, LLC
  Transportation/                        
13% Secured Debt (Maturity — January 31, 2011)
  Logistics     450,000       425,302       425,302  
Member Units (6) (Fully diluted 9.3%)
                125,000       145,000  
Warrants (Fully diluted 5.5%)
                12,500       76,667  
 
                       
 
                562,802       646,969  
 
                           
Lighting Unlimited, LLC
  Commercial and Residential                        
Prime Plus 1% Secured Debt (Maturity — August 22, 2012) (7)
  Lighting Products and     1,900,000       1,881,059       1,881,059  
14% Secured Debt (Maturity — August 22, 2012)
  Design Services     1,600,000       1,521,796       1,521,796  
Warrants (Fully diluted 15.0%)
                50,000       50,000  
 
                       
 
                3,452,855       3,452,855  
 
                           
Talen’s Marine and Fuel, Inc.
  Fuel Supplier Servicing                        
13% Secured Debt (Maturity — September 9, 2012)
  Primarily the Marine     7,050,000       6,663,288       6,663,288  
Warrants (Fully diluted 14.0%)
  Markets             262,000       262,000  
 
                       
 
                6,925,288       6,925,288  
 
                           
Wicks N’ More, LLC
  Manufacturer of                        
12% Secured Debt (Maturity — April 26, 2011)
  High-end Candles     2,480,000       2,285,667       1,114,867  
Member Units (Fully diluted 7.7%)
                240,000        
Warrants (Fully diluted 14.2%)
                140,000        
 
                       
 
                2,665,667       1,114,867  
 
                       
 
                           
Subtotal Affiliate Investments
                24,910,609       19,955,498  
 
                       

 

14


 

MAIN STREET CAPITAL II, LP
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2007
                             
Investment (1)   Industry   Principal (5)     Cost (5)     Fair Value  
 
                           
Non-Control/Non-Affiliate Investments (4):
                           
 
                           
East Teak Fine Hardwoods, Inc.
                           
13% Current/5.5% PIK Secured Debt (Maturity — April 13, 2011)
  Hardwood Products     889,015       871,647       871,647  
Common Stock (Fully diluted 1.8%)
                70,000       263,846  
 
                       
 
                941,647       1,135,493  
 
                           
KBK Industries, LLC
  Specialty Manufacturer                        
14% Secured Debt (Maturity — January 23, 2011)
  of Oilfield and     1,312,500       1,234,310       1,234,310  
8% Secured Debt (Maturity — July 1, 2009)
  Industrial Products     207,688       207,688       207,688  
Prime Plus 2% Secured Debt (Maturity January 31, 2008)
                25,000       228,750  
Member Units (6) (Fully diluted 4.8%)
                62,500       233,333  
 
                       
 
                1,529,498       1,904,081  
 
                           
Support Systems Homes, Inc.
  Manages Substance                        
14% Current/4% PIK Secured Debt (Maturity — June 5, 2012)
  Abuse Treatment Centers     2,288,511       2,238,737       2,238,737  
8% Secured Debt (Maturity — June 5, 2012)
        238,332       235,521       235,521  
 
                       
 
                2,474,258       2,474,258  
 
                           
Turbine Air Systems, Ltd.
  Commercial and                        
12% Secured Debt (Maturity — October 11, 2011)
  Industrial Chilling Systems     1,000,000       901,041       901,041  
 
                       
 
                           
Subtotal Non-Control/Non-Affiliate Investments
                5,846,444       6,414,873  
 
                       
 
                           
Total Portfolio Investments, December 31, 2007
              $ 68,818,651     $ 65,563,297  
 
                       
     
(1)   Debt investments are generally income producing. Equity and warrants are non-income producing, unless otherwise noted.
 
(2)   Controlled investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
 
(3)   Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.
 
(4)   Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
 
(5)   Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.
 
(6)   Income producing through payment of dividends or distributions.
 
(7)   Subject to contractual minimum interest rates.

 

15


 

MAIN STREET CAPITAL II, LP
NOTES TO COMBINED FINANCIAL STATEMENTS
(information at September 30, 2009 and for the nine months ended September 30, 2009 and 2008 is unaudited)
Note 1. Organization and Basis of Presentation:
Organization
Main Street Capital II, LP (the Fund), a Delaware limited partnership, was formed on June 30, 2005 for the purpose of providing private financing to lower middle market companies. The Fund began capital raising in 2005 and commenced investment operations in January 2006. The general partner is Main Street Capital II GP, LLC, a Delaware limited liability company (the General Partner). The Fund’s investments are managed by Main Street Capital Partners, LLC (the Investment Manager). The General Partner and the Investment Manager are affiliated through common management.
On January 19, 2006, the Fund was granted a license to operate as a Small Business Investment Company (SBIC) pursuant to Section 301(c) of the Small Business Investment Act of 1958, as amended, and the regulations thereunder (the SBIC Act). As of September 30, 2009 and December 31, 2008 and 2007, the Fund had issued $70,000,000, $50,000,000, and $39,800,000, respectively, in debentures through the SBIC program.
Basis of Presentation
The Fund’s combined financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Fund’s results of operations and cash flows for the nine months ended September 30, 2009 and 2008 and for the years ended December 31, 2008 and 2007, and financial position as of September 30, 2009 and December 31, 2008 and 2007, are presented on a combined basis with the accounts of the General Partner. The effects of all intercompany transactions between the Fund and the General Partner have been eliminated. The total assets of the General Partner after eliminations were immaterial for all periods presented. “Marketable securities and idle funds investments” are classified as financial instruments and are reported separately on the Fund’s Combined Balance Sheets and Combined Schedule of Investments due to the nature of such investments. To allow for more relevant disclosure of the Fund’s “core” investment portfolio, “core” portfolio investments, as used herein, refers to all of the Fund’s portfolio investments excluding all “Marketable securities and idle funds investments.”
In connection with valuing portfolio investments, marketable securities and idle funds investments, the Fund adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification” or “ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”) 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. The Fund accounts for these investments at fair value.
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”), the Fund is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in the AICPA Guide occurs if the Fund owns a controlled operating company that provides all or substantially all of its services directly to the Fund or to an investment company of the Fund. None of the investments made by the Fund qualify for this exception. Therefore, the Fund’s portfolio investments are carried on the balance sheet at fair value, as discussed further in Note 2, with any adjustments to fair value recognized as “Net Change in Unrealized Appreciation (Depreciation) from Investments” on the Statement of Operations until the investment is disposed of, resulting in any gain or loss on exit being recognized as a “Net Realized Gain (Loss) from Investments.”
Unaudited Interim Results
The accompanying interim combined balance sheet and schedule of investments as of September 30, 2009 and the interim combined statements of operations and cash flows for the nine months ended September 30, 2009 and 2008, and the interim combined statement of changes in members’ equity and partners’ capital for the nine months ended September 30, 2009 are all unaudited interim financial statements. These unaudited interim financial statements have been prepared on the same basis as the accompanying annual audited financial statements and, in the opinion of management, reflect all adjustments (which include normal, recurring adjustments) necessary to present fairly the combined accounts of the Fund and the General Partner for such interim periods. The interim results as of and for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be achieved for the full year ended December 31, 2009.

 

16


 

Portfolio Investment Classification
The Fund classifies its portfolio investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. Under the 1940 Act, “Affiliate Investments” are defined as investments in which between 5% and 25% of the voting securities are owned. Under the 1940 Act, “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control investments nor Affiliate investments.
Note 2. Significant Accounting Policies:
Valuation of Investments
The Fund accounts for its core portfolio investments at fair value. As a result, the Fund adopted the provisions of 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. ASC 820 requires the Fund to assume that the portfolio investment is to be sold in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. With the adoption of this statement, the Fund incorporated the income approach to estimate the fair value of its core portfolio debt investments principally using a yield-to-maturity model. The adoption of ASC 820 did not have a significant impact on the core investment portfolio fair value determination.
The Fund’s core business plan calls for it to invest primarily in illiquid securities issued by private companies. These core investments may be subject to restrictions on resale and will generally have no established trading market. As a result, the Fund determines in good faith the fair value of its portfolio investments pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by the General Partner and in accordance with the 1940 Act. The Fund reviews external events, including private mergers, sales and acquisitions involving comparable companies, and includes these events in the valuation process. The Fund’s 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 the Fund has a controlling interest in the portfolio company or has the ability to nominate a majority of the portfolio company’s board of directors. Market quotations are generally not readily available for the Fund’s control investments. As a result, the Fund determines the fair value of control investments using a combination of market and income approaches. Under the market approach, the Fund 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, the Fund analyzes various factors, including the portfolio company’s historical and projected financial results. The Fund allocates the enterprise value to investments in order of the legal priority of the investments. The Fund 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 the Fund’s control investments estimate the value of the investment if it were to sell, or exit, the investment, assuming the highest and best use of the investment by market participants. In addition, these valuation approaches consider the value associated with the Fund’s ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.
For valuation purposes, non-control investments are composed of debt and equity securities for which the Fund does not have a controlling interest in the portfolio company, or the ability to nominate a majority of the portfolio company’s board of directors. Market quotations for the Fund’s non-control investments are generally not readily available. For the Fund’s non-control investments, the Fund uses a combination of market and income approaches to value its equity investments and the income approach to value its debt instruments. For non-control debt investments, the Fund determines the fair value primarily using a yield approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments. The Fund’s estimate of the expected repayment date of a debt security is generally the legal maturity date of the instrument, as the Fund generally intends to hold its loans to maturity. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. The Fund will use the value determined by the yield analysis as the fair value for that security; however, because of the Fund’s general intent to hold its loans to maturity, the fair value will not exceed the face amount of the debt security. A change in the assumptions that the Fund uses to estimate the fair value of its debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a debt security is in workout status, the Fund 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.

 

17


 

Due to the inherent uncertainty in the valuation process, the Fund’s 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. The Fund determines the fair value of each individual investment and records changes in fair value as unrealized appreciation or depreciation.
The Fund believes its investments as of September 30, 2009 and December 31, 2008 and 2007 approximate fair value as of those dates based on the market in which the Fund operates and other conditions in existence at those reporting periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Additionally, as explained above, the financial statements include portfolio investments whose values have been estimated by the General Partner in the absence of readily ascertainable market values. Because of the inherent uncertainty of the valuations, those estimated values may differ significantly from the values that would have been used had a readily available market for the investments existed, and it is reasonably possible that the differences could be material.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less.
Partner Capital Contributions
Partner contributions are recognized when the Fund has received the amounts called against the partners’ capital commitment.
Interest and Dividend Income
Interest and dividend income is recorded on the accrual basis to the extent that such 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 the valuation policy, accrued interest and dividend income is evaluated periodically for collectibility. When a loan or debt security becomes 90 days or more past due, and if the Fund otherwise does not expect the debtor to be able to service all of its debt or other obligations, the Fund 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 or written off, it will be removed from non-accrual status.
While not significant to its total core portfolio, the Fund holds debt instruments in its core investment portfolio that contain payment-in-kind (“PIK”) interest provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment.
As of September 30, 2009, the Fund had two investments on non-accrual status, which comprised approximately 6.9% of the core investment portfolio at fair value. As of December 31, 2008, the Fund had no investments on non-accrual status. As of December 31, 2007, the Fund had two investments on non-accrual status, which comprised approximately 7.7% of the core investment portfolio at fair value.

 

18


 

Deferred Financing Costs
Deferred financing costs consist of SBIC Debenture commitment fees and SBIC Debenture leverage fees which have been capitalized and amortized into interest expense over the life of the related debt. Deferred financing costs balances as of September 30, 2009 and December 31, 2008 and 2007 are as follows:
                         
    September 30,     December 31,  
    2009     2008     2007  
    (unaudited)                  
SBIC Debenture Commitment Fees
  $ 800,000     $ 800,000     $ 500,000  
SBIC Debenture Leverage Fees
    1,695,000       1,210,000       962,650  
 
                 
Subtotal
    2,495,000       2,010,000       1,462,650  
Less Accumulated Amortization
    (418,102 )     (249,893 )     (84,715 )
 
                 
 
  $ 2,076,898     $ 1,760,107     $ 1,377,935  
 
                 
Estimated aggregate amortization expense for each of the five years succeeding December 31, 2008 and thereafter is as follows:
         
    Estimated  
Year Ending December 31,   Amortization  
2009
  $ 228,084  
2010
    247,000  
2011
    249,500  
2012
    249,500  
2013
    249,500  
2014 and thereafter
    1,021,523  
Fee Income — Structuring and Advisory
The Fund may periodically provide services, including structuring and advisory services, to its portfolio companies. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are accreted into interest income over the life of the financing.
Unearned Income — Debt Origination Fees and Original Issue Discount
The Fund capitalizes upfront debt origination fees received in connection with financings and reflects such fees as unearned income netted against investments. The Fund will also capitalize and offset direct loan origination costs against the origination fees received. The unearned income from the fees, net of debt origination costs, is accreted into interest income based on the effective interest method over the life of the financing.
In connection with its debt investments, the Fund sometimes receives nominal cost warrants (“nominal cost equity”) that are valued as part of the negotiation process with the particular portfolio company. When the Fund receives nominal cost equity, the Fund allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the debt is reflected as unearned income, which is netted against the investment, and accreted into interest income based on the effective interest method over the life of the debt.
Income Taxes
The Fund is taxed under the partnership provisions of the Internal Revenue Code. Under these provisions of the Code, the General Partner and Limited Partners are responsible for reporting their share of the Partnership’s taxable income or loss on their income tax returns. Accordingly, the Fund is not subject to Federal or State income taxes.

 

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Net Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation or Depreciation from Investments
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries. Net change in unrealized appreciation or depreciation from investments reflects the net change in the valuation of the investment portfolio and financial instruments pursuant to the Fund’s valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation on exited investments.
Syndication Costs
Syndication costs (generally fees and expenses associated with fund raising) are deducted from partners’ capital as incurred.
Recently Issued Accounting Standards
In October 2008, the FASB amended ASC 820 with ASC 820-10-35-15A, Financial Assets in a Market That Is Not Active, to provide an illustrative example of how to determine the fair value of a financial asset in an inactive market. ASC 820-10-35-15A does not change the fair value measurement principles previously set forth. Since adopting ASC 820 in January 2008, the Fund’s practices for determining the fair value of its investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in ASC 820-10-35-15A. Therefore, the Fund’s adoption of the update did not affect its practices for determining the fair value of its investment portfolio and financial instruments, and its adoption did not have a material effect on its financial position or results of operations.
In April 2009, the FASB amended ASC 820 and ASC 825 with ASC 820-10-35, Subsequent Measurement, and ASC 825-10-65, Transition and Open Effective Date Information. Both amendments are effective for reporting periods ending on or after June 15, 2009. Since adopting ASC 820 and ASC 825 in January 2008, the Fund’s practices for determining fair value and for disclosures about the fair value of its investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in the amended pronouncements. Therefore, the Fund’s adoption of these updates did not affect its practices for determining the fair value of its investment portfolio and financial instruments, and its adoption did not have a material effect on its financial position or results of operations.
In May 2009, the FASB amended ASC 855, Subsequent Events with ASC 855-10-50, Disclosure, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10-50 includes a new required disclosure of the date through which an entity has evaluated subsequent events and is effective for interim periods or fiscal years ending after June 15, 2009. The Fund’s adoption of ASC 855-10-50 did not have a material effect on its financial position or results of operations.
In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles, which became the single official source of authoritative, nongovernmental U.S. GAAP, other than rules and interpretive releases issued by the Securities and Exchange Commission. The Codification reorganized the literature and changed the naming mechanism by which topics are referenced. ASC 105 was effective for the Fund during its interim period ended September 30, 2009. The Company’s accounting policies and amounts presented in the financial statements were not impacted by this change.
Note 3. Fair Value Hierarchy:
In accordance with ASC 820, the Fund has categorized its portfolio investments, marketable securities and idle funds investments based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).
Portfolio investments, marketable securities and idle funds investments, recorded on the Fund’s balance sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1 — Investments whose values are based on unadjusted quoted prices for identical assets in an active market that the Fund has the ability to access (examples include investments in active exchange-traded equity securities and investments in most U.S. government and agency securities).

 

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Level 2 — Investments whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the investment. Level 2 inputs include the following:
    Quoted prices for similar assets in active markets (for example, investments in restricted stock);
    Quoted prices for identical or similar assets in non-active markets (for example, investments in thinly traded public companies);
    Pricing models whose inputs are observable for substantially the full term of the investment (for example, market interest rate indices); and
    Pricing models whose inputs are derived principally from, or corroborated by, observable market data through correlation or other means for substantially the full term of the investment.
Level 3 — Investments whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the investment (for example, investments in illiquid securities issued by private companies).
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such investments categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). The Fund conducts reviews of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain investments.
As of September 30, 2009, all of the Fund’s marketable securities and idle funds investments consisted primarily of investments in secured debt investments and certificates of deposit. The fair value determination for these investments primarily consisted of observable inputs. As a result, all of the Fund’s marketable securities and idle funds investments were categorized as Level 1 as of September 30, 2009, with a fair value of $8,271,411. For the years ended December 31, 2008 and 2007, the Fund had no investments categorized as marketable securities and idle funds investments.
As of September 30, 2009 and December 31, 2008 and 2007, all of the Fund’s core portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for these core investments primarily consisted of unobservable inputs. As a result, all of the Fund’s core portfolio investments were categorized as Level 3. The fair value determination of each portfolio investment required one or more of the following unobservable inputs:
    Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
    Current and projected financial condition of the portfolio company;
    Current and projected ability of the portfolio company to service its debt obligations;
    Type and amount of collateral, if any, underlying the investment;
    Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/EBITDA ratio) applicable to the investment;
    Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
    Pending debt or capital restructuring of the portfolio company;
    Projected operating results of the portfolio company;
    Current information regarding any offers to purchase the investment;
    Current ability of the portfolio company to raise any additional financing as needed;
    Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
    Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
    Qualitative assessment of key management;
    Contractual rights, obligations or restrictions associated with the investment; and
    Other factors deemed relevant.

 

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The following table provides a summary of changes in fair value of the Fund’s Level 3 portfolio investments for the nine months ended September 30, 2009 and for the year ended December 31, 2008:
                                                         
                                    Net     Net        
                                    Changes from     Unrealized        
Type of   December 31, 2008     Accretion of     Redemptions/     New     Unrealized     Appreciation     September 30, 2009  
Investment   Fair Value     Unearned Income     Repayments (1)     Investments (1)     to Realized     (Depreciation)     Fair Value  
Debt
  $ 56,457,409     $ 436,542     $ (3,362,895 )   $ 9,773,237     $ (163,927 )   $ (8,208,063 )   $ 54,932,303  
Equity
    6,494,179                   333,336       (68,346 )     1,495,885       8,255,054  
Warrant
    3,500,000                   1,230,517       (349,500 )     549,364       4,930,381  
 
                                         
 
  $ 66,451,588     $ 436,542     $ (3,362,895 )   $ 11,337,090     $ (581,773 )   $ (6,162,814 )   $ 68,117,738  
 
                                         
     
(1)   Includes the impact of non-cash conversions.
                                                         
                                    Net     Net        
                                    Changes from     Unrealized        
Type of   December 31, 2007     Accretion of     Redemptions/     New     Unrealized     Appreciation     December 31, 2008  
Investment   Fair Value     Unearned Income     Repayments (1)     Investments (1)     to Realized     (Depreciation)     Fair Value  
Debt
  $ 57,153,552     $ 996,918     $ (16,464,056 )   $ 17,994,888     $ 967,048     $ (4,190,941 )   $ 56,457,409  
Equity
    6,022,858             (240,000 )     2,247,000       240,000       (1,775,679 )     6,494,179  
Warrant
    2,386,887             (402,000 )     638,032       140,000       737,081       3,500,000  
 
                                         
 
  $ 65,563,297     $ 996,918     $ (17,106,056 )   $ 20,879,920     $ 1,347,048     $ (5,229,539 )   $ 66,451,588  
 
                                         
     
(1)   Includes the impact of non-cash conversions.
Note 4. Partners’ Capital Contributions, Allocations and Distributions:
As of September 30, 2009 and December 31, 2008 and 2007, the Fund had received irrevocable commitments from investors to contribute capital up to $55,470,000. The members of the General Partner also made Limited Partner commitments to the Fund. Through December 31, 2008 and 2007, the Fund also has received funding from its capital commitments totaling $27,907,668, representing approximately 50% of private capital commitments.
Net profits and losses of the Fund are allocated to the General Partner and Limited Partners as follows:
  1.   Net Profits:
  a.   First, to the Partners to the extent and proportion of net losses allocated.
  b.   Second, any remaining amounts of net profits, 80% to the Limited Partners and 20% to the General Partner.
  2.   Net Losses:
  a.   First, to the Partners to the extent and in proportion to net profits previously allocated.
  b.   Second, the remaining amount of net losses to the Partners, in proportion to the positive balances in their respective capital accounts.
  3.   Not withstanding a) and b):
  a.   If the capital account of the General Partner or any Limited Partner is reduced to an amount equal to the aggregate capital contributions of such Partner, the balance of net losses will be allocated:
  i.   First, to the remaining capital accounts of the General Partner and Limited Partners in proportion to their respective positive capital accounts until their account balances have been reduced to zero.
  ii.   Second, to the General Partner.
  b.   If net losses have been allocated pursuant to 3.(a). above, any net profits that are required to be allocated after such special allocation of net losses as provided pursuant to 3.(a). will be allocated:
  i.   First, to the General Partner until the special allocation in 3.(a).ii. is reversed and eliminated.
  ii.   Second, to the General Partner and Limited Partners until the effect of any such special allocation of net losses has been reversed and eliminated.
The Fund is a licensed SBIC and may make distributions of cash and/or property only at such times as permitted by the SBIC Act and as determined under the Partnership Agreement. Under the Partnership Agreement, the General Partner is entitled to 20% of the Fund’s distributions, subject to a “clawback” provision that requires the General Partner to return an amount of allocated profits and distributions to the Fund if, and to the extent that, distributions to the General Partner over the life of the Fund causes the limited partners of the Fund to receive cumulative distributions which are less than their share (approximately 80%) of the cumulative net profits of the Fund. As of September 30, 2009, the Fund had made distributions of $5,119,757.

 

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Note 5. Management Agreement:
The Fund has a management agreement with the Investment Manager, an affiliate of the General Partner due to common management. The Investment Manager is 100% owned by Main Street Capital Corporation. The Investment Manager manages the day-to-day activities of the Fund. The Investment Manager pays normal operating expenses, except those specifically required to be borne by the Fund. The expenses paid by the Investment Manager include the cost of office space, equipment and personnel required for the Fund’s day-to-day operations. The expenses that are paid by the Fund include certain transaction costs incidental to the acquisition and disposition of investments, management fees to the Investment Manager, organizational costs, offering costs, SBIC leverage fees, certain insurance and accounting costs and other expenses as defined by the Partnership Agreement.
For the five year period following the SBIC license approval, as compensation for its services, the Fund will pay the Investment Manager each fiscal quarter in advance, 0.50% of the sum of i) the Fund’s Regulatory Capital, as defined, as of the first day of the fiscal quarter, ii) any Permitted Distribution as defined by the Partnership Agreement, and iii) for so long as the Fund is an SBIC, an assumed two tiers (two times) of SBIC Debenture leverage.
Following the initial five year period after SBIC license approval, the Fund will pay the Investment Manager, each fiscal quarter in advance, 0.50% of the Active Investments made by the Fund, as defined by the Partnership Agreement.
The Fund will not pay any management compensation with respect to any fiscal year in excess of the amount of management compensation approved by the U.S. Small Business Administration (SBA) and in conformance with the Partnership Agreement. The management fees for the years ended December 31, 2008 and 2007 were $3,325,200 and $2,556,300, respectively. The management fees for the nine months ended September 30, 2009 and 2008 were $2,493,900 for both respective periods. The fees for 2008 and 2007 exclude $0 and $526,050, respectively, which were voluntarily waived by the Investment Manager.
Note 6. Concentrations of Credit Risk:
The Fund places its cash in financial institutions, and at times, such balances may be in excess of the FDIC limit.
Note 7. SBIC Debentures:
As described in Note 1, the Fund has issued SBIC Debentures through September 30, 2009 totaling $70,000,000. As of September 30, 2009, the fund has unused commitments from the SBA to draw down additional leverage in amounts up to $10,000,000, expiring September 30, 2012. The Fund paid a 1% fee for these commitments. The ability to draw on these commitments is contingent on the SBA’s approval of the leverage at each draw application and the Fund’s adherence to the SBIC regulations. The Fund is subject to annual compliance examinations by the SBA. There have been no historical findings resulting from these SBA examinations.
SBIC Debentures payable at September 30, 2009 and at December 31, 2008 and 2007 consist of the following:
                                 
                            Fixed  
            Pooling     Maturity     Interest  
    Amount     Date     Date     Rate  
 
  $ 5,000,000       9/27/2006       9/1/2016       6.48 %
 
    7,100,000       3/28/2007       3/1/2017       6.32 %
 
    19,800,000       9/26/2007       9/1/2017       6.43 %
 
    7,900,000       9/26/2007       9/1/2017       6.47 %
 
                             
Balance at December 31, 2007
    39,800,000                          
 
                               
 
    10,200,000       3/26/2008       3/1/2018       6.38 %
 
                             
Balance at December 31, 2008
    50,000,000                          
 
                               
 
    20,000,000       9/22/2009       9/1/2019       4.95 %
 
                             
Balance at September 30, 2009
  $ 70,000,000                          
 
                             
The stated fixed interest rates include an SBA annual charge on top of the prevailing market rates. SBIC Debentures are pooled twice a year, in March and September. Accordingly, the long-term interest rate of the fundings will be fixed on the applicable pooling date and the draws will bear a short term interim financing rate until the applicable pooling date.

 

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SBIC Debentures provide for interest to be paid semi-annually. For the nine months ended September 30, 2009 and 2008, the Fund paid $3,530,817 and $2,748,644, respectively, of interest on the outstanding SBIC Debentures. In 2008 and 2007, the Fund paid $2,748,644 and $695,003, respectively, of interest on the outstanding SBIC Debentures. As of September 30, 2009, and as of December 31, 2008 and 2007, the weighted average interest rate on the SBIC Debentures was 6.0%, 6.4% and 6.4%, respectively.
Note 8. Bank Line of Credit:
The Fund has a $5,000,000 unsecured revolving line of credit with a financial institution to bridge funding for investments. The annual interest rate for this line of credit is the prime rate plus 1%, with a maturity date in April 2010. For the nine months ended September 30, 2009 and 2008, the Fund paid interest and financing fees on the line of credit totaling $15,070 and $60,267, respectively. For the years ended December 31, 2008 and 2007, the Fund paid interest and financing fees on the line of credit totaling $66,587 and $96,389, respectively.
The line of credit is personally guaranteed by the controlling principals of the General Partner. As of September 30, 2009, the Fund had $0 outstanding balance on the line of credit. As of December 31, 2008 and 2007, the Fund had a $0 and $3,000,000, respectively, outstanding balance on the line of credit.
Note 9. Commitments:
At September 30, 2009, the Fund had two outstanding commitments to fund unused revolving loans for up to $600,000 in total.
Note 10. Financial Highlights:
                                 
    Nine Months Ended        
    September 30,     Years Ended December 31,  
    2009 (1)     2008 (1)     2008 (1)     2007 (1)  
Net assets at end of period
  $ 14,127,953     $ 22,829,820     $ 19,958,808     $ 24,625,572  
Average net assets
    17,043,381       23,727,696       22,292,190       23,437,511  
Average outstanding debt
    60,000,000       46,400,000       46,400,000       24,700,000  
Ratio of total expenses, excluding interest expense, to average net assets (2)(3)
    15.33 %     11.08 %     15.72 %     11.56 %
Ratio of total expenses to average net assets (2)(3)
    32.49 %     21.45 %     30.61 %     17.89 %
Ratio of net investment income to average net assets (2)
    6.75 %     6.80 %     10.23 %     10.56 %
Ratio of contributed capital to total capital commitments
    50.31 %     50.31 %     50.31 %     50.31 %
Total return based on change in net asset value (4)(5)
    -25.01 %     -3.84 %     -14.52 %     -2.60 %
     
(1)   The amounts reflected in the financial highlights above represent the combined general partner and limited partner amounts. See the Combined Statements of Changes in Members’ Equity and Partners’ Capital for additional information.
 
(2)   Not annualized.
 
(3)   The Investment Manager voluntarily waived $526,050 of management fees for the year ended December 31, 2007.
 
(4)   Total return based on change in net asset value was calculated using the sum of ending net asset value plus distributions to members and partners during the period less capital contributions during the period, as divided by the beginning net asset value.
 
(5)   This ratio combines the total return for both the managing investors (the General Partner) and the non-managing investors (the Limited Partners).

 

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Note 11. Income Taxes:
The Fund is taxed under the partnership provisions of the Internal Revenue Code. Under these provisions of the Internal Revenue Code, the General Partner and Limited Partners are responsible for reporting their share of the Partnership’s income or loss on their income tax returns. Listed below is a reconciliation of Net Increase (Decrease) in Members’ Equity and Partners’ Capital Resulting From Operations to taxable income for the nine months ended September 30, 2009 and 2008 and for the years ended December 31, 2008 and 2007:
                                 
    Nine Months Ended        
    September 30,     Years Ended December 31,  
    2009     2008     2008     2007  
 
Net Increase (decrease) in net assets resulting from operations
  $ (4,990,855 )   $ (945,753 )   $ (3,576,762 )   $ (576,791 )
Net Change in unrealized (appreciation) depreciation from investments
    6,616,884       3,347,699       3,882,491       4,005,154  
Accrual basis to cash basis adjustments:
                               
Deferred debt origination fees included in taxable income
    159,720       131,049       282,909       885,346  
Accretion of unearned fee income for book income
    (187,062 )     (104,141 )     (547,257 )     (231,150 )
Net Change in other assets
    115,555       165,749       (96,496 )     (445,081 )
Net Change in interest payable
    (789,293 )     (469,762 )     339,105       646,466  
Portfolio company pass through taxable income (loss)
                226,232       (590,720 )
Other
    (5,269 )     (9,863 )     (34,461 )     (74,090 )
 
                       
Taxable Income
  $ 919,680     $ 2,114,978     $ 475,761     $ 3,619,134  
 
                       
Note 12. Related Party Transactions:
The Fund co-invests with Main Street Capital Corporation and its subsidiaries (collectively, “MSCC”) in several investments. MSCC and the Fund are commonly managed by the Investment Manager. The co-investments among the Fund and MSCC were made at the same time and on the same terms and conditions. The co-investments were made in accordance with the Investment Manager’s conflicts policy and in accordance with the applicable SBIC conflict of interest regulations.
As discussed further in Note 5 — Management Agreement, the Fund paid certain management fees to the Investment Manager during the nine months ended September 30, 2009 and 2008, and the years ended December 31, 2008 and 2007. The Investment Manager is managed by principals who also control the General Partner of the Fund.
The principals of the General Partner and their affiliates, collectively have invested $3,015,000 in the limited partnership interests of the Fund which represents a 5% limited partner interests and which includes an unfunded portion totaling $1,504,832.

 

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Note 13. Subsequent Events:
During October 2009, the Fund sold its portfolio investment in Universal Scaffolding & Equipment, LLC (Universal), which was on non-accrual status as of September 30, 2009, for $1.8 million. The Fund had recorded unrealized depreciation as of September 30, 2009 on its Universal investment equal to the loss it realized on the sale in the fourth quarter of 2009.
In November 2009, the Fund completed a new portfolio investment in Drilling Info, Inc. (Drilling Info), a premier information service provider for the domestic upstream oil and gas industry. The Fund provided Drilling Info with debt financing in connection with its acquisition of a data service company that provides data products and web-enabled, decision-support applications to various users within the energy industry. The Fund’s $3.2 million investment in Drilling Info consists of a second lien, secured debt investment with an equity warrant participation representing an approximate 2% equity interest in Drilling Info.
During December 2009 and January 2010, the Fund made distributions to its limited partners totaling $1.1 million.
On January 7, 2010, MSCC consummated the transactions related to its formal offer (Exchange Offer) commenced on September 23, 2009 to exchange shares of its common stock for at least a majority of the limited partner interests of the Fund. The Exchange Offer was applicable to all Fund limited partner interests except for any limited partner interests owned by affiliates of MSCC, including any limited partner interests owned by officers or directors of MSCC. At the closing of the Exchange Offer, approximately 88% of the total dollar value of Fund limited partner interests were validly exchanged for 1,239,695 shares of MSCC common stock. A 12% minority ownership in the total dollar value of Fund limited partnership interests remains outstanding, including approximately 5% owned by affiliates of MSCC. Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the General Partner were also transferred to MSCC for no consideration. In connection with the Exchange Offer, MSC II Equity Interests, LLC (MSEI II) was formed as a wholly owned subsidiary of the Fund. The Fund transferred to MSEI II certain equity investments in portfolio companies which are “pass through” entities for tax purposes. MSEI II has elected for tax purposes to be treated as a separate taxable entity and is taxed at normal corporate tax rates based on its taxable income.
The Fund has performed an evaluation of subsequent events through January 7, 2010, which is the date the financial statements were issued.

 

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