UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
(Amendment No. 1)
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33130
Triangle Capital
Corporation
(Exact name of registrant as
specified in its charter)
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Maryland
(State or other jurisdiction
of
incorporation or organization)
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06-1798488
(I.R.S. Employer
Identification No.)
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3700 Glenwood Avenue, Suite 530,
Raleigh, North Carolina
(Address of principal
executive offices)
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27612
(Zip Code)
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Registrants telephone number, including area code:
(919) 719-4770
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of June 30, 2009 was
approximately $83,565,704.
The number of shares outstanding of the registrants Common
Stock on March 1, 2010 was 11,934,594.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
relating to the 2010 Annual Meeting of Stockholders, to be filed
with the Securities and Exchange Commission, are incorporated by
reference in Part III of this Annual Report on
Form 10-K,
and certain exhibits previously filed with the Securities and
Exchange commission are incorporated by reference into
Part IV of this Annual Report.
TRIANGLE
CAPITAL CORPORATION
TABLE OF
CONTENTS
ANNUAL
REPORT ON
FORM 10-K
For the Fiscal Year Ended December 31, 2009
1
EXPLANATORY
NOTE
This
Form 10-K/A
amends the Annual Report on
Form 10-K
of Triangle Capital Corporation for the year ended
December 31, 2009 filed with the Securities and Exchange
Commission on March 10, 2010 (the
Form 10-K)
for the sole purpose of correcting typographical errors to the
Audit and Internal Control Reports of the Independent Registered
Public Accounting Firm included for purposes of Part II,
Item 8.
No other change has been made to the
Form 10-K.
This
Form 10-K/A
speaks as of the original filing date of the
Form 10-K,
does not reflect events that may have occurred subsequent to the
original filing date, and does not modify or update in any way
disclosures made in the
Form 10-K.
FORWARD-LOOKING
STATEMENTS
This Annual Report contains forward-looking statements which
are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Statements that are
not historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Some of
the statements in this Annual Report constitute forward-looking
statements because they relate to future events or our future
performance or financial condition. Forward-looking statements
may include, among other things, statements as to our future
operating results, our business prospects and the prospects of
our portfolio companies, the impact of the investments that we
expect to make, the ability of our portfolio companies to
achieve their objectives, our expected financings and
investments, the adequacy of our cash resources and working
capital, and the timing of cash flows, if any, from the
operations of our portfolio companies. Words such as
expect, anticipate, target,
goals, project, intend,
plan, believe, seek,
estimate, continue,
forecast, may, should,
potential, variations of such words, and similar
expressions indicate a forward-looking statement, although not
all forward-looking statements include these words. Readers are
cautioned that the forward-looking statements contained in this
Annual Report are only predictions, are not guarantees of future
performance, and are subject to risks, events, uncertainties and
assumptions that are difficult to predict. Our actual results
could differ materially from those implied or expressed in the
forward-looking statements for any reason, including the factors
discussed in Item 1A entitled Risk Factors in
Part I of this Annual Report and elsewhere in this Annual
Report. Other factors that could cause actual results to differ
materially include changes in the economy, risks associated with
possible disruption in our operations or the economy generally
due to terrorism, and future changes in laws or regulations and
conditions in our operating areas. These statements are based on
our current expectations, estimates, forecasts, information and
projections about the industry in which we operate and the
beliefs and assumptions of our management as of the date of this
Annual Report. We assume no obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, unless we are required
to do so by law. Although we undertake no obligation to revise
or update any forward-looking statements, whether as a result of
new information, future events or otherwise, you are advised to
consult any additional disclosures that we may make directly to
you or through reports that we in the future may file with the
SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
2
PART I
Formation
of Our Company
We are a Maryland corporation incorporated on October 10,
2006, for the purposes of acquiring 100% of the equity interests
in Triangle Mezzanine Fund LLLP (the Fund) and
its general partner, Triangle Mezzanine LLC (TML),
raising capital in our initial public offering, which was
completed in February 2007 (the IPO) and thereafter
operating as an internally managed business development company
(BDC) under the Investment Company Act of 1940 (the
1940 Act). Unless otherwise noted, the terms
we, us, our and
Triangle refer to the Fund prior to the IPO and to
Triangle Capital Corporation and its subsidiaries, including the
Fund, after the IPO. At the time of closing of the IPO, we
consummated the following formation transactions
(Formation Transactions):
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We acquired 100% of the limited partnership interests in the
Fund, which became our wholly owned subsidiary, retained its
license by the United States Small Business Administration (the
SBA) to operate as a small business investment
company (an SBIC), continued to hold its existing
investments and made new investments with the net proceeds of
the IPO.
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We acquired 100% of the equity interests in TML, the general
partner of the Fund.
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The IPO consisted of the sale of 4,770,000 shares of our
common stock at a price of $15.00 per share, resulting in net
proceeds to us of approximately $64.7 million after
deducting offering costs. As a result of the IPO and the
Formation Transactions described above, we and the Fund are
closed-end, non-diversified investment companies that have
elected to be treated as BDCs under the 1940 Act.
The following chart reflects graphically our organizational
structure after the IPO and consummation of the Formation
Transactions:
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(1) |
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Based on 6,686,760 shares of common stock outstanding
immediately after the IPO and consummation of the Formation
Transactions. |
Our headquarters are in Raleigh, North Carolina, and our
Internet address is www.tcap.com. We are not including the
information contained on our website as a part of, or
incorporating it by reference into, this Annual Report on
Form 10-K.
We make available free of charge through our website our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to these reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish such material to,
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the Securities and Exchange Commission. Copies of this Annual
Report and other reports are also available without charge upon
written request to us.
Overview
of our Business
We are a specialty finance company that provides customized
financing solutions to lower middle market companies located
throughout the United States. We define lower middle market
companies as those having annual revenues between $10.0 and
$100.0 million. Our investment objective is to seek
attractive returns by generating current income from our debt
investments and capital appreciation from our equity related
investments. Our investment philosophy is to partner with
business owners, management teams and financial sponsors to
provide flexible financing solutions to fund growth, changes of
control, or other corporate events. We invest primarily in
senior and subordinated debt securities secured by first and
second lien security interests in portfolio company assets,
coupled with equity interests.
We focus on investments in companies with a history of
generating revenues and positive cash flows, an established
market position and a proven management team with a strong
operating discipline. Our target portfolio company has annual
revenues between $20.0 and $75.0 million and annual
earnings before interest, taxes, depreciation and amortization
(EBITDA) between $3.0 and $20.0 million. We
believe that these companies have less access to capital and
that the market for such capital is underserved relative to
larger companies. Companies of this size are generally privately
held and are less well known to traditional capital sources such
as commercial and investment banks.
Our investments generally range from $5.0 to $15.0 million
per portfolio company. In certain situations, we have partnered
with other funds to provide larger financing commitments. We are
continuing to operate the Fund as an SBIC and to utilize the
proceeds of the sale of SBA-guaranteed debentures, referred to
herein as SBA leverage, to enhance returns to our stockholders.
As of December 31, 2009, we had investments in 37 portfolio
companies, with an aggregate cost of $209.9 million.
Our
Business Strategy
We seek attractive returns by generating current income from our
debt investments and capital appreciation from our equity
related investments by:
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Focusing on Underserved Markets. We believe
that broad-based consolidation in the financial services
industry coupled with operating margin and growth pressures have
caused financial institutions to de-emphasize services to lower
middle market companies in favor of larger corporate clients and
capital market transactions. We believe these dynamics have
resulted in the financing market for lower middle market
companies to be underserved, providing us with greater
investment opportunities.
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Providing Customized Financing Solutions. We
offer a variety of financing structures and have the flexibility
to structure our investments to meet the needs of our portfolio
companies. Typically we invest in senior and subordinated debt
securities, coupled with equity interests. We believe our
ability to customize financing arrangements makes us an
attractive partner to lower middle market companies.
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Leveraging the Experience of Our Management
Team. Our senior management team has extensive
experience advising, investing in, lending to and operating
companies across changing market cycles. The members of our
management team have diverse investment backgrounds, with prior
experience at investment banks, specialty finance companies,
commercial banks, and privately and publicly held companies in
the capacity of executive officers. We believe this diverse
experience provides us with an in depth understanding of the
strategic, financial and operational challenges and
opportunities of lower middle market companies. We believe this
understanding allows us to select and structure better
investments and to efficiently monitor and provide managerial
assistance to our portfolio companies.
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Applying Rigorous Underwriting Policies and Active Portfolio
Management. Our senior management team has
implemented rigorous underwriting policies that are followed in
each transaction. These policies include a thorough analysis of
each potential portfolio companys competitive position,
financial performance, management team operating discipline,
growth potential and industry
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attractiveness, allowing us to better assess the companys
prospects. After investing in a company, we monitor the
investment closely, typically receiving monthly, quarterly and
annual financial statements. We analyze and discuss in detail
the companys financial performance with management in
addition to attending regular board of directors meetings. We
believe that our initial and ongoing portfolio review process
allows us to monitor effectively the performance and prospects
of our portfolio companies.
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Taking Advantage of Low Cost Debentures Guaranteed by the
SBA. Our license to do business as an SBIC allows
us to issue fixed-rate, low interest debentures which are
guaranteed by the SBA and sold in the capital markets,
potentially allowing us to increase our net interest income
beyond the levels achievable by other BDCs utilizing traditional
leverage.
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Maintaining Portfolio Diversification. While
we focus our investments in lower middle market companies, we
seek to invest across various industries. We monitor our
investment portfolio to ensure we have acceptable industry
balance, using industry and market metrics as key indicators. By
monitoring our investment portfolio for industry balance we seek
to reduce the effects of economic downturns associated with any
particular industry or market sector. However, we may from time
to time hold securities of a single portfolio company that
comprise more than 5.0% of our total assets
and/or more
than 10.0% of the outstanding voting securities of the portfolio
company. For that reason, we are classified as a non-diversified
management investment company under the 1940 Act.
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Utilizing Long-Standing Relationships to Source
Deals. Our senior management team maintains
extensive relationships with entrepreneurs, financial sponsors,
attorneys, accountants, investment bankers, commercial bankers
and other non-bank providers of capital who refer prospective
portfolio companies to us. These relationships historically have
generated significant investment opportunities. We believe that
our network of relationships will continue to produce attractive
investment opportunities.
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Investments
Debt
Investments
We tailor the terms of our debt investments to the facts and
circumstances of each transaction and prospective portfolio
company, negotiating a structure that seeks to protect our
rights and manage our risk while creating incentives for the
portfolio company to achieve its business plan. To that end, we
typically seek board observation rights with each of our
portfolio companies and offer managerial assistance. We also
seek to limit the downside risks of our investments by
negotiating covenants that are designed to protect our
investments while affording our portfolio companies as much
flexibility in managing their businesses as possible. Such
restrictions may include affirmative and negative covenants,
default penalties, lien protection, change of control provisions
and put rights. We typically add a prepayment penalty structure
to enhance our total return on our investments.
We typically invest in senior secured debt and subordinated
notes. Senior subordinated notes are junior to senior secured
debt but senior to other series of subordinated notes. Our
senior secured debt investments and subordinated note
investments generally have terms of three to seven years. Our
senior secured debt investments generally provide for variable
interest at rates ranging from LIBOR plus 350 basis points
to LIBOR plus 950 basis points and our subordinated debt
investments generally provide for fixed interest rates between
12.0% and 17.0% per annum. Our subordinated note investments
generally are secured by a second priority security interest in
the assets of the borrower and generally include an equity
component, such as warrants to purchase common stock in the
portfolio company. In addition, certain loan investments may
have a form of interest that is not paid currently but is
accrued and added to the loan balance and paid at the end of the
term, referred to as payment in kind, or PIK interest. In our
negotiations with potential portfolio companies, we generally
seek to minimize PIK interest as we have to pay out such accrued
interest as dividends to our stockholders, and we may have to
borrow money or raise additional capital in order to meet the
requirement of having to pay out at least 90.0% of our income to
continue to qualify as a Regulated Investment Company, or RIC,
for federal tax purposes. At December 31, 2009, the
weighted average yield on all of our outstanding debt
investments (including PIK interest) was approximately 14.7% and
the weighted
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average yield on all of outstanding investments (including
equity and equity-linked investments) was approximately 13.5%.
Equity
Investments
When we provide financing, we may acquire equity interests in
the portfolio company. We generally seek to structure our equity
investments as non-control investments to provide us with
minority rights and event-driven or time-driven puts. We also
seek to obtain registration rights in connection with these
investments, which may include demand and piggyback
registration rights, board seats and board observation rights.
Our investments have in the past and may in the future contain a
synthetic equity position pursuant to a formula typically
setting forth royalty rights we may exercise in accordance with
such formula.
Investment
Criteria
We utilize the following criteria and guidelines in evaluating
investment opportunities. However, not all of these criteria and
guidelines have been, or will be, met in connection with each of
our investments.
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Established Companies With Positive Cash
Flow. We seek to invest in established companies
with a history of generating revenues and positive cash flows.
We typically focus on companies with a history of profitability
and minimum trailing twelve month EBITDA of $3.0 million.
We do not invest in
start-up
companies, distressed situations,
turn-aroundsituations or companies that we believe
have unproven business plans.
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Experienced Management Teams With Meaningful Equity
Ownership. Based on our prior investment
experience, we believe that a management team with significant
experience with a portfolio company or relevant industry
experience and meaningful equity ownership is more committed to
a portfolio company. We believe management teams with these
attributes are more likely to manage the companies in a manner
that protects our debt investment and enhances the value of our
equity investment.
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Strong Competitive Position. We seek to invest
in companies that have developed strong positions within their
respective markets, are well positioned to capitalize on growth
opportunities and compete in industries with barriers to entry.
We also seek to invest in companies that exhibit a competitive
advantage, which may help to protect their market position and
profitability.
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Varied Customer and Supplier Base. We prefer
to invest in companies that have a varied customer and supplier
base. Companies with a varied customer and supplier base are
generally better able to endure economic downturns, industry
consolidation and shifting customer preferences.
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Significant Invested Capital. We believe the
existence of significant underlying equity value provides
important support to investments. We look for portfolio
companies that we believe have sufficient value beyond the layer
of the capital structure in which we invest.
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Investment
Committees
Triangle Capital Corporation has an investment committee that is
responsible for all aspects of our investment process relating
to investments made by Triangle Capital Corporation or any of
its subsidiaries, other than investments made by Triangle
Mezzanine Fund. The members of the Triangle Capital Corporation
investment committee are Messrs. Garland S. Tucker III,
Brent P.W. Burgess, Steven C. Lilly, Jeffrey A. Dombcik, Douglas
A. Vaughn, and David F. Parker.
Triangle Mezzanine Fund has an investment committee that is
responsible for all aspects of our investment process relating
to investments made by Triangle Mezzanine Fund. The members of
the Triangle Mezzanine Fund investment committee are
Messrs. Garland S. Tucker III, Brent P.W. Burgess, Steven
C. Lilly, Jeffrey A. Dombcik, Douglas A. Vaughn, and David F.
Parker. Douglas A. Vaughns appointment to the Triangle
Mezzanine Fund investment committee is contingent upon our
receiving confirmation from the U.S. Small Business
Administration. For purposes of the discussion herein, any
reference to the investment
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committee refers to both the investment committee of
Triangle Capital Corporation and the investment committee of
Triangle Mezzanine Fund.
Investment
Process
Our investment committee meets once a week but also meets on an
as needed basis depending on transaction volume. Our investment
committee has organized our investment process into five
distinct stages:
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Origination
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Due Diligence and Underwriting
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Approval
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Documentation and Closing
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Portfolio Management and Investment Monitoring
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Our investment process is summarized in the following chart:
Origination
The origination process for our investments includes sourcing,
screening, preliminary due diligence, transaction structuring,
and negotiation. Our origination process ultimately leads to the
issuance of a non-binding term sheet. Investment origination is
conducted by our nine investment professionals who are
responsible for sourcing potential investment opportunities. Our
investment professionals utilize their extensive relationships
with various financial sponsors, entrepreneurs, attorneys,
accountants, investment bankers and other non-bank providers of
capital to source transactions with prospective portfolio
companies.
If a transaction meets our investment criteria, we perform
preliminary due diligence, taking into consideration some or all
of the following factors:
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A comprehensive financial model that we prepare based on
quantitative analysis of historical financial performance,
financial projections and pro forma financial ratios assuming
investment;
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Competitive landscape surrounding the potential investment;
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Strengths and weaknesses of the potential investments
business strategy and industry;
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Results of a broad qualitative analysis of the companys
products or services, market position, market dynamics and
customers and suppliers; and
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Potential investment structures, certain financing ratios and
investment pricing terms.
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If the results of our preliminary due diligence are
satisfactory, the origination team prepares a Summary
Transaction Memorandum which is presented to our investment
committee. If our investment committee recommends moving
forward, we issue a non-binding term sheet to the potential
portfolio company. Upon execution of a term sheet, we begin our
formal due diligence and underwriting process as we move toward
investment approval.
Due
Diligence and Underwriting
Our due diligence on a prospective investment is completed by a
minimum of two investment professionals, which we define as the
underwriting team. The members of the underwriting team work
together to conduct due diligence and to understand the
relationships among the prospective portfolio companys
business plan, operations and financial performance through
various methods, including, among others,
on-site
visits with management, in-depth review of historical and
projected financial data, interviews with customers and
suppliers, management background checks, third-party accounting
reports and review of any material contracts.
In most circumstances, we utilize outside experts to review the
legal affairs, accounting systems and results, and, where
appropriate, we engage specialists to investigate issues like
environmental matters and general industry outlooks. During the
underwriting process, significant attention is given to
sensitivity analyses and how companies might be expected to
perform in a protracted downside operating
environment. In addition, we analyze key financing ratios and
other industry metrics, including total debt to EBITDA, EBITDA
to fixed charges, EBITDA to total interest expense, total debt
to total capitalization and total senior debt to total
capitalization.
Upon completion of a satisfactory due diligence review and as
part of our evaluation of a proposed investment, the
underwriting team prepares an Investment Memorandum for
presentation to our investment committee. The Investment
Memorandum includes information about the potential portfolio
company such as its history, business strategy, potential
strengths and risks involved, analysis of key customers and
suppliers, working capital analysis, third party consultant
findings, expected returns on investment structure, anticipated
sources of repayment and exit strategies, analysis of historical
financial statements, and potential capitalization and ownership.
Approval
The underwriting team for the proposed investment presents the
Investment Memorandum to our investment committee for
consideration and approval. After reviewing the Investment
Memorandum, members of the investment committee may request
additional due diligence or modify the proposed financing
structure or terms of the proposed investment. Before we proceed
with any investment, the investment committee must approve the
proposed investment. Upon receipt of transaction approval, the
underwriting team proceeds to document the transaction.
Documentation
and Closing
The underwriting team is responsible for all documentation
related to investment closings. In addition, we rely on law
firms with whom we have worked on multiple transactions to help
us complete the necessary documentation associated with
transaction closings. If a transaction changes materially from
what was originally approved by the investment committee, the
underwriting team requests a formal meeting of the investment
committee to communicate the contemplated changes. The
investment committee has the right to approve the amended
transaction structure, to suggest alternative structures or not
to approve the contemplated changes.
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Portfolio
Management and Investment Monitoring
Our investment professionals generally employ several methods of
evaluating and monitoring the performance of our portfolio
companies, which, depending on the particular investment, may
include the following specific processes, procedures and reports:
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Monthly and quarterly review of actual financial performance
versus the corresponding period of the prior year and financial
projections;
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Monthly and quarterly monitoring of all financial and other
covenants;
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Review of senior lender loan compliance certificates, where
applicable;
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Quarterly review of operating results, and general business
performance, including the preparation of a portfolio monitoring
report which is distributed to members of our investment
committee;
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Periodic
face-to-face
meetings with management teams and financial sponsors of
portfolio companies;
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Attendance at portfolio company board meetings through board
seats or observation rights; and
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Application of our investment rating system to each investment.
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In the event that our investment committee determines that an
investment is underperforming, or circumstances suggest that the
risk associated with a particular investment has significantly
increased, we undertake more aggressive monitoring of the
affected portfolio company. The level of monitoring of an
investment is determined by a number of factors, including, but
not limited to, trends in the financial performance of the
portfolio company, the investment structure and the type of
collateral securing our investment, if any.
Investment
Rating System
We monitor a wide variety of key credit statistics that provide
information regarding our portfolio companies to help us assess
credit quality and portfolio performance. We generally require
our portfolio companies to have annual financial audits in
addition to monthly and quarterly unaudited financial
statements. Using these statements, we calculate and evaluate
certain financing ratios. For purposes of analyzing the
financial performance of our portfolio companies, we may make
certain adjustments to their financial statements to reflect the
pro forma results of the portfolio company consistent with a
change of control transaction, to reflect anticipated cost
savings resulting from a merger or restructuring, costs related
to new product development, compensation to previous owners, and
other acquisition or restructuring related items.
As part of our valuation procedures we assign an investment
rating to all of our investments in debt securities. Our
investment rating system uses a scale of 0 to 10, with 10 being
the lowest probability of default and principal loss. This
system is used to estimate the probability of default on our
debt securities and the probability of loss if there is a
default. The system is also used to assist us in estimating the
fair value of equity related securities. These types of systems
are referred to as risk rating systems and are also used by
banks and rating agencies. Our risk rating system covers both
qualitative and quantitative aspects of the business and the
securities we hold.
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Each portfolio company debt investment is rated based upon the
following numeric investment rating system:
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Investment
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Rating
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Description
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10
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Investment is performing above original expectations and
possibly 30.0% or more above original projections provided by
the portfolio company. Investment has been positively influenced
by an unforeseen external event. Full return of principal and
interest is expected. Capital gain is expected.
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Investment is performing above original expectations and
possibly 30.0% or more above original projections provided by
the portfolio company. Investment may have been or is soon to be
positively influenced by an unforeseen external event. Full
return of principal and interest is expected. Capital gain is
expected.
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Investment is performing above original expectations and
possibly 21.0% to 30.0% above original projections provided by
the portfolio company. Full return of principal and interest is
expected. Capital gain is expected.
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7
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Investment is performing above original expectations and
possibly 11.0% to 21.0% above original projections provided by
the portfolio company. Full return of principal and interest is
expected. Depending on age of transaction, potential for capital
gain exists.
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Investment is performing above original expectations and
possibly 5.0% to 11.0% above original projections provided by
the portfolio company. Full return of principal and interest is
expected. Depending on age of transaction, potential for capital
gain exists.
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5
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Investment is performing in line with original expectations.
Full return of principal and interest is expected. Depending on
age of transaction, potential for capital gain may be expected.
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4
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Investment is performing below original expectations, but no
covenant defaults have occurred. Full return of principal and
interest is expected. Potential for capital gain may still be
expected.
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3
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Investment is in default of transaction covenants but interest
payments are current. No loss of principal is expected.
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2
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Investment is in default of transaction covenants and interest
(and possibly principal) payments are not current. A principal
loss of between 1.0% and 33.0% is expected.
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1
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Investment is in default of transaction covenants and interest
(and possibly principal) payments are not current. A principal
loss of between 34.0% and 67.0% is expected.
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0
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Investment is in default and a principal loss of between 68.0%
and 100.0% is expected.
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Valuation
Process and Determination of Net Asset Value
Valuation
Process
The most significant estimate inherent in the preparation of our
financial statements is the valuation of investments and the
related amounts of unrealized appreciation and depreciation of
investments. We have established and documented processes and
methodologies for determining the fair values of portfolio
company investments on a recurring (quarterly) basis. As
discussed below, we have engaged an independent valuation firm
to assist us in our valuation process.
On January 1, 2008, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, which was later codified as Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 820, Fair
Value Measurements and Disclosures. ASC Topic 820, which
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles and expands disclosures about fair value measurements.
ASC Topic 820 clarifies that the exchange price is the price in
an orderly transaction between market participants to sell an
asset or transfer a liability in the market in which the
reporting entity would transact for the asset or liability, that
is, the principal or most advantageous market for the asset or
liability. The transaction to sell the asset or transfer the
liability is a hypothetical transaction at the measurement date,
considered from the perspective of a market participant that
holds the asset or owes the liability. ASC Topic
10
820 provides a consistent definition of fair value which focuses
on exit price and prioritizes, within a measurement of fair
value, the use of market-based inputs over entity-specific
inputs. In addition, ASC Topic 820 provides a framework for
measuring fair value, and establishes a three-level hierarchy
for fair value measurements based upon the transparency of
inputs to the valuation of an asset or liability as of the
measurement date. The three levels of valuation hierarchy
established by ASC Topic 820 are defined as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. We invest
primarily in debt and equity instruments of privately held
companies for which quoted prices falling within the categories
of Level 1 and Level 2 inputs are not available.
Therefore, we value all of our investments at fair value, as
determined in good faith by our Board of Directors, using
Level 3 inputs, as further described below. Due to the
inherent uncertainty in the valuation process, our Board of
Directors estimate of fair value may differ significantly
from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
In addition, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the valuations currently assigned. For a
discussion of the risks inherent in determining the value of
securities for which readily available market values do not
exist, see Risk Factors Risks Relating to Our
Business and Structure Our investment portfolio is
and will continue to be recorded at fair value as determined in
good faith by our board of directors and, as a result, there is
and will continue to be uncertainty as to the value of our
portfolio investments included in Item 1A of
Part I of this Annual Report.
Debt and equity securities that are not publicly traded and for
which a limited market does not exist are valued at fair value
as determined in good faith by our Board of Directors. There is
no single standard for determining fair value in good faith, as
fair value depends upon circumstances of each individual case.
In general, fair value is the amount that we might reasonably
expect to receive upon the current sale of the security.
We evaluate the investments in portfolio companies using the
most recent portfolio company financial statements and
forecasts. We also consult with the portfolio companys
senior management to obtain further updates on the portfolio
companys performance, including information such as
industry trends, new product development and other operational
issues. Additionally, we consider some or all of the following
factors:
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financial standing of the issuer of the security;
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comparison of the business and financial plan of the issuer with
actual results;
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the size of the security held as it relates to the liquidity of
the market for such security;
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any pending public offering of common stock by the issuer of the
security;
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pending reorganization activity affecting the issuer, such as
merger or debt restructuring;
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ability of the issuer to obtain needed financing;
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changes in the economy affecting the issuer;
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financial statements and reports from portfolio company senior
management and ownership;
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11
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the type of security, the securitys cost at the date of
purchase and any contractual restrictions on the disposition of
the security;
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discount from market value of unrestricted securities of the
same class at the time of purchase;
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special reports prepared by analysts;
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information as to any transactions or offers with respect to the
security
and/or sales
to third parties of similar securities;
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the issuers ability to make payments and the type of
collateral;
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the current and forecasted earnings of the issuer;
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statistical ratios compared to lending standards and to other
similar securities; and
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other pertinent factors.
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In making the good faith determination of the value of debt
securities, we start with the cost basis of the security, which
includes any unamortized original issue discount, unamortized
loan origination fees, and payment in
kind (PIK) interest, if any. We also use the risk rating system
discussed above under Investment Rating System to
estimate the probability of default on the debt securities and
the probability of loss if there is a default. The risk rating
system covers both qualitative and quantitative aspects of the
business and the securities held. In valuing debt securities, we
utilize an income approach model that considers
factors including, but not limited to, (i) the portfolio
investments current risk rating, (ii) the portfolio
companys current trailing twelve months
(TTM) results of operations as compared to the
portfolio companys TTM results of operations as of the
date the investment was made, (iii) the portfolio
companys current leverage as compared to its leverage as
of the date the investment was made, and (iv) current
pricing and credit metrics for similar proposed and executed
investment transactions. In valuing equity securities of private
companies, we consider valuation methodologies consistent with
industry practice, including (i) valuation using a
valuation model based on original transaction multiples and the
portfolio companys recent financial performance,
(ii) valuation of the securities based on recent sales in
comparable transactions, and (iii) a review of similar
companies that are publicly traded and the market multiple of
their equity securities.
Unrealized appreciation or depreciation on portfolio investments
are recorded as increases or decreases in investments on the
balance sheets and are separately reflected on the statements of
operations in determining net increase or decrease in net assets
resulting from operations.
Determination of the fair value involves subjective judgments
and estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to our financial statements will refer to the uncertainty
with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements. In
addition, the SBA has established certain valuation guidelines
for SBICs to follow when valuing portfolio investments.
Duff & Phelps, LLC (Duff &
Phelps), an independent valuation firm, provides third
party valuation consulting services to us, which consist of
certain limited procedures that we identified and requested
Duff & Phelps to perform (hereinafter referred to as
the procedures). We generally request
Duff & Phelps to perform the procedures on each
portfolio company at least once in every calendar year and for
new portfolio companies, at least once in the twelve-month
period subsequent to the initial investment. In certain
instances, we may determine that it is not cost-effective, and
as a result is not in our stockholders best interest, to
request Duff & Phelps to perform the procedures on one
or more portfolio companies. Such instances include, but are not
limited to, situations where the fair value of our investment in
the portfolio company is determined to be insignificant relative
to our total investment portfolio. For a further discussion of
Duff & Phelps procedures, see the section
entitled Investment Valuation included in
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 7 of Part II of this Annual Report.
12
Quarterly
Net Asset Value Determination
We determine the net asset value per share of our common stock
on at least a quarterly basis, and more frequently if we are
required to do so pursuant to an equity offering or pursuant to
federal laws and regulations. The net asset value per share is
equal to the value of our total assets minus total liabilities
and any preferred stock outstanding divided by the total number
of shares of common stock outstanding.
Managerial
Assistance
As a BDC, we offer, and must provide upon request, managerial
assistance to certain of our portfolio companies. This
assistance typically involves, among other things, monitoring
the operations of our portfolio companies, participating in
board and management meetings, consulting with and advising
officers of portfolio companies and providing other
organizational and financial guidance. Our senior management
team provides such services. We believe, based on our management
teams combined experience at investment banks, specialty
finance companies, commercial banks, and operating in
executive-level capacities in various operating companies, we
offer this assistance effectively. We may receive fees for these
services.
Competition
We compete for investments with a number of BDCs and investment
funds (including private equity funds, mezzanine funds and other
SBICs), as well as traditional financial services companies such
as commercial banks and other sources of financing. Many of
these entities have greater financial and managerial resources
than we do. We believe we compete with these entities primarily
on the basis of our willingness to make smaller investments, the
experience and contacts of our management team, our responsive
and efficient investment analysis and decision-making processes,
our comprehensive suite of customized financing solutions and
the investment terms we offer.
We believe that some of our competitors make senior secured
loans, junior secured loans and subordinated debt investments
with interest rates that are comparable to or lower than the
rates we offer. Therefore, we do not seek to compete primarily
on the interest rates we offer to potential portfolio companies.
Our competitors also do not always require equity components in
their investments. For additional information concerning the
competitive risks we face, see Risk Factors
Risks Relating to Our Business and Structure We
operate in a highly competitive market for investment
opportunities included in Item 1A of Part I of
this Annual Report.
Brokerage
Allocation and Other Practices
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we infrequently use brokers
in the normal course of our business. Our management team is
primarily responsible for the execution of any publicly traded
securities portion of our portfolio transactions and the
allocation of brokerage commissions. We do not expect to execute
transactions through any particular broker or dealer, but will
seek to obtain the best net results for us, taking into account
such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of
execution, and operational facilities of the firm and the
firms risk and skill in positioning blocks of securities.
While we will generally seek reasonably competitive trade
execution costs, we will not necessarily pay the lowest spread
or commission available. Subject to applicable legal
requirements, we may select a broker based partly upon brokerage
or research services provided to us. In return for such
services, we may pay a higher commission than other brokers
would charge if we determine in good faith that such commission
is reasonable in relation to the services provided. We did not
pay any brokerage commissions during the years ended
December 31, 2009, 2008 or 2007 in connection with the
acquisition
and/or
disposal of our investments.
Dividend
Reinvestment Plan
We have adopted a dividend reinvestment plan that provides for
reinvestment of our distributions on behalf of our stockholders,
unless a stockholder elects to receive cash as provided below.
As a result, if our
13
board of directors authorizes, and we declare, a cash dividend,
then our stockholders who have not opted out of our
dividend reinvestment plan will have their cash dividends
automatically reinvested in additional shares of our common
stock, rather than receiving the cash dividends.
No action will be required on the part of a registered
stockholder to have his or her cash dividend reinvested in
shares of our common stock. A registered stockholder may elect
to receive an entire dividend in cash by notifying The Bank of
New York Mellon, the Plan Administrator and our
transfer agent and registrar, in writing so that such notice is
received by the plan administrator no later than the record date
for dividends to stockholders. The plan administrator will set
up an account for shares acquired through the plan for each
stockholder who has not elected to receive dividends in cash and
hold such shares in non-certificated form. Upon request by a
stockholder participating in the plan, received in writing not
less than 10 days prior to the record date, the plan
administrator will, instead of crediting shares to the
participants account, issue a certificate registered in
the participants name for the number of whole shares of
our common stock and a check for any fractional share. Those
stockholders whose shares are held by a broker or other
financial intermediary may receive dividends in cash by
notifying their broker or other financial intermediary of their
election.
We intend to use primarily newly issued shares to implement the
plan, so long as our shares are trading at or above net asset
value. If our shares are trading below net asset value, we
intend to purchase shares in the open market in connection with
our implementation of the plan. If we use newly issued shares to
implement the plan, the number of shares to be issued to a
stockholder is determined by dividing the total dollar amount of
the dividend payable to such stockholder by the market price per
share of our common stock at the close of regular trading on the
Nasdaq Global Market on the dividend payment date. Market price
per share on that date will be the closing price for such shares
on the Nasdaq Global Market or, if no sale is reported for such
day, at the average of their reported bid and asked prices. If
we purchase shares in the open market to implement the plan, the
number of shares to be issued to a stockholder is determined by
dividing the total dollar amount of the dividend payable to such
stockholder by the average price per share for all shares
purchased by the Plan Administrator in the open market in
connection with the dividend. The number of shares of our common
stock to be outstanding after giving effect to payment of the
dividend cannot be established until the value per share at
which additional shares will be issued has been determined and
elections of our stockholders have been tabulated.
There will be no brokerage charges or other charges to
stockholders who participate in the plan. We will pay the plan
administrators fees under the plan. If a participant
elects by written notice to the plan administrator to have the
plan administrator sell part or all of the shares held by the
plan administrator in the participants account and remit
the proceeds to the participant, the plan administrator is
authorized to deduct a $15.00 transaction fee plus a $0.10 per
share brokerage commission from the proceeds.
Stockholders who receive dividends in the form of stock
generally are subject to the same federal, state and local tax
consequences as are stockholders who elect to receive their
dividends in cash. A stockholders basis for determining
gain or loss upon the sale of stock received in a dividend from
us will be equal to the total dollar amount of the dividend
payable to the stockholder. Any stock received in a dividend
will have a holding period for tax purposes commencing on the
day following the day on which the shares are credited to the
U.S. stockholders account.
Participants may terminate their accounts under the plan by
notifying the plan administrator via its website at
https://www.bnymellon.com/shareowner/isd, by filling out the
transaction request form located at the bottom of their
statement and sending it to the plan administrator at BNY Mellon
Shareowner Services, P.O. Box 358035, Pittsburgh,
Pennsylvania
15252-8015,
or by calling the plan administrator at
(866) 228-7201.
We may terminate the plan upon notice in writing mailed to each
participant at least 30 days prior to any record date for
the payment of any dividend by us. All correspondence concerning
the plan should be directed to the plan administrator by mail at
BNY Mellon Shareowner Services, P.O. Box 358035,
Pittsburgh, Pennsylvania
15252-8015.
14
Employees
At December 31, 2009, we employed fourteen individuals,
including investment and portfolio management professionals,
operations professionals and administrative staff. We expect to
expand our management team and administrative staff in the
future in proportion to our growth.
Election
to be Regulated as a Business Development Company and Regulated
Investment Company
We and the Fund are closed-end, non-diversified management
investment companies that have elected to be treated as BDCs
under the 1940 Act. In addition, we have elected to be treated
as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended (the Code). Our election to be
regulated as a BDC and our election to be treated as a RIC for
federal income tax purposes have a significant impact on our
operations. Some of the most important effects on our operations
of our election to be regulated as a BDC and our election to be
treated as a RIC are outlined below.
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We report our investments at market value or fair value with
changes in value reported through our statements of
operations.
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In accordance with the requirements of Article 6 of
Regulation S-X,
we report all of our investments, including debt investments, at
market value or, for investments that do not have a readily
available market value, at their fair value as
determined in good faith by our board of directors. Changes in
these values are reported through our statements of operations
under the caption of net unrealized appreciation
(depreciation) of investments. See Valuation Process
and Determination of Net Asset Value above.
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We intend to distribute substantially all of our income to
our stockholders. We generally will be required to pay income
taxes only on the portion of our taxable income we do not
distribute to stockholders (actually or constructively).
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As a BDC, we have elected to be treated as a RIC under
Subchapter M of the Code. As a RIC, so long as we meet certain
minimum distribution,
source-of-income
and asset diversification requirements, we generally are
required to pay income taxes only on the portion of our taxable
income and gains we do not distribute (actually or
constructively) and certain built-in gains. We intend to
distribute to our stockholders substantially all of our income.
We may, however, make deemed distributions to our stockholders
of any retained net long-term capital gains. If this happens,
our stockholders will be treated as if they received an actual
distribution of the capital gains and reinvested the net
after-tax proceeds in us. Our stockholders also may be eligible
to claim a tax credit (or, in certain circumstances, a tax
refund) equal to their allocable share of the tax we pay on the
deemed distribution. See Material U.S. Federal Income
Tax Considerations. We met our minimum distribution
requirements for 2007, 2008 and 2009 and continually monitor our
distribution requirements with the goal of ensuring compliance
with the Code.
In addition, we have certain wholly owned taxable subsidiaries
(the Taxable Subsidiaries), each of which holds a
portion of one or more of our portfolio investments that are
listed on the Consolidated Schedule of Investments. The Taxable
Subsidiaries are consolidated for GAAP purposes, such that our
consolidated financial statements reflect our investments in the
portfolio companies owned by the Taxable Subsidiaries. The
purpose of the Taxable Subsidiaries is to permit us to hold
certain interests in portfolio companies that are organized as
limited liability companies (LLCs) (or other forms
of pass through entities) and still satisfy the RIC
tax requirement that at least 90% of the RICs gross income
for federal income tax purposes must consist of investment
income. Absent the Taxable Subsidiaries, a proportionate amount
of any gross income of an LLC (or other pass through
entity) portfolio investment would flow through directly to the
RIC. To the extent that such income did not consist of
investment income, it could jeopardize our ability to qualify as
a RIC and therefore cause us to incur significant amounts of
corporate-level federal income taxes. Where interests in LLCs
(or other pass-through entities) are owned by the Taxable
Subsidiaries, however, the income from such interests is taxed
to the Taxable Subsidiaries and does not flow through to the
RIC, thereby helping us preserve
15
our RIC status and resultant tax advantages. The Taxable
Subsidiaries are not consolidated for income tax purposes and
may generate income tax expense as a result of their ownership
of the portfolio companies. This income tax expense, if any, is
reflected in our Statement of Operations.
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Our ability to use leverage as a means of financing our
portfolio of investments is limited.
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As a BDC, we are required to meet a coverage ratio of total
assets to total senior securities of at least 200.0%. For this
purpose, senior securities include all borrowings (other than
SBA leverage and certain other short-term borrowings) and any
preferred stock we may issue in the future. Additionally, our
ability to continue to utilize leverage as a means of financing
our portfolio of investments may be limited by this asset
coverage test.
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We are required to comply with the provisions of the 1940 Act
applicable to business development companies.
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As a BDC, we are required to have a majority of directors who
are not interested persons under the 1940 Act. In
addition, we are required to comply with other applicable
provisions of the 1940 Act, including those requiring the
adoption of a code of ethics, fidelity bonding and investment
custody arrangements. See Regulation of Business
Development Companies below.
Exemptive
Relief
The 1940 Act prohibits certain transactions between us, the
Fund, as well as our and their affiliates, without first
obtaining an exemptive order from the SEC. We and the Fund filed
a joint exemptive application with the SEC in 2007 requesting
relief under various Sections of the 1940 Act that would permit
us, as the BDC parent, and the Fund, as a BDC/SBIC subsidiary,
to operate effectively as one company for 1940 Act regulatory
purposes. Specifically, the application requested relief for us
and the Fund to (a) engage in certain transactions with
each other, (b) invest in securities in which the other is
an investor and engage in transactions with portfolio companies
that would not otherwise be prohibited if the BDC and its
subsidiary were one company, (c) be subject to modified
consolidated asset coverage requirements for senior securities
issued by the BDC and the BDC/SBIC subsidiary, (d) allow
the BDC/SBIC subsidiary to have the maximum amount of borrowing
capacity for SBICs permitted under the SBA and the 1940 Act, and
(e) allow the Fund, as the BDC/SBIC subsidiary, to file
reports under the Securities Exchange Act of 1934 (the
Exchange Act) on a consolidated basis with us, the
parent BDC. In October 2008, the SEC issued an exemptive relief
order approving the above requests.
In addition, under current SEC rules and regulations, BDCs may
not grant options or restricted stock to directors who are not
officers or employees of the BDC. Similarly, under the 1940 Act,
BDCs cannot issue stock for services to their executive officers
and employees other than options, warrants and rights to acquire
capital stock. In March 2008, we received an exemptive relief
order from the SEC that permits us to grant restricted stock to
our independent directors as a portion of their compensation for
service on our Board of Directors and permits us to grant
restricted stock in exchange for or in recognition of services
by our executive officers and employees.
Regulation
of Business Development Companies
The following is a general summary of the material regulatory
provisions affecting BDCs. It does not purport to be a complete
description of all of the laws and regulations affecting BDCs.
Both we and the Fund have elected to be regulated as BDCs under
the 1940 Act. The 1940 Act contains prohibitions and
restrictions relating to transactions between BDCs and their
affiliates, principal underwriters and affiliates of those
affiliates or underwriters. The 1940 Act requires that a
majority of the directors be persons other than interested
persons, as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that we may not change the
nature of our business so as to cease to be, or to withdraw our
election as, a BDC unless approved by a majority of our
outstanding voting securities.
16
In addition, the 1940 Act defines a majority of the
outstanding voting securities as the lesser of
(i) 67.0% or more of the voting securities present at a
meeting if the holders of more than 50.0% of our outstanding
voting securities are present or represented by proxy, or
(ii) 50.0% of our voting securities.
Qualifying
Assets
Under the 1940 Act, a BDC may not acquire any asset other than
assets of the type listed in Section 55(a) of the 1940 Act,
which are referred to as qualifying assets, unless, at the time
the acquisition is made, qualifying assets represent at least
70.0% of the companys total assets. The principal
categories of qualifying assets relevant to our business are any
of the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible portfolio
company is defined in the 1940 Act and rules adopted pursuant
thereto as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than an SBIC wholly
owned by the BDC) or a company that would be an investment
company but for exclusions under the 1940 Act for certain
financial companies such as banks, brokers, commercial finance
companies, mortgage companies and insurance companies; and
(c) satisfies any of the following:
(i) does not have any class of securities with respect to
which a broker or dealer may extend margin credit;
(ii) is controlled by a BDC or a group of companies
including a BDC and the BDC has an affiliated person who is a
director of the eligible portfolio company;
(iii) is a small and solvent company having total assets of
not more than $4.0 million and capital and surplus of not
less than $2.0 million;
(iv) does not have any class of securities listed on a
national securities exchange; or
(v) has a class of securities listed on a national
securities exchange, but has an aggregate market value of
outstanding voting and non-voting common equity of less than
$250.0 million.
(2) Securities in companies that were eligible portfolio
companies when we made our initial investment if certain other
requirements are satisfied.
(3) Securities of any eligible portfolio company that we
control.
(4) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing arrangements.
(5) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and we already own 60.0% of the
outstanding equity of the eligible portfolio company.
(6) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(5) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(7) Cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less
from the time of investment.
17
In addition, a BDC must have been organized and have its
principal place of business in the United States and must be
operated for the purpose of making investments in the types of
securities described in (1), (2), (3), or (4) above.
Managerial
Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for
the purpose of the 70.0% test, we must either control the issuer
of the securities or must offer to make available to the issuer
of the securities (other than small and solvent companies
described above) significant managerial assistance; except that,
where we purchase such securities in conjunction with one or
more other persons acting together, one of the other persons in
the group may make available such managerial assistance. Making
available significant managerial assistance means,
among other things, any arrangement whereby we, through our
directors, officers or employees, offer to provide, and, if
accepted, do so provide, significant guidance and counsel
concerning the management, operations or business objectives and
policies of a portfolio company.
Temporary
Investments
Pending investment in other types of qualifying
assets, as described above, our investments may consist of
cash, cash equivalents, U.S. government securities or
high-quality debt securities maturing in one year or less from
the time of investment, which we refer to, collectively, as
temporary investments, so that 70.0% of our assets are
qualifying assets. We may invest in U.S. Treasury bills or
in repurchase agreements, provided that such agreements are
fully collateralized by cash or securities issued by the
U.S. Government or its agencies. A repurchase agreement
involves the purchase by an investor, such as us, of a specified
security and the simultaneous agreement by the seller to
repurchase it at an
agreed-upon
future date and at a price that is greater than the purchase
price by an amount that reflects an
agreed-upon
interest rate. There is no percentage restriction on the
proportion of our assets that may be invested in such repurchase
agreements. However, if more than 25.0% of our total assets
constitute repurchase agreements from a single counterparty, we
would not meet the Diversification Tests in order to qualify as
a RIC for federal income tax purposes. Thus, we do not intend to
enter into repurchase agreements with a single counterparty in
excess of this limit. Our management team will monitor the
creditworthiness of the counterparties with which we enter into
repurchase agreement transactions.
Senior
Securities
We are permitted, under specified conditions, to issue multiple
classes of debt and one class of stock senior to our common
stock if our asset coverage, as defined in the 1940 Act, is at
least equal to 200.0% immediately after each such issuance. In
addition, while any senior securities remain outstanding, we
must make provisions to prohibit any distribution to our
stockholders or the repurchase of such securities or shares
unless we meet the applicable asset coverage ratios at the time
of the distribution or repurchase. We may also borrow amounts up
to 5.0% of the value of our total assets for temporary or
emergency purposes without regard to asset coverage. For a
discussion of the risks associated with leverage, see Risk
Factors Risks Relating to Our Business and
Structure Because we intend to distribute
substantially all of our income to our stockholders to maintain
our status as a regulated investment company, we will continue
to need additional capital to finance our growth, and
regulations governing our operation as a business development
company will affect our ability to, and the way in which we,
raise additional capital included in Item 1A of
Part I of this Annual Report.
Code
of Ethics and Corporate Governance Guidelines
We have adopted a code of ethics, which we call our Code
of Conduct, and corporate governance guidelines, which
collectively cover ethics and business conduct. These documents
apply to our directors, officers and employees. Our Code of
Conduct and corporate governance guidelines are available on the
Investor Relations section of our website at the following URL:
http://ir.tcap.com/governance.cfm.
We will report any amendments to or waivers of a required
provision of our Code of Conduct and corporate governance
guidelines on our website or in a Current Report on
Form 8-K.
18
Compliance
Policies and Procedures
We have adopted and implemented written policies and procedures
reasonably designed to prevent violation of the
U.S. federal securities laws, and are required to review
these compliance policies and procedures annually for their
adequacy and the effectiveness of their implementation, and to
designate a chief compliance officer to be responsible for
administering such policies and procedures. Steven C. Lilly
serves as our Chief Compliance Officer.
Proxy
Voting Policies and Procedures
We vote proxies relating to our portfolio securities in the best
interest of our stockholders. We review on a
case-by-case
basis each proposal submitted to a stockholder vote to determine
its impact on the portfolio securities held by us. Although we
generally vote against proposals that may have a negative impact
on our portfolio securities, we may vote for such a proposal if
there exists compelling long-term reasons to do so.
Our proxy voting decisions are made by the investment
professionals who are responsible for monitoring each of our
investments. To ensure that our vote is not the product of a
conflict of interest, we require that: (i) anyone involved
in the decision making process disclose to our chief compliance
officer any potential conflict that he or she is aware of and
any contact that he or she has had with any interested party
regarding a proxy vote; and (ii) employees involved in the
decision making process or vote administration are prohibited
from revealing how we intend to vote on a proposal in order to
reduce any attempted influence from interested parties.
Stockholders may, without charge, obtain information regarding
how we voted proxies with respect to our portfolio securities by
making a written request for proxy voting information to: Chief
Compliance Officer, 3700 Glenwood Avenue, Suite 530,
Raleigh, North Carolina 27612.
Other
We may also be prohibited under the 1940 Act from knowingly
participating in certain transactions with our affiliates
without the prior approval of our board of directors who are not
interested persons and, in some cases, prior approval by the SEC.
We will be periodically examined by the SEC for compliance with
the 1940 Act.
We are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a BDC, we are
prohibited from protecting any director or officer against any
liability to us or our stockholders arising from willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such persons
office.
We are required to adopt and implement written policies and
procedures reasonably designed to prevent violation of the
federal securities laws, review these policies and procedures
annually for their adequacy and the effectiveness of their
implementation, and to designate a chief compliance officer to
be responsible for administering the policies and procedures.
Small
Business Administration Regulations
The Fund is licensed by the Small Business Administration to
operate as a Small Business Investment Company under
Section 301(c) of the Small Business Investment Act of
1958. The Fund initially obtained its SBIC license on
September 11, 2003.
SBICs are designed to stimulate the flow of private equity
capital to eligible small businesses. Under SBA regulations,
SBICs may make loans to eligible small businesses, invest in the
equity securities of such businesses and provide them with
consulting and advisory services. The Fund has typically
invested in senior and subordinated debt, acquired warrants
and/or made
equity investments in qualifying small businesses.
Under present SBA regulations, eligible small businesses
generally include businesses that (together with their
affiliates) have a tangible net worth not exceeding
$18.0 million and have average annual net income
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after Federal income taxes not exceeding $6.0 million
(average net income to be computed without benefit of any
carryover loss) for the two most recent fiscal years. In
addition, an SBIC must devote 20.0% of its investment activity
to smaller concerns as defined by the SBA. A smaller
concern generally includes businesses that have a tangible net
worth not exceeding $6.0 million and have average annual
net income after Federal income taxes not exceeding
$2.0 million (average net income to be computed without
benefit of any net carryover loss) for the two most recent
fiscal years. SBA regulations also provide alternative size
standard criteria to determine eligibility for designation as an
eligible small business or smaller concern, which criteria
depend on the industry in which the business is engaged and are
based on such factors as the number of employees and gross
revenue. However, once an SBIC has invested in a company, it may
continue to make follow on investments in the company,
regardless of the size of the portfolio company at the time of
the follow on investment, up to the time of the portfolio
companys initial public offering.
The SBA prohibits an SBIC from providing funds to small
businesses for certain purposes, such as relending and
investment outside the United States, to businesses engaged in a
few prohibited industries, and to certain passive
(non-operating) companies. In addition, without prior SBA
approval, an SBIC may not invest an amount equal to more than
20.0% of the SBICs regulatory capital in any one portfolio
company.
The SBA places certain limitations on the financing terms of
investments by SBICs in portfolio companies (such as limiting
the permissible interest rate on debt securities held by an SBIC
in a portfolio company). Although prior regulations prohibited
an SBIC from controlling a small business concern except in
limited circumstances, regulations adopted by the SBA in 2002
now allow an SBIC to exercise control over a small business for
a period of seven years from the date on which the SBIC
initially acquires its control position. This control period may
be extended for an additional period of time with the SBAs
prior written approval.
The SBA restricts the ability of an SBIC to lend money to any of
its officers, directors and employees or to invest in affiliates
thereof. The SBA also prohibits, without prior SBA approval, a
change of control of an SBIC or transfers that would
result in any person (or a group of persons acting in concert)
owning 10.0% or more of a class of capital stock of a licensed
SBIC. A change of control is any event which would
result in the transfer of the power, direct or indirect, to
direct the management and policies of an SBIC, whether through
ownership, contractual arrangements or otherwise.
An SBIC (or group of SBICs under common control) may generally
have outstanding debentures guaranteed by the SBA in amounts up
to three times the amount of the regulatory capital of the
SBIC(s). Debentures guaranteed by the SBA have a maturity of ten
years, require semi-annual payments of interest, do not require
any principal payments prior to maturity, and, historically,
were subject to certain prepayment penalties. Those prepayment
penalties no longer apply as of September 2006. As of
December 31, 2009, we, through the Fund, had issued
$121.9 million of SBA-guaranteed debentures, which had an
annual weighted average interest rate of 5.77%, which includes
$115.1 million of pooled SBA-guaranteed debentures with a
weighted average fixed interest rate of 6.03% and
$6.8 million of unpooled SBA-guaranteed debentures with a
weighted average interim interest rate of 1.41%. As of
December 31, 2009, the maximum statutory limit on the
dollar amount of outstanding SBA-guaranteed debentures that may
be issued by a single SBIC was $150.0 million. In June
2009, the Fund received a new leverage commitment from the SBA
which increased the Funds ability to issue SBA guaranteed
debentures up to the maximum statutory limit of
$150.0 million. In addition, we have applied for a second
SBIC license, which application is currently being reviewed by
the SBA. If approved, this license would provide us with the
capability to issue an additional $75.0 million of
SBA-guaranteed debentures.
SBICs must invest idle funds that are not being used to make
loans in investments permitted under SBA regulations in the
following limited types of securities: (i) direct
obligations of, or obligations guaranteed as to principal and
interest by, the United States government, which mature within
15 months from the date of the investment;
(ii) repurchase agreements with federally insured
institutions with a maturity of seven days or less (and the
securities underlying the repurchase obligations must be direct
obligations of or guaranteed by the federal government);
(iii) certificates of deposit with a maturity of one year
or less, issued by a federally insured institution; (iv) a
deposit account in a federally insured institution that is
subject to a withdrawal
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restriction of one year or less; (v) a checking account in
a federally insured institution; or (vi) a reasonable petty
cash fund.
SBICs are periodically examined and audited by the SBAs
staff to determine its compliance with SBIC regulations and are
periodically required to file certain forms with the SBA. The
Fund was audited by the SBA during 2009, and no findings were
disclosed as a result of the audit.
Neither the SBA nor the U.S. government or any of its
agencies or officers has approved any ownership interest to be
issued by us or any obligation that we or any of our
subsidiaries may incur.
Securities
Exchange Act of 1934 and Sarbanes-Oxley Act Compliance
We are subject to the reporting and disclosure requirements of
the Exchange Act, including the filing of quarterly, annual and
current reports, proxy statements and other required items. In
addition, we are subject to the Sarbanes-Oxley Act of 2002,
which imposes a wide variety of regulatory requirements on
publicly-held companies and their insiders. For example:
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pursuant to
Rule 13a-14
of the Exchange Act, our Chief Executive Officer and Chief
Financial Officer are required to certify the accuracy of the
financial statements contained in our periodic reports;
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pursuant to Item 307 of
Regulation S-K,
our periodic reports are required to disclose our conclusions
about the effectiveness of our disclosure controls and
procedures;
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pursuant to
Rule 13a-15
of the Exchange Act, our management is required to prepare a
report regarding its assessment of our internal control over
financial reporting, and separately, our independent registered
public accounting firm audits our internal controls over
financial reporting; and
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pursuant to Item 308 of
Regulation S-K
and
Rule 13a-15
of the Exchange Act, our periodic reports must disclose whether
there were significant changes in our internal control over
financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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The
Nasdaq Global Market Corporate Governance Regulations
The Nasdaq Global Market has adopted corporate governance
regulations that listed companies must comply with. We believe
we are in compliance with such corporate governance listing
standards. We intend to monitor our compliance with all future
listing standards and to take all necessary actions to ensure
that we stay in compliance.
Material
U.S. Federal Income Tax Considerations
The following discussion is a general summary of the material
U.S. federal income tax considerations applicable to us and
to an investment in our shares. This summary does not purport to
be a complete description of the income tax considerations
applicable to such an investment. For example, we have not
described tax consequences that may be relevant to certain types
of holders subject to special treatment under U.S. federal
income tax laws, including stockholders subject to the
alternative minimum tax, tax-exempt organizations, insurance
companies, dealers in securities, pension plans and trusts, and
financial institutions. This summary assumes that investors hold
our common stock as capital assets (within the meaning of the
Code). This discussion is based upon the Code, Treasury
regulations, and administrative and judicial interpretations,
each as of the date of this Annual Report on
Form 10-K
and all of which are subject to change, possibly retroactively,
which could affect the continuing validity of this discussion.
This summary does not discuss any aspects of U.S. estate or
gift tax or foreign, state or local tax. It does not discuss the
special treatment under U.S. federal income tax laws that
could result if we invested in tax-exempt securities or certain
other investment assets.
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A U.S. stockholder generally is a beneficial
owner of shares of our common stock who is for U.S. federal
income tax purposes:
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A citizen or individual resident of the United States;
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A corporation or other entity treated as a corporation, for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States or any political
subdivision thereof;
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A trust if a court within the United States is asked to exercise
primary supervision over the administration of the trust and one
or more United States persons have the authority to control all
substantive decisions of the trust; or
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A trust or an estate, the income of which is subject to
U.S. federal income taxation regardless of its source.
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A
Non-U.S. stockholder
is a beneficial owner of shares of our common stock that is not
a U.S. stockholder.
If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds shares of our
common stock, the U.S. federal income tax treatment of a
partner in the partnership will generally depend upon the status
of the partner and the activities of the partnership. A
prospective stockholder that is a partner of a partnership
holding shares of our common stock should consult his, her or
its tax advisors with respect to the purchase, ownership and
disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an
investor of an investment in our shares will depend on the facts
of his, her or its particular situation. We encourage investors
to consult their own tax advisors regarding the specific
consequences of such an investment, including tax reporting
requirements, the applicability of federal, state, local and
foreign tax laws, eligibility for the benefits of any applicable
tax treaty and the effect of any possible changes in the tax
laws.
Election
to be Taxed as a Regulated Investment Company
As a BDC, we have qualified and elected to be treated as a RIC
under Subchapter M of the Code. As a RIC, we generally will not
have to pay corporate-level U.S. federal income taxes
on any income that we distribute to our stockholders as
dividends. To maintain our RIC status, we must, among other
things, meet certain
source-of-income
and asset diversification requirements (as described below). In
addition, in order to maintain RIC tax treatment, we must
distribute to our stockholders, for each taxable year, at least
90.0% of our investment company taxable income,
which is generally our net ordinary income plus the excess of
net short-term capital gains over net long-term capital losses
(the Annual Distribution Requirement).
Taxation
as a Regulated Investment Company
If we qualify as a RIC and satisfy the Annual Distribution
Requirement, then we will not be subject to U.S. federal
income tax on the portion of our income we distribute (or are
deemed to distribute) to stockholders. However, we will be
subject to U.S. federal income tax at the regular corporate
rates on any income or capital gains not distributed (or deemed
distributed) to our stockholders.
We will be subject to a 4.0% nondeductible U.S. federal
excise tax on certain undistributed income unless we distribute
in a timely manner an amount at least equal to the sum of
(1) 98.0% of our net ordinary income for each calendar
year, (2) 98.0% of our capital gain net income for each
calendar year and (3) any income recognized, but not
distributed, in preceding years and on which we paid no
U.S. federal income tax (the Excise Tax Avoidance
Requirement). We generally will endeavor in each taxable
year to avoid any U.S. federal excise tax on our earnings.
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In order to qualify as a RIC for U.S. federal income tax
purposes, we must, among other things:
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continue to qualify as a BDC under the 1940 Act at all times
during each taxable year;
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derive in each taxable year at least 90.0% of our gross income
from dividends, interest, payments with respect to certain
securities and loans, gains from the sale of stock or other
securities, or other income derived with respect to our business
of investing in such stock or securities (the 90.0% Income
Test); and
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diversify our holdings so that at the end of each quarter of the
taxable year:
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at least 50.0% of the value of our assets consists of cash, cash
equivalents, U.S. Government securities, securities of
other RICs, and other securities if such other securities of any
one issuer do not represent more than 5.0% of the value of our
assets or more than 10.0% of the outstanding voting securities
of the issuer; and
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no more than 25.0% of the value of our assets is invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer or of two or more
issuers that are controlled, as determined under applicable
Internal Revenue Code rules, by us and that are engaged in the
same or similar or related trades or businesses (the
Diversification Tests).
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We may be required to recognize taxable income in circumstances
in which we do not receive cash. For example, if we hold debt
obligations that are treated under applicable tax rules as
having original issue discount (such as debt instruments with
PIK interest or, in certain cases, increasing interest rates or
issued with warrants), we must include in income each year a
portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing
such income is received by us in the same taxable year. We may
also have to include in income other amounts that we have not
yet received in cash, such as PIK interest and deferred loan
origination fees that are paid after origination of the loan or
are paid in non-cash compensation such as warrants or stock.
Because any original issue discount or other amounts accrued
will be included in our investment company taxable income for
the year of accrual, we may be required to make a distribution
to our stockholders in order to satisfy the Annual Distribution
Requirement, even though we will not have received any
corresponding cash amount. As a result, we may have difficulty
meeting the annual distribution requirement necessary to
maintain RIC tax treatment under the Code. We may have to sell
some of our investments at times
and/or at
prices we would not consider advantageous, raise additional debt
or equity capital or forgo new investment opportunities for this
purpose. If we are not able to obtain cash from other sources,
we may fail to qualify for RIC tax treatment and thus become
subject to corporate-level U.S. federal income tax.
In order to meet the 90% Income Test, we may establish one or
more special purpose corporations to hold assets from which we
do not anticipate earning dividend, interest or other qualifying
income under the 90% Income Test. Any such special purpose
corporation would generally be subject to U.S. federal
income tax, and could result in a reduced after-tax yield on the
portion of our assets held there.
Gain or loss realized by us from warrants acquired by us as well
as any loss attributable to the lapse of such warrants generally
will be treated as capital gain or loss. Such gain or loss
generally will be long-term or short-term, depending on how long
we held a particular warrant.
Although we do not presently expect to do so, we are authorized
to borrow funds and to sell assets in order to satisfy
distribution requirements. However, under the 1940 Act, we are
not permitted to make distributions to our stockholders while
our debt obligations and other senior securities are outstanding
unless certain asset coverage tests are met. See
Regulation of Business Development Companies
Senior Securities above. Moreover, our ability to dispose
of assets to meet our distribution requirements may be limited
by (1) the illiquid nature of our portfolio
and/or
(2) other requirements relating to our status as a RIC,
including the Diversification Tests. If we dispose of assets in
order to meet the Annual Distribution Requirement or the Excise
Tax Avoidance Requirement, we may make such dispositions at
times that, from an investment standpoint, are not advantageous.
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We may invest in preferred securities or other securities the
U.S. federal income tax treatment of which may not be clear
or may be subject to recharacterization by the IRS. To the
extent the tax treatment of such securities or the income from
such securities differs from the expected tax treatment, it
could affect the timing or character of income recognized,
requiring us to purchase or sell securities, or otherwise change
our portfolio, in order to comply with the tax rules applicable
to RICs under the Code.
The remainder of this discussion assumes that we qualify as a
RIC and have satisfied the Annual Distribution Requirement.
Taxation
of U.S. Stockholders
Distributions by us generally are taxable to
U.S. stockholders as ordinary income or capital gains.
Distributions of our investment company taxable
income (which is, generally, our net ordinary income plus
realized net short-term capital gains in excess of realized net
long-term capital losses) will be taxable as ordinary income to
U.S. stockholders to the extent of our current or
accumulated earnings and profits, whether paid in cash or
reinvested in additional common stock. To the extent such
distributions paid by us to non-corporate stockholders
(including individuals) are attributable to dividends from
U.S. corporations and certain qualified foreign
corporations, such distributions (Qualifying
Dividends) may be eligible for a maximum tax rate of 15.0%
(through 2010). In this regard, it is anticipated that
distributions paid by us will generally not be Qualifying
Dividends and, therefore, generally will not qualify for the
preferential rate applicable to Qualifying Dividends.
Distributions of our net capital gains (which is generally our
realized net long-term capital gains in excess of realized net
short-term capital losses) properly designated by us as
capital gain dividends will be taxable to a
U.S. stockholder as long-term capital gains at a maximum
rate of 15.0% (through 2010) in the case of individuals,
trusts or estates, regardless of the
U.S. stockholders holding period for his, her or its
shares of our common stock and regardless of whether paid in
cash or reinvested in additional common stock. Distributions in
excess of our earnings and profits first will reduce a
U.S. stockholders adjusted tax basis in such
stockholders common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such
U.S. stockholder.
We currently intend to retain some or all of our realized net
long-term capital gains in excess of realized net short-term
capital losses, but to designate the retained net capital gain
as a deemed distribution. In that case, among other
consequences, we will pay tax on the retained amount, each
U.S. stockholder will be required to include his, her or
its share of the deemed distribution in income as if it had been
actually distributed to the U.S. stockholder, and the
U.S. stockholder will be entitled to claim a credit equal
to his, her or its allocable share of the tax paid thereon by
us. Because we expect to pay tax on any retained capital gains
at our regular corporate tax rate, and because that rate is in
excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual
U.S. stockholders will be treated as having paid will
exceed the tax they owe on the capital gain distribution and
such excess generally may be refunded or claimed as a credit
against the U.S. stockholders other U.S. federal
income tax obligations. The amount of the deemed distribution
net of such tax will be added to the
U.S. stockholders cost basis for his, her or its
common stock. In order to utilize the deemed distribution
approach, we must provide written notice to our stockholders
prior to the expiration of 60 days after the close of the
relevant taxable year. We cannot treat any of our investment
company taxable income as a deemed distribution.
In any fiscal year, we may elect to make distributions to our
stockholders in excess of our taxable earnings for that fiscal
year. As a result, a portion of those distributions may be
deemed a return of capital to our stockholders.
The Internal Revenue Service recently issued guidance that
permits certain distributions made by a RIC consisting of both
cash and its stock to be treated as dividend distributions for
purposes of satisfying the annual distribution requirements
applicable to RICs. Based on that guidance, if we satisfy
certain requirements, including the requirement that at least
10% of the total value of any such distribution consists of
cash, the cash and our shares that we distribute will be treated
as a dividend, to the extent of our earnings and profits. If we
make such a distribution to our stockholders, each of our
stockholders will be required to treat the total value of the
distribution that each stockholder receives as a dividend, to
the extent of each stockholders pro-
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rata share of our earnings and profits, regardless of whether
such stockholder receives cash, our shares or a combination of
cash and our shares.
We advise each of our stockholders that the taxes resulting from
your receipt of a distribution consisting of cash and our shares
may exceed the cash that you receive in the distribution. We
urge each of our stockholders to consult your tax advisor
regarding the specific federal, state, local and foreign income
and other tax consequences of distributions consisting of both
cash and our shares.
For purposes of determining (1) whether the Annual
Distribution Requirement is satisfied for any year and
(2) the amount of capital gain dividends paid for that
year, we may, under certain circumstances, elect to treat a
dividend that is paid during the following taxable year as if it
had been paid during the taxable year in question. If we make
such an election, the U.S. stockholder will still be
treated as receiving the dividend in the taxable year in which
the distribution is made. However, any dividend declared by us
in October, November or December of any calendar year, payable
to stockholders of record on a specified date in such a month
and actually paid during January of the following year, will be
treated as if it had been received by our U.S. stockholders
on December 31 of the year in which the dividend was declared.
If an investor purchases shares of our common stock shortly
before the record date of a distribution, the price of the
shares will include the value of the distribution and the
investor will be subject to tax on the distribution even though
economically it may represent a return of his, her or its
investment.
A stockholder generally will recognize taxable gain or loss if
the stockholder sells or otherwise disposes of his, her or its
shares of our common stock. The amount of gain or loss will be
measured by the difference between such stockholders
adjusted tax basis in the common stock sold and the amount of
the proceeds received in exchange. Any gain arising from such
sale or disposition generally will be treated as long-term
capital gain or loss if the stockholder has held his, her or its
shares for more than one year. Otherwise, it will be classified
as short-term capital gain or loss. However, any capital loss
arising from the sale or disposition of shares of our common
stock held for six months or less will be treated as long-term
capital loss to the extent of the amount of capital gain
dividends received, or undistributed capital gain deemed
received, with respect to such shares. In addition, all or a
portion of any loss recognized upon a disposition of shares of
our common stock may be disallowed if other shares of our common
stock are purchased (whether through reinvestment of
distributions or otherwise) within 30 days before or after
the disposition.
In general, individual U.S. stockholders are subject to a
maximum federal income tax rate of 15.0% (through 2010) on
their net capital gain (i.e., the excess of realized net
long-term capital gains over realized net short-term capital
losses), recognized prior to January 1, 2011, including any
long-term capital gain derived from an investment in our shares.
Such rate is lower than the maximum rate on ordinary income
currently payable by individuals. Corporate
U.S. stockholders currently are subject to federal income
tax on net capital gain at the maximum 35.0% rate also applied
to ordinary income. Non-corporate stockholders with net capital
losses for a year (i.e., capital losses in excess of capital
gains) generally may deduct up to $3,000 of such losses against
their ordinary income each year; any net capital losses of a
non-corporate stockholder in excess of $3,000 generally may be
carried forward and used in subsequent years as provided in the
Code. Corporate stockholders generally may not deduct any net
capital losses for a year, but may carry back such losses for
three years or carry forward such losses for five years.
We will send to each of our U.S. stockholders, as promptly
as possible after the end of each calendar year, a notice
detailing, on a per share and per distribution basis, the
amounts includible in such U.S. stockholders taxable
income for such year as ordinary income and as long-term capital
gain. In addition, the federal tax status of each years
distributions generally will be reported to the Internal Revenue
Service (including the amount of dividends, if any, eligible for
the 15.0% maximum rate (through 2010)). Dividends paid by us
generally will not be eligible for the dividends-received
deduction or the preferential tax rate applicable to Qualifying
Dividends because our income generally will not consist of
Qualifying Dividends. Distributions may also be subject to
additional state, local and foreign taxes depending on a
U.S. stockholders particular situation.
25
We may be required to withhold U.S. federal income tax
(backup withholding) at a rate of 28.0% (through
2010) from all taxable distributions to any non-corporate
U.S. stockholder (1) who fails to furnish us with a
correct taxpayer identification number or a certificate that
such stockholder is exempt from backup withholding, or
(2) with respect to whom the IRS notifies us that such
stockholder has failed to properly report certain interest and
dividend income to the IRS and to respond to notices to that
effect. An individuals taxpayer identification number is
his or her social security number. Any amount withheld under
backup withholding is allowed as a credit against the
U.S. stockholders federal income tax liability,
provided that proper information is provided to the IRS.
Taxation
of Non-U.S.
Stockholders
Whether an investment in the shares is appropriate for a
Non-U.S. stockholder
will depend upon that persons particular circumstances. An
investment in the shares by a
Non-U.S. stockholder
may have adverse tax consequences.
Non-U.S. stockholders
should consult their tax advisers before investing in our common
stock.
Distributions of our investment company taxable
income to
Non-U.S. stockholders
(including interest income and realized net short-term capital
gains in excess of realized long-term capital losses, which
generally would be free of withholding if paid to
Non-U.S. stockholders
directly) will be subject to withholding of federal tax at a
30.0% rate (or lower rate provided by an applicable treaty) to
the extent of our current and accumulated earnings and profits
unless an applicable exception applies. If the distributions are
effectively connected with a U.S. trade or business of the
Non-U.S. stockholder,
and, if an income tax treaty applies, attributable to a
permanent establishment in the United States, we will not be
required to withhold U.S. federal tax if the
Non-U.S. stockholder
complies with applicable certification and disclosure
requirements, although the distributions will be subject to
U.S. federal income tax at the rates applicable to
U.S. persons. (Special certification requirements apply to
a
Non-U.S. stockholder
that is a foreign partnership or a foreign trust, and such
entities are urged to consult their own tax advisors.)
Actual or deemed distributions of our net capital gains to a
Non-U.S. stockholder,
and gains realized by a
Non-U.S. stockholder
upon the sale of our common stock, will not be subject to
federal withholding tax and generally will not be subject to
U.S. federal income tax unless the distributions or gains,
as the case may be, are effectively connected with a
U.S. trade or business of the
Non-U.S. stockholder
and, if an income tax treaty applies, are attributable to a
permanent establishment maintained by the
Non-U.S. stockholder
in the United States.
If we distribute our net capital gains in the form of deemed
rather than actual distributions, a
Non-U.S. stockholder
will be entitled to a U.S. federal income tax credit or tax
refund equal to the stockholders allocable share of the
tax we pay on the capital gains deemed to have been distributed.
In order to obtain the refund, the
Non-U.S. stockholder
must obtain a U.S. taxpayer identification number and file
a U.S. federal income tax return even if the
Non-U.S. stockholder
would not otherwise be required to obtain a U.S. taxpayer
identification number or file a U.S. federal income tax
return. For a corporate
Non-U.S. stockholder,
distributions (both actual and deemed), and gains realized upon
the sale of our common stock that are effectively connected to a
U.S. trade or business may, under certain circumstances, be
subject to an additional branch profits tax at a
30.0% rate (or at a lower rate if provided for by an applicable
treaty). Accordingly, investment in the shares may not be
appropriate for a
Non-U.S. stockholder.
A
Non-U.S. stockholder
who is a non-resident alien individual, and who is otherwise
subject to withholding of U.S. federal tax, may be subject
to information reporting and backup withholding of
U.S. federal income tax on dividends unless the
Non-U.S. stockholder
provides us or the dividend paying agent with an IRS
Form W-8BEN
(or an acceptable substitute form) or otherwise meets
documentary evidence requirements for establishing that it is a
Non-U.S. stockholder
or otherwise establishes an exemption from backup withholding.
As a RIC, we will be subject to the alternative minimum tax
(AMT), but any items that are treated differently
for AMT purposes must be apportioned between us and our
stockholders and this may affect the stockholders AMT
liabilities. Although regulations explaining the precise method
of apportionment have not
26
yet been issued by the Internal Revenue Service, we intend in
general to apportion these items in the same proportion that
dividends paid to each stockholder bear to our taxable income
(determined without regard to the dividends paid deduction),
unless we determine that a different method for a particular
item is warranted under the circumstances.
Non-U.S. persons
should consult their own tax advisors with respect to the
U.S. federal income tax and withholding tax, and state,
local and foreign tax consequences of an investment in the
shares.
Failure
to Qualify as a Regulated Investment Company
If we are unable to qualify for treatment as a RIC, we would be
subject to U.S. federal income tax on all of our taxable
income at regular corporate rates, regardless of whether we make
any distributions to our stockholders. Distributions would not
be required, and any distributions would be taxable to our
stockholders as Qualifying Dividends to the extent of our
current and accumulated earnings and profits. Subject to certain
limitations under the Code, corporate distributees would be
eligible for the dividends-received deduction. Distributions in
excess of our current and accumulated earnings and profits would
be treated first as a return of capital to the extent of the
stockholders tax basis, and any remaining distributions
would be treated as a capital gain.
Available
Information
We intend to make this Annual Report, as well as our quarterly
reports on
Form 10-Q,
our current reports on
Form 8-K
and, if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) of the Exchange Act,
publicly available on our website (www.tcap.com) without charge
as soon as reasonably practicable following our filing of such
reports with the Securities and Exchange Commission
(SEC). Our SEC reports can be accessed through the
investor relations section of our website. The information found
on our website is not part of this or any other report we file
with or furnish to the SEC. We assume no obligation to update or
revise any forward looking statements in this Annual Report or
in other reports filed with the SEC, whether as a result of new
information, future events or otherwise, unless we are required
to do so by law. A copy of this Annual Report and our other
reports is available without charge upon written request to
Investor Relations, Triangle Capital Corporation, 3700 Glenwood
Avenue, Suite 530, Raleigh, North Carolina 27612.
Further, a copy of this Annual Report is obtainable from the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC
at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and our other filings at www.sec.gov.
We have adopted a code of ethics for Triangle Capital
Corporation and Triangle Mezzanine Fund LLLP, which we call
our Code of Conduct), which every director, officer
and employee is expected to observe. The Code of Conduct for
Triangle Capital Corporation and Triangle Mezzanine
Fund LLLP is publicly available on our website under
Corporate Governance at the following URL:
http://ir.tcap.com/governance.cfm
and is referenced in this Annual Report as Exhibit 14.1.
As indicated above in this Annual Report under
Forward-Looking Statements, those statements in this
Annual Report that are not historical facts may be
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Investing in our
common stock involves a number of significant risks. The risks
set out below are not the only risks we face. Additional risks
and uncertainties not presently known to us or not presently
deemed material by us might also impair our operations and
performance. If any of the following events occur, our business,
financial condition and results of operations could be
materially and adversely affected. In such case, our net asset
value and the trading price of our common stock could decline,
and you may lose all or part of your investment.
27
Risks
Relating to Our Business and Structure
Our
financial condition and results of operations will depend on our
ability to manage and deploy capital effectively.
Our ability to continue to achieve our investment objective will
depend on our ability to effectively manage and deploy our
capital, which will depend, in turn, on our management
teams ability to continue to identify, evaluate, invest
in, and monitor companies that meet our investment criteria. We
cannot assure you that we will continue to achieve our
investment objective.
Accomplishing this result on a cost-effective basis will be
largely a function of our management teams handling of the
investment process, its ability to provide competent, attentive
and efficient services and our access to investments offering
acceptable terms. In addition to monitoring the performance of
our existing investments, members of our management team and our
investment professionals may also be called upon to provide
managerial assistance to our portfolio companies. These demands
on their time may distract them or slow the rate of investment.
Even if we are able to grow and build upon our investment
operations in a manner commensurate with the increased capital
available to us as a result of recent offerings of our common
stock, any failure to manage our growth effectively could have a
material adverse effect on our business, financial condition,
results of operations and prospects. The results of our
operations will depend on many factors, including the
availability of opportunities for investment, readily accessible
short and long-term funding alternatives in the financial
markets and economic conditions. Furthermore, if we cannot
successfully operate our business or implement our investment
policies and strategies as described in this Annual Report, it
could negatively impact our ability to pay dividends and cause
you to lose all or part of your investment.
Current
market conditions have impacted debt and equity capital markets
in the United States, and we do not expect these conditions to
improve in the near future.
Since the third quarter of 2007, global credit and other
financial markets have suffered substantial stress, volatility,
illiquidity and disruption. These forces reached extraordinary
levels in late 2008, resulting in the bankruptcy of, the
acquisition of, or government intervention in the affairs of
several major domestic and international financial institutions.
In particular, the financial services sector has been negatively
impacted by significant write-offs as the value of the assets
held by financial firms has declined, impairing their capital
positions and abilities to lend and invest. We believe that such
value declines were exacerbated by widespread forced
liquidations as leveraged holders of financial assets, faced
with declining prices, were compelled to sell to meet margin
requirements and maintain compliance with applicable capital
standards. Such forced liquidations have also impaired or
eliminated many investors and investment vehicles, leading to a
decline in the supply of capital for investment and depressed
pricing levels for many assets. These events significantly
diminished overall confidence in the debt and equity markets,
engendered unprecedented declines in the values of certain
assets, and caused extreme economic uncertainty.
Since March 2009, there have been signs that the global credit
and other financial market conditions have improved as stability
has increased throughout the international financial system.
Concentrated policy initiatives undertaken by central banks and
governments appear to have curtailed the incidence of
large-scale failures within the global financial system.
Concurrently, investor confidence, financial indicators, capital
markets activity and asset prices have shown signs of marked
improvement since the second quarter of 2009. While financial
conditions have improved, economic activity has remained subdued
and corporate interest rate risk premiums, otherwise known as
credit spreads, remain at historically high levels, particularly
in the commercial loan and high yield bond markets. These
conditions could increase our funding costs, limit our access to
the capital markets or result in a decision by lenders not to
extend credit to us. These events could prevent us from
increasing our investment originations and negatively impact our
operating results.
28
Our
investment portfolio is and will continue to be recorded at fair
value as determined in good faith by our board of directors and,
as a result, there is and will continue to be uncertainty as to
the value of our portfolio investments.
Under the 1940 Act, we are required to carry our portfolio
investments at market value or, if there is no readily available
market value, at fair value as determined by our board of
directors. Typically there is not a public market for the
securities of the privately held companies in which we have
invested and will generally continue to invest. As a result, we
value these securities quarterly at fair value as determined in
good faith by our board of directors based on input from
management, a third party independent valuation firm and our
audit committee.
The determination of fair value and consequently, the amount of
unrealized gains and losses in our portfolio, is to a certain
degree subjective and dependent on the judgment of our board.
Certain factors that may be considered in determining the fair
value of our investments include the nature and realizable value
of any collateral, the portfolio companys earnings and its
ability to make payments on its indebtedness, the markets in
which the portfolio company does business, comparison to
comparable publicly-traded companies, discounted cash flows and
other relevant factors. Because such valuations, and
particularly valuations of private securities and private
companies, are inherently uncertain, may fluctuate over short
periods of time and may be based on estimates, our
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. Due to this uncertainty, our fair value
determinations may cause our net asset value on a given date to
materially understate or overstate the value that we may
ultimately realize upon the sale or disposition of one or more
of our investments. As a result, investors purchasing our common
stock based on an overstated net asset value would pay a higher
price than the value of our investments might warrant.
Conversely, investors selling shares during a period in which
the net asset value understates the value of our investments
will receive a lower price for their shares than the value of
our investments might warrant.
We
operate in a highly competitive market for investment
opportunities.
A large number of entities compete with us to make the types of
investments that we make in target companies. We compete for
investments with other BDCs and investment funds (including
private equity funds and mezzanine funds), as well as
traditional financial services companies such as commercial and
investment banks and other sources of funding. Moreover,
alternative investment vehicles, such as hedge funds, also
invest in lower middle market companies. As a result,
competition for investment opportunities in lower middle market
companies is intense. Many of our competitors are substantially
larger and have considerably greater financial, technical and
marketing resources than we do. For example, some competitors
may have a lower cost of capital and access to funding sources
that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments than we have. These characteristics could allow our
competitors to consider a wider variety of investments,
establish more relationships and offer better pricing and more
flexible structuring than we are able to do. We may lose
investment opportunities if we do not match our
competitors pricing, terms and structure. If we are forced
to match our competitors pricing, terms and structure, we
may not be able to achieve acceptable returns on our investments
or may bear substantial risk of capital loss. A significant part
of our competitive advantage stems from the fact that the market
for investments in lower middle market companies is underserved
by traditional commercial banks and other financing sources. A
significant increase in the number
and/or the
size of our competitors in this target market could force us to
accept less attractive investment terms. Furthermore, many of
our competitors have greater experience operating under, or are
not subject to, the regulatory restrictions that the 1940 Act
imposes on us as a BDC.
We are
dependent upon our key investment personnel for our future
success.
We depend on the members of our senior management team,
particularly Garland S. Tucker, III, Brent P.W. Burgess and
Steven C. Lilly, for the final selection, structuring, closing
and monitoring of our investments. These employees have critical
industry experience and relationships that we rely on to
implement our business plan. If we lose the services of these
individuals, we may not be able to operate our business as
29
we expect, and our ability to compete could be harmed, which
could cause our operating results to suffer. Effective
February 21, 2009, Messrs. Tucker, Burgess and Lilly
are no longer employed by us pursuant to employment agreements.
Rather, each is currently employed by us on an at-will basis.
Our success depends on attracting and retaining qualified
personnel in a competitive environment.
We experience competition in attracting and retaining qualified
personnel, particularly investment professionals, and we may be
unable to maintain or grow our business if we cannot attract and
retain such personnel. Our ability to attract and retain
personnel with the requisite credentials, experience and skills
depends on several factors including, but not limited to, our
ability to offer competitive wages, benefits and professional
growth opportunities. Many of the entities, including investment
funds (such as private equity funds and mezzanine funds) and
traditional financial services companies, with which we compete
for experienced personnel have greater resources than we have.
The competitive environment for qualified personnel may require
us to take certain measures to ensure that we are able to
attract and retain experienced personnel. Such measures may
include increasing the attractiveness of our overall
compensation packages, altering the structure of our
compensation packages through the use of additional forms of
compensation, or other steps. The inability to attract and
retain experienced personnel could have a material adverse
effect on our business.
Our
business model depends to a significant extent upon strong
referral relationships, and our inability to maintain or develop
these relationships, as well as the failure of these
relationships to generate investment opportunities, could
adversely affect our business.
We expect that members of our management team will maintain
their relationships with financial institutions, private equity
and other non-bank investors, investment bankers, commercial
bankers, attorneys, accountants and consultants, and we will
rely to a significant extent upon these relationships to provide
us with potential investment opportunities. If our management
team fails to maintain its existing relationships or develop new
relationships with other sponsors or sources of investment
opportunities, we will not be able to grow our investment
portfolio. In addition, individuals with whom members of our
management team have relationships are not obligated to provide
us with investment opportunities, and, therefore, there is no
assurance that such relationships will generate investment
opportunities for us.
We
have limited operating history as a business development company
and as a regulated investment company, which may impair your
ability to assess our prospects.
The 1940 Act imposes numerous constraints on the operations of
BDCs. Prior to the consummation of our initial public offering
in February 2007, we had not operated, and our management team
had no experience operating, as a BDC under the 1940 Act or as a
RIC under Subchapter M of the Code. As a result, we have limited
operating results under these regulatory frameworks that can
demonstrate to you either their effect on our business or our
ability to manage our business under these frameworks. Our
management teams limited experience in managing a
portfolio of assets under such constraints may hinder our
ability to take advantage of attractive investment opportunities
and, as a result, achieve our investment objective. Furthermore,
any failure to comply with the requirements imposed on BDCs by
the 1940 Act could cause the SEC to bring an enforcement action
against us. If we do not remain a BDC, we might be regulated as
a closed-end investment company under the 1940 Act, which would
further decrease our operating flexibility.
Regulations
governing our operation as a business development company will
affect our ability to, and the way in which we raise additional
capital.
Our business will require capital to operate and grow. We may
acquire such additional capital from the following sources:
Senior Securities. Currently we, through the
Fund, issue debt securities guaranteed by the SBA. In the
future, we may issue debt securities or preferred stock
and/or
borrow money from banks or other financial
30
institutions, which we refer to collectively as senior
securities. As a result of issuing senior securities, we will be
exposed to additional risks, including, but not limited to, the
following:
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Under the provisions of the 1940 Act, we are permitted, as a
BDC, to issue senior securities only in amounts such that our
asset coverage, as defined in the 1940 Act, equals at least 200%
after each issuance of senior securities. If the value of our
assets declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments
and, depending on the nature of our leverage, repay a portion of
our debt at a time when such sales
and/or
repayments may be disadvantageous.
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Any amounts that we use to service our debt or make payments on
preferred stock will not be available for dividends to our
common stockholders.
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It is likely that any senior securities or other indebtedness we
issue will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility.
Additionally, some of these securities or other indebtedness may
be rated by rating agencies, and in obtaining a rating for such
securities and other indebtedness, we may be required to abide
by operating and investment guidelines that further restrict
operating and financial flexibility.
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We and, indirectly, our stockholders will bear the cost of
issuing and servicing such securities and other indebtedness.
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Preferred stock or any convertible or exchangeable securities
that we issue in the future may have rights, preferences and
privileges more favorable than those of our common stock,
including separate voting rights and could delay or prevent a
transaction or a change in control to the detriment of the
holders of our common stock.
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Additional Common Stock. We are not generally
able to issue and sell our common stock at a price below net
asset value per share. We may, however, sell our common stock,
warrants, options or rights to acquire our common stock, at a
price below the current net asset value of the common stock if
our board of directors determines that such sale is in the best
interests of our stockholders, and our stockholders approve such
sale. At our Annual Stockholders Meeting on May 6, 2009,
our stockholders voted to allow us to issue common stock at a
price below net asset value per share for a period of one year
ending May 5, 2010. Our stockholders did not specify a
maximum discount below net asset value at which we are able to
issue our common stock; however, we do not intend to issue
shares of our common stock below net asset value unless our
board of directors determines that it would be in our
stockholders best interests to do so. In any such case,
however, the price at which our common stock are to be issued
and sold may not be less than a price which, in the
determination of our board of directors, closely approximates
the market value of such securities (less any distributing
commission or discount). We may also make rights offerings to
our stockholders at prices per share less than the net asset
value per share, subject to applicable requirements of the 1940
Act. If we raise additional funds by issuing more common stock
or senior securities convertible into, or exchangeable for, our
common stock, the percentage ownership of our stockholders at
that time would decrease, and they may experience dilution.
Moreover, we can offer no assurance that we will be able to
issue and sell additional equity securities in the future, on
favorable terms or at all.
The
Fund is licensed by the SBA, and therefore subject to SBA
regulations.
The Fund is licensed to act as an SBIC and is regulated by the
SBA. Under current SBA regulations, a licensed SBIC can provide
capital to those entities that have a tangible net worth not
exceeding $18.0 million and an average annual net income
after federal income taxes not exceeding $6.0 million for
the two most recent fiscal years. In addition, a licensed SBIC
must devote 20.0% of its investment activity to those entities
that have a tangible net worth not exceeding $6.0 million
and an average annual net income after federal income taxes not
exceeding $2.0 million for the two most recent fiscal
years. The SBA also places certain limitations on the financing
terms of investments by SBICs in portfolio companies and
prohibits SBICs from providing funds for certain purposes or to
businesses in a few prohibited industries. Compliance with SBA
31
requirements may cause the Fund, and us, as its parent, to
forego attractive investment opportunities that are not
permitted under SBA regulations.
Further, the SBA regulations require that a licensed SBIC be
periodically examined and audited by the SBA to determine its
compliance with the relevant SBA regulations. The SBA prohibits,
without prior SBA approval, a change of control of
an SBIC or transfers that would result in any person (or a group
of persons acting in concert) owning 10.0% or more of a class of
capital stock of a licensed SBIC. If the Fund fails to comply
with applicable SBA regulations, the SBA could, depending on the
severity of the violation, limit or prohibit the Funds use
of debentures, declare outstanding debentures immediately due
and payable,
and/or limit
the Fund from making new investments. In addition, the SBA can
revoke or suspend a license for willful or repeated violation
of, or willful or repeated failure to observe, any provision of
the Small Business Investment Act of 1958 or any rule or
regulation promulgated thereunder. Such actions by the SBA
would, in turn, negatively affect us because the Fund is our
wholly owned subsidiary.
Because
we borrow money, the potential for gain or loss on amounts
invested in us is magnified and may increase the risk of
investing in us.
Borrowings, also known as leverage, magnify the potential for
gain or loss on invested equity capital. As we intend to use
leverage to partially finance our investments, our stockholders
experience increased risks associated with investing in our
common stock. The Fund issues debt securities guaranteed by the
SBA and sold in the capital markets. As a result of its
guarantee of the debt securities, the SBA has fixed dollar
claims on the Funds assets that are superior to the claims
of our common stockholders. We may also borrow from banks and
other lenders in the future. If the value of our assets
increases, then leveraging would cause the net asset value
attributable to our common stock to increase more sharply than
it would have had we not leveraged. Conversely, if the value of
our assets decreases, leveraging would cause net asset value to
decline more sharply than it otherwise would have had we not
leveraged. Similarly, any increase in our income in excess of
interest payable on the borrowed funds would cause our net
investment income to increase more than it would without the
leverage, while any decrease in our income would cause our net
investment income to decline more sharply than it would have had
we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments. Leverage is
generally considered a speculative investment technique.
As a BDC, we are generally required to meet a coverage ratio of
total assets to total borrowings and other senior securities,
which include all of our borrowings (other than SBA leverage)
and any preferred stock we may issue in the future, of at least
200%. If this ratio declines below 200%, we may not be able to
incur additional debt and may need to sell a portion of our
investments to repay some debt when it is disadvantageous to do
so, and we may not be able to make distributions. Currently, we
do not have senior securities outstanding and therefore are not
limited by this ratio.
On December 31, 2009, we had $121.9 million of
outstanding indebtedness guaranteed by the SBA, which had a
weighted average annualized interest cost of 5.77%. The
calculation of this weighted average interest rate includes
i) the interim rates charged on $6.8 million of SBA
guaranteed debentures that have not yet been pooled and
ii) the fixed rates charged on $115.1 million of
pooled SBA guaranteed debentures. The unpooled SBA-guaranteed
debentures have a weighted average interim interest rate of
1.41% and the pooled SBA guaranteed debentures have a weighted
average interest rate of 6.03%.
Our ability to achieve our investment objectives may depend in
part on our ability to achieve additional leverage on favorable
terms by issuing debentures guaranteed by the SBA or by
borrowing from banks, or insurance companies, and there can be
no assurance that such additional leverage can in fact be
achieved.
SBA
regulations limit the outstanding dollar amount of
SBA-guaranteed debentures that may be issued by an SBIC or group
of SBICs under common control.
The SBA regulations currently limit the dollar amount of
SBA-guaranteed debentures that can be issued by any one SBIC to
$150.0 million or to a group of SBICs under common control
to $225.0 million. Moreover, an SBIC may not borrow an
amount in excess of three times its regulatory capital. As of
32
December 31, 2009, the Fund had issued $121.9 million
in debentures guaranteed by the SBA and has the ability to issue
up to the statutory maximum of $150.0 million of
SBA-guaranteed debentures. While we cannot presently predict
whether or not we will borrow the maximum permitted amount, if
we reach the maximum dollar amount of SBA-guaranteed debentures
permitted, and thereafter require additional capital, our cost
of capital may increase, and there is no assurance that we will
be able to obtain additional financing on acceptable terms.
Moreover, the Funds current status as an SBIC does not
automatically assure that the Fund will continue to receive
SBA-guaranteed debenture funding. Receipt of SBA leverage
funding is dependent upon the Fund continuing to be in
compliance with SBA regulations and policies and there being
funding available. The amount of SBA leverage funding available
to SBICs is dependent upon annual Congressional authorizations
and in the future may be subject to annual Congressional
appropriations. There can be no assurance that there will be
sufficient debenture funding available at the times desired by
the Fund.
The debentures guaranteed by the SBA have a maturity of ten
years and require semi-annual payments of interest. The Fund
will need to generate sufficient cash flow to make required
interest payments on the debentures. If the Fund is unable to
meet its financial obligations under the debentures, the SBA, as
a creditor, will have a superior claim to the Funds assets
over our stockholders in the event we liquidate the Fund or the
SBA exercises its remedies under such debentures as the result
of a default by us. In addition, the SBA must approve our
independent directors before the Fund will be permitted to issue
additional debentures guaranteed by the SBA.
We may
experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including our ability or
inability to make investments in companies that meet our
investment criteria, the interest rate payable on the debt
securities we acquire, the level of our expenses, variations in
and the timing of the recognition of realized and unrealized
gains or losses, the degree to which we encounter competition in
our markets and general economic conditions. As a result of
these factors, results for any period should not be relied upon
as being indicative of performance in future periods.
Our
ability to enter into and exit investment transactions with our
affiliates will be restricted.
Except in those instances where we have received prior exemptive
relief from the SEC, we will be prohibited under the 1940 Act
from knowingly participating in certain transactions with our
affiliates without the prior approval of our independent
directors. Any person that owns, directly or indirectly, 5.0% or
more of our outstanding voting securities is deemed our
affiliate for purposes of the 1940 Act and we are generally
prohibited from buying or selling any security from or to such
affiliate, absent the prior approval of our independent
directors. The 1940 Act also prohibits joint
transactions with an affiliate, which could include investments
in the same portfolio company (whether at the same or different
times), without prior approval of our independent directors. If
a person acquires more than 25.0% of our voting securities, we
will be prohibited from buying or selling any security from or
to such person, or entering into joint transactions with such
person, absent the prior approval of the SEC. These restrictions
could limit or prohibit us from making certain attractive
investments that we might otherwise make absent such
restrictions.
Our
board of directors may change our operating policies and
strategies without prior notice or stockholder approval, the
effects of which may be adverse.
Our board of directors has the authority to modify or waive our
current operating policies and strategies without prior notice
and without stockholder approval. We cannot predict the effect
any changes to our current operating policies, investment
criteria and strategies would have on our business, net asset
value, operating results and value of our stock. However, the
effects might be adverse, which could negatively impact our
ability to pay you dividends and cause you to lose all or part
of your investment. Moreover, we will have significant
flexibility in investing the net proceeds from any future
offerings of our common stock and may
33
use the net proceeds from such offerings in ways with which
investors may not agree or for purposes other than those
currently contemplated.
We
will be subject to corporate-level income tax if we are unable
to qualify as a regulated investment company (RIC)
under Subchapter M of the Code, which will adversely affect our
results of operations and financial condition.
We have elected to be treated as a RIC under the Code, which
generally will allow us to avoid being subject to an entity
level tax. To obtain and maintain RIC tax treatment under the
Code, we must meet the following annual distribution, income
source and asset diversification requirements:
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The annual distribution requirement for a RIC will be satisfied
if we distribute to our stockholders on an annual basis at least
90.0% of our net ordinary income and realized net short-term
capital gains in excess of realized net long-term capital
losses, if any. We will be subject to a 4.0% nondeductible
federal excise tax, however, to the extent that we do not
satisfy certain additional minimum distribution requirements on
a calendar year basis. See Material U.S. Federal
Income Tax Considerations. Because we use debt financing,
we are subject to certain asset coverage ratio requirements
under the 1940 Act and may in the future become subject to
certain financial covenants under loan and credit agreements
that could, under certain circumstances, restrict us from making
distributions necessary to satisfy the annual distribution
requirement. If we are unable to obtain cash from other sources,
we could fail to qualify for RIC tax treatment and thus become
subject to corporate-level income tax.
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The income source requirement will be satisfied if we obtain at
least 90.0% of our income for each year from distributions,
interest, gains from the sale of stock or securities or similar
sources.
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The asset diversification requirement will be satisfied if we
meet certain asset diversification requirements at the end of
each quarter of our taxable year. To satisfy this requirement,
at least 50.0% of the value of our assets must consist of cash,
cash equivalents, U.S. Government securities, securities of
other RICs, and other acceptable securities; and no more than
25.0% of the value of our assets can be invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer, of two or more issuers
that are controlled, as determined under applicable Code rules,
by us and that are engaged in the same or similar or related
trades or businesses or of certain qualified publicly
traded partnerships. Failure to meet these requirements
may result in our having to dispose of certain investments
quickly in order to prevent the loss of RIC status. Because most
of our investments will be in private companies, and therefore
will be relatively illiquid, any such dispositions could be made
at disadvantageous prices and could result in substantial losses.
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If we fail to qualify for or maintain RIC tax treatment for any
reason and are subject to corporate income tax, the resulting
corporate taxes could substantially reduce our net assets, the
amount of income available for distribution and the amount of
our distributions.
We may
not be able to pay you distributions, our distributions may not
grow over time, and a portion of distributions paid to you may
be a return of capital.
We intend to pay quarterly distributions to our stockholders out
of assets legally available for distribution. We cannot assure
you that we will achieve investment results that will allow us
to make a specified level of cash distributions or
year-to-year
increases in cash distributions. Our ability to pay
distributions might be harmed by, among other things, the risk
factors described in this Annual Report. In addition, the
inability to satisfy the asset coverage test applicable to us as
a BDC could, in the future, limit our ability to pay
distributions. All distributions will be paid at the discretion
of our board of directors and will depend on our earnings, our
financial condition, maintenance of our RIC status, compliance
with applicable BDC regulations, the Funds compliance with
applicable SBIC regulations and such other factors as our board
of directors may deem relevant from time to time. We cannot
assure you that we will pay distributions to our stockholders in
the future.
34
When we make quarterly distributions, we will be required to
determine the extent to which such distributions are paid out of
current or accumulated earnings, recognized capital gains or
capital. To the extent there is a return of capital, investors
will be required to reduce their basis in our stock for federal
tax purposes.
We may
have difficulty paying our required distributions if we
recognize income before or without receiving cash representing
such income.
For U.S. federal income tax purposes, we are required to
include in income certain amounts that we have not yet received
in cash, such as the accretion of original issue discount, which
may arise if we receive warrants in connection with the
origination of a loan or possibly in other circumstances, or
contractual PIK interest, which represents contractual interest
added to the loan balance and due at the end of the loan term.
The accretion of such original issue discounts or increases in
loan balances as a result of contractual PIK arrangements will
be included in income before we receive any corresponding cash
payments. We also may be required to include in income certain
other amounts that we will not receive in cash.
Since, in certain cases, we may recognize income before or
without receiving cash representing such income, we may have
difficulty meeting the annual distribution requirement necessary
to obtain and maintain RIC tax treatment under the Code.
Accordingly, we may have to sell some of our investments at
times and/or
at prices we would not consider advantageous, raise additional
debt or equity capital or reduce new investment originations for
this purpose. If we are not able to obtain cash from other
sources, we may fail to qualify for RIC tax treatment and thus
become subject to corporate-level income tax. For additional
discussion regarding the tax implications of a RIC, please see
Material U.S. Federal Income Tax
Considerations Taxation as a Regulated Investment
Company.
The
Fund, as an SBIC, may be unable to make distributions to us that
may harm our ability to meet regulated investment company
requirements, which could result in the imposition of an
entity-level tax.
In order for us to continue to qualify as a RIC, we will be
required to distribute on an annual basis substantially all of
our taxable income, including income from our subsidiaries,
including the Fund. As the majority of our investments are held
by the Fund, we will be substantially dependent on the Fund for
cash distributions to enable us to meet the RIC distribution
requirements. The Fund may be limited by the Small Business
Investment Act of 1958, and SBA regulations governing SBICs,
from making certain distributions to us that may be necessary to
enable us to qualify as a RIC. We may have to request a waiver
of the SBAs restrictions for the Fund to make certain
distributions to maintain our status as a RIC. We cannot assure
you that the SBA will grant such waiver and if the Fund is
unable to obtain a waiver, compliance with the SBA regulations
may result in loss of RIC status and a consequent imposition of
an entity-level tax on us.
Because
we intend to distribute substantially all of our income to our
stockholders to maintain our status as a regulated investment
company, we will continue to need additional capital to finance
our growth, and regulations governing our operation as a
business development company will affect our ability to, and the
way in which we, raise additional capital.
In order to satisfy the requirements applicable to a RIC and to
avoid payment of excise taxes, we intend to distribute to our
stockholders substantially all of our net ordinary income and
net capital gain income except for certain net long-term capital
gains recognized after we became a RIC, some or all of which we
may retain, pay applicable income taxes with respect thereto,
and elect to treat as deemed distributions to our stockholders.
As a BDC, we generally are required to meet a coverage ratio of
total assets to total senior securities, which includes all of
our borrowings (other than SBA leverage) and any preferred stock
we may issue in the future, of at least 200.0%. This requirement
limits the amount that we may borrow. If the value of our assets
declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments
or sell additional common stock and, depending on the nature of
our leverage, to repay a portion of our indebtedness at a time
when such sales may be disadvantageous. In addition, issuance of
additional securities could dilute the percentage ownership of
our current stockholders in us.
35
While we expect to be able to borrow and to issue additional
debt and equity securities, we cannot assure you that debt and
equity financing will be available to us on favorable terms, or
at all. If additional funds are not available to us, we could be
forced to curtail or cease new investment activities, and our
net asset value could decline. In addition, as a BDC, we
generally are not permitted to issue equity securities priced
below net asset value without stockholder approval. At our
Annual Stockholders Meeting on May 6, 2009, our
stockholders voted to allow us to issue common stock at a price
below net asset value per share for a period of one year ending
May 5, 2010. Our stockholders did not specify a maximum
discount below net asset value at which we are able to issue our
common stock; however, we do not intend to issue shares of our
common stock below net asset value unless our board of directors
determines that it would be in our stockholders best
interests to do so.
Changes
in laws or regulations governing our operations may adversely
affect our business or cause us to alter our business
strategy.
We, the Fund and our portfolio companies will be subject to
regulation at the local, state and federal level. New
legislation may be enacted or new interpretations, rulings or
regulations could be adopted, including those governing the
types of investments we are permitted to make, any of which
could harm us and our stockholders, potentially with retroactive
effect. In addition, any change to the SBAs current
debenture program could have a significant impact on our ability
to obtain lower-cost leverage and, therefore, our competitive
advantage over other finance companies.
Additionally, any changes to the laws and regulations governing
our operations relating to permitted investments may cause us to
alter our investment strategy in order to avail ourselves of new
or different opportunities. Such changes could result in
material differences to the strategies and plans set forth in
this Annual Report and may result in our investment focus
shifting from the areas of expertise of our management team to
other types of investments in which our management team may have
less expertise or little or no experience. Thus, any such
changes, if they occur, could have a material adverse effect on
our results of operations and the value of your investment.
Efforts
to comply with the Sarbanes-Oxley Act will involve significant
expenditures, and non-compliance with the Sarbanes-Oxley Act may
adversely affect us.
We are subject to the Sarbanes-Oxley Act of 2002, and the
related rules and regulations promulgated by the SEC. Among
other requirements, under Section 404 of the Sarbanes-Oxley
Act and rules and regulations of the SEC thereunder, our
management is required to report on our internal controls over
financial reporting. We are required to review on an annual
basis our internal controls over financial reporting, and on a
quarterly and annual basis to evaluate and disclose significant
changes in our internal controls over financial reporting. We
have and expect to continue to incur significant expenses
related to compliance with the Sarbanes-Oxley Act, which will
negatively impact our financial performance and our ability to
make distributions. In addition, this process results in a
diversion of managements time and attention. Since we have
a limited operating history as a company subject to the
Sarbanes-Oxley Act, we cannot assure you that our internal
controls over financial reporting will continue to be effective.
In the event that we are unable to maintain compliance with the
Sarbanes-Oxley Act and related rules, we may be adversely
affected.
Risks
Relating to Our Investments
Our
investments in portfolio companies may be risky, and we could
lose all or part of our investment.
Investing in lower middle market companies involves a number of
significant risks. Among other things, these companies:
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may have limited financial resources to meet future capital
needs and thus may be unable to grow or meet their obligations
under their debt instruments that we hold, which may be
accompanied by a deterioration in the value of any collateral
and a reduction in the likelihood of us realizing any guarantees
from subsidiaries or affiliates of our portfolio companies that
we may have obtained in
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connection with our investment, as well as a corresponding
decrease in the value of the equity components of our
investments;
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may have shorter operating histories, narrower product lines,
smaller market shares
and/or more
significant customer concentration than larger businesses, which
tend to render them more vulnerable to competitors actions
and market conditions, as well as general economic downturns;
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are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us;
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generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk
of obsolescence, and may require substantial additional capital
to support their operations, finance expansion or maintain their
competitive position; and
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generally have less publicly available information about their
businesses, operations and financial condition. We rely on the
ability of our management team and investment professionals to
obtain adequate information to evaluate the potential returns
from investing in these companies. If we are unable to uncover
all material information about these companies, we may not make
a fully informed investment decision, and may lose all or part
of our investment.
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In addition, in the course of providing significant managerial
assistance to certain of our portfolio companies, certain of our
officers and directors may serve as directors on the boards of
such companies. To the extent that litigation arises out of our
investments in these companies, our officers and directors may
be named as defendants in such litigation, which could result in
an expenditure of funds (through our indemnification of such
officers and directors) and the diversion of management time and
resources.
The
lack of liquidity in our investments may adversely affect our
business.
We invest, and will continue to invest in companies whose
securities are not publicly traded, and whose securities will be
subject to legal and other restrictions on resale or will
otherwise be less liquid than publicly traded securities. The
illiquidity of these investments may make it difficult for us to
sell these investments when desired. In addition, if we are
required to liquidate all or a portion of our portfolio quickly,
we may realize significantly less than the value at which we had
previously recorded these investments. As a result, we do not
expect to achieve liquidity in our investments in the near-term.
Our investments are usually subject to contractual or legal
restrictions on resale or are otherwise illiquid because there
is usually no established trading market for such investments.
The illiquidity of most of our investments may make it difficult
for us to dispose of them at a favorable price, and, as a
result, we may suffer losses.
We are
a non-diversified investment company within the meaning of the
1940 Act, and therefore we are not limited with respect to the
proportion of our assets that may be invested in securities of a
single issuer.
We are classified as a non-diversified investment company within
the meaning of the 1940 Act, which means that we are not limited
by the 1940 Act with respect to the proportion of our assets
that we may invest in securities of a single issuer. To the
extent that we assume large positions in the securities of a
small number of issuers, our net asset value may fluctuate to a
greater extent than that of a diversified investment company as
a result of changes in the financial condition or the
markets assessment of the issuer. We may also be more
susceptible to any single economic or regulatory occurrence than
a diversified investment company. Beyond our regulated
investment company asset diversification requirements and
certain SBA diversification requirements for our investments
held by the Fund, we do not have fixed guidelines for
diversification, and our investments could be concentrated in
relatively few portfolio companies.
37
We may
not have the funds or ability to make additional investments in
our portfolio companies.
We may not have the funds to make additional investments in our
portfolio companies. After our initial investment in a portfolio
company, we may be called upon from time to time to provide
additional funds to such company or have the opportunity to
increase our investment through the exercise of a warrant to
purchase common stock. There is no assurance that we will make,
or will have sufficient funds to make, follow-on investments.
Any decisions not to make a follow-on investment or any
inability on our part to make such an investment may have a
negative impact on a portfolio company in need of such an
investment, may result in a missed opportunity for us to
increase our participation in a successful operation or may
reduce the expected yield on the investment.
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
We invest primarily in senior secured debt and subordinated
notes as well as equity issued by lower middle market companies.
Our portfolio companies may have, or may be permitted to incur,
other debt that ranks equally with, or senior to, the debt in
which we invest. By their terms, such debt instruments may
entitle the holders to receive payment of interest or principal
on or before the dates on which we are entitled to receive
payments with respect to the debt instruments in which we
invest. Also, in the event of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio
company, holders of debt instruments ranking senior to our
investment in that portfolio company would typically be entitled
to receive payment in full before we receive any distribution.
After repaying such senior creditors, such portfolio company may
not have any remaining assets to use for repaying its obligation
to us. In the case of debt ranking equally with debt instruments
in which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the
event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy of the relevant portfolio company.
There
may be circumstances where our debt investments could be
subordinated to claims of other creditors or we could be subject
to lender liability claims.
Even though we may have structured certain of our investments as
senior loans, if one of our portfolio companies were to go
bankrupt, depending on the facts and circumstances and based
upon principles of equitable subordination as defined by
existing case law, a bankruptcy court could subordinate all or a
portion of our claim to that of other creditors and transfer any
lien securing such subordinated claim to the bankruptcy estate.
The principles of equitable subordination defined by case law
have generally indicated that a claim may be subordinated only
if its holder is guilty of misconduct or where the senior loan
is re-characterized as an equity investment and the senior
lender has actually provided significant managerial assistance
to the bankrupt debtor. We may also be subject to lender
liability claims for actions taken by us with respect to a
borrowers business or instances where we exercise control
over the borrower. It is possible that we could become subject
to a lenders liability claim, including as a result of
actions taken in rendering significant managerial assistance or
actions to compel and collect payments from the borrower outside
the ordinary course of business.
Second
priority liens on collateral securing loans that we make to our
portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and us.
Certain loans that we make are secured by a second priority
security interest in the same collateral pledged by a portfolio
company to secure senior debt owed by the portfolio company to
commercial banks or other traditional lenders. Often the senior
lender has procured covenants from the portfolio company
prohibiting the incurrence of additional secured debt without
the senior lenders consent. Prior to and as a condition of
permitting the portfolio company to borrow money from us secured
by the same collateral pledged to the senior lender, the senior
lender will require assurances that it will control the
disposition of any collateral in the event of bankruptcy or
other default. In many such cases, the senior lender will
require us to enter into an intercreditor agreement
prior to permitting the portfolio company to borrow from us.
Typically
38
the intercreditor agreements we are requested to execute
expressly subordinate our debt instruments to those held by the
senior lender and further provide that the senior lender shall
control: (1) the commencement of foreclosure or other
proceedings to liquidate and collect on the collateral;
(2) the nature, timing and conduct of foreclosure or other
collection proceedings; (3) the amendment of any collateral
document; (4) the release of the security interests in
respect of any collateral; and (5) the waiver of defaults
under any security agreement. Because of the control we may cede
to senior lenders under intercreditor agreements we may enter,
we may be unable to realize the proceeds of any collateral
securing some of our loans.
Finally, the value of the collateral securing our debt
investment will ultimately depend on market and economic
conditions, the availability of buyers and other factors.
Therefore, there can be no assurance that the proceeds, if any,
from the sale or sales of all of the collateral would be
sufficient to satisfy the loan obligations secured by our second
priority liens after payment in full of all obligations secured
by the senior lenders first priority liens on the
collateral. There is also a risk that such collateral securing
our investments may decrease in value over time, may be
difficult to sell in a timely manner, may be difficult to
appraise and may fluctuate in value based upon the success of
the portfolio company and market conditions. If such proceeds
are not sufficient to repay amounts outstanding under the loan
obligations secured by our second priority liens, then we, to
the extent not repaid from the proceeds of the sale of the
collateral, will only have an unsecured claim against the
companys remaining assets, if any.
If we
do not invest a sufficient portion of our assets in qualifying
assets, we could fail to qualify as a business development
company or be precluded from investing according to our current
business strategy.
As a BDC, we may not acquire any assets other than
qualifying assets unless, at the time of and after
giving effect to such acquisition, at least 70.0% of our total
assets are qualifying assets. For further detail, see
Regulation of Business Development Companies
included in Item 1 of Part I of this Annual report on
Form 10-K.
We believe that substantially all of our investments are
qualifying assets. However, we may be precluded from investing
in what we believe are attractive investments if such
investments are not qualifying assets for purposes of the 1940
Act. If we do not invest a sufficient portion of our assets in
qualifying assets, we could lose our status as a BDC, which
would have a material adverse effect on our business, financial
condition and results of operations. Similarly, these rules
could prevent us from making follow-on investments in existing
portfolio companies (which could result in the dilution of our
position).
We
generally will not control our portfolio
companies.
We do not, and do not expect to, control most of our portfolio
companies, even though we may have board representation or board
observation rights, and our debt agreements may contain certain
restrictive covenants. As a result, we are subject to the risk
that a portfolio company in which we invest may make business
decisions with which we disagree and the management of such
company, as representatives of the holders of their common
equity, may take risks or otherwise act in ways that do not
serve our interests as debt investors. Due to the lack of
liquidity for our investments in non-traded companies, we may
not be able to dispose of our interests in our portfolio
companies as readily as we would like or at an appropriate
valuation. As a result, a portfolio company may make decisions
that could decrease the value of our portfolio holdings.
Economic
recessions or downturns could impair our portfolio companies and
harm our operating results.
Since the third quarter of 2007, global credit and other
financial markets have suffered substantial stress, volatility,
illiquidity and disruption. These forces reached extraordinary
levels in late 2008, resulting in the bankruptcy of, the
acquisition of, or government intervention in the affairs of
several major domestic and international financial institutions.
In particular, the financial services sector has been negatively
impacted by significant write-offs as the value of the assets
held by financial firms has declined, impairing their capital
positions and abilities to lend and invest. We believe that such
value declines were exacerbated by widespread forced
liquidations as leveraged holders of financial assets, faced
with declining prices, were compelled to sell to meet margin
requirements and maintain compliance with applicable capital
standards. Such forced
39
liquidations have also impaired or eliminated many investors and
investment vehicles, leading to a decline in the supply of
capital for investment and depressed pricing levels for many
assets. These events significantly diminished overall confidence
in the debt and equity markets, engendered unprecedented
declines in the values of certain assets, and caused extreme
economic uncertainty.
Since March 2009, there have been signs that the global credit
and other financial market conditions have improved as stability
has increased throughout the international financial system.
Concentrated policy initiatives undertaken by central banks and
governments appear to have curtailed the incidence of
large-scale failures within the global financial system.
Concurrently, investor confidence, financial indicators, capital
markets activity and asset prices have shown signs of marked
improvement since the second quarter of 2009. While financial
conditions have improved, economic activity has remained subdued
and corporate interest rate risk premiums, otherwise known as
credit spreads, remain at historically high levels, particularly
in the commercial loan and high yield bond markets.
Many of our current
and/or
future portfolio companies may be susceptible to economic
slowdowns or recessions and may be unable to repay our debt
investments during these periods. Therefore, our non-performing
assets are likely to increase, and the value of our portfolio is
likely to decrease during these periods. Current adverse
economic conditions may also decrease the value of any
collateral securing some of our debt investments and the value
of our equity investments. A prolonged economic slowdown or
recession may further decrease the value of such collateral and
result in losses of value in our portfolio and a decrease in
investment income, net investment income, assets, and net worth.
Unfavorable economic conditions also could increase our funding
costs, limit our access to the capital markets or result in a
decision by lenders not to extend credit to us on terms we deem
acceptable. These events could prevent us from increasing
investments and harm our operating results.
Our
financial results may be affected adversely if one or more of
our portfolio investments defaults on its loans or fails to
perform as we expect.
Our portfolio consists primarily of debt and equity investments
in privately owned middle-market businesses. Compared to larger
publicly owned companies, these middle-market companies may be
in a weaker financial position and experience wider variations
in their operating results, which may make them more vulnerable
to economic downturns. Typically, these companies need more
capital to compete; however, their access to capital is limited
and their cost of capital is often higher than that of their
competitors. Our portfolio companies face intense competition
from larger companies with greater financial, technical and
marketing resources and their success typically depends on the
management talents and efforts of an individual or a small group
of persons. The loss of any of their key employees could affect
their ability to compete effectively and harm their financial
condition. Further, some of these companies conduct business in
regulated industries that are susceptible to regulatory changes.
These factors could impair the cash flow of our portfolio
companies and result in other events, such as bankruptcy. These
events could limit a portfolio companys ability to repay
their obligations to us, which may have an adverse affect on the
return on, or the recovery of, our investment in these
businesses. Deterioration in a borrowers financial
condition and prospects may be accompanied by deterioration in
the value of the loans collateral.
Some of these companies cannot obtain financing from public
capital markets or from traditional credit sources, such as
commercial banks. Accordingly, loans made to these types of
companies pose a higher default risk, than loans made to
companies who have access to traditional credit sources.
Generally, little, if any, public information is available about
such companies. Therefore, we must rely on our employees
diligence to obtain the information needed to make well-informed
investment decisions. If we do not uncover material information
about these companies, we may not make a fully informed
investment decision, which could, in turn cause us to lose money
on our investments.
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Potential
writedowns or losses with respect to portfolio investments
existing and to be made in the future could adversely affect our
results of operations, cash flows, dividend level, net asset
value and stock price.
As of December 31, 2009, the fair value of our non-accrual
assets was approximately $7.0 million, which comprised
approximately 3.5% of the total fair value of our portfolio. The
fair value of these non-accrual assets was less than cost as of
December 31, 2009. In addition, as of December 31,
2009, we had, on a fair value basis, approximately
$18.0 million of debt investments or 8.9% of the total fair
value of our portfolio, which were current with respect to
scheduled interest and principal payments, but which were
carried at less than cost. In light of current economic
conditions, certain of our portfolio companies may be unable to
service our debt investments on a timely basis. These conditions
may also decrease the value of collateral securing some of our
debt investments, as well as the value of our equity
investments. As a result, the number of non-performing assets in
our portfolio may increase, and the overall value of our
portfolio may decrease, which could lead to financial losses in
our portfolio and a decrease in our investment income, net
investment income, dividends and assets.
Any
unrealized losses we experience on our loan portfolio may be an
indication of future realized losses, which could reduce our
income available for distribution.
As a BDC, we are required to carry our investments at market
value or, if no market value is ascertainable, at the fair value
as determined in good faith by our Board of Directors. Decreases
in the market values or fair values of our investments will be
recorded as unrealized depreciation. Any unrealized losses in
our loan portfolio could be an indication of a portfolio
companys inability to meet its repayment obligations to us
with respect to the affected loans. This could result in
realized losses in the future and ultimately in reductions of
our income available for distribution in future periods.
Defaults
by our portfolio companies will harm our operating
results.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio
companys ability to meet its obligations under the debt or
equity securities that we hold. We may incur expenses to the
extent necessary to seek recovery upon default or to negotiate
new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.
Prepayments
of our debt investments by our portfolio companies could
adversely impact our results of operations and reduce our return
on equity.
We are subject to the risk that the investments we make in our
portfolio companies may be repaid prior to maturity. When this
occurs, we will generally reinvest these proceeds in temporary
investments, pending their future investment in new portfolio
companies. These temporary investments will typically have
substantially lower yields than the debt being prepaid and we
could experience significant delays in reinvesting these
amounts. Any future investment in a new portfolio company may
also be at lower yields than the debt that was repaid. As a
result, our results of operations could be materially adversely
affected if one or more of our portfolio companies elect to
prepay amounts owed to us. Additionally, prepayments could
negatively impact our return on equity, which could result in a
decline in the market price of our common stock.
Changes
in interest rates may affect our cost of capital and net
investment income.
Most of our debt investments will bear interest at fixed rates
and the value of these investments could be negatively affected
by increases in market interest rates. In addition, an increase
in interest rates would make it more expensive to use debt to
finance our investments. As a result, a significant increase in
market interest rates could both reduce the value of our
portfolio investments and increase our cost of capital, which
would reduce our net investment income. Also, an increase in
interest rates available to investors could make an investment
in our common stock less attractive if we are not able to
increase our dividend rate, a situation which could reduce the
value of our common stock. Conversely, a decrease in interest
rates may have an
41
adverse impact on our returns by requiring us to seek lower
yields on our debt investments and by increasing the risk that
our portfolio companies will prepay our debt investments,
resulting in the need to redeploy capital at potentially lower
rates.
We may
not realize gains from our equity investments.
Certain investments that we have made in the past and may make
in the future include warrants or other equity securities.
Investments in equity securities involve a number of significant
risks, including the risk of further dilution as a result of
additional issuances, inability to access additional capital and
failure to pay current distributions. Investments in preferred
securities involve special risks, such as the risk of deferred
distributions, credit risk, illiquidity and limited voting
rights. In addition, we may from time to time make non-control,
equity co-investments in companies in conjunction with private
equity sponsors. Our goal is ultimately to realize gains upon
our disposition of such equity interests. However, the equity
interests we receive may not appreciate in value and, in fact,
may decline in value. Accordingly, we may not be able to realize
gains from our equity interests, and any gains that we do
realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience. We also may
be unable to realize any value if a portfolio company does not
have a liquidity event, such as a sale of the business,
recapitalization or public offering, which would allow us to
sell the underlying equity interests. We often seek puts or
similar rights to give us the right to sell our equity
securities back to the portfolio company issuer. We may be
unable to exercise these puts rights for the consideration
provided in our investment documents if the issuer is in
financial distress.
Risks
Relating to Our Common Stock
Shares
of closed-end investment companies, including business
development companies, frequently trade at a discount to their
net asset value.
Shares of closed-end investment companies, including BDCs,
frequently trade at a discount from net asset value. This
characteristic of closed-end investment companies and BDCs is
separate and distinct from the risk that our net asset value per
share may decline. We cannot predict whether our common stock
will trade at, above or below net asset value. In addition, if
our common stock trades below net asset value, we will generally
not be able to issue additional common stock at the market price
without first obtaining the approval of our stockholders and our
independent directors. At our Annual Stockholders Meeting on
May 6, 2009, our stockholders voted to allow us to issue
common stock at a price below net asset value per share for a
period of one year ending May 5, 2010. Our stockholders did
not specify a maximum discount below net asset value at which we
are able to issue our common stock; however, we do not intend to
issue shares of our common stock below net asset value unless
our board of directors determines that it would be in our
stockholders best interests to do so.
Investing
in our common stock may involve an above average degree of
risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk than alternative
investment options and a higher risk of volatility or loss of
principal. Our investments in portfolio companies may be highly
speculative, and therefore, an investment in our shares may not
be suitable for someone with lower risk tolerance.
The
market price of our common stock may be volatile and fluctuate
significantly.
Fluctuations in the trading prices of our shares may adversely
affect the liquidity of the trading market for our shares and,
if we seek to raise capital through future equity financings,
our ability to raise such equity capital. The market price and
liquidity of the market for our common stock may be
significantly affected by numerous factors, some of which are
beyond our control and may not be directly related to our
operating performance. These factors include:
42
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significant volatility in the market price and trading volume of
securities of BDCs or other companies in our sector, which are
not necessarily related to the operating performance of these
companies;
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changes in regulatory policies or tax guidelines, particularly
with respect to RICs, BDCs or SBICs;
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loss of RIC status or the Funds status as an SBIC;
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changes in earnings or variations in operating results;
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changes in the value of our portfolio of investments;
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any shortfall in investment income or net investment income or
any increase in losses from levels expected by investors or
securities analysts;
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loss of a major funding source;
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fluctuations in interest rates;
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the operating performance of companies comparable to us;
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departure of our key personnel;
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global or national credit market changes; and
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general economic trends and other external factors.
|
As illustrated by recent events in the market for subprime
loans, and mortgage securities generally, the market for any
security is subject to volatility. The loans and securities
purchased by us and issued by us are no exception to this
fundamental investment truism that prices will fluctuate,
although we lack any material exposure to the subprime and
mortgage markets.
We may
be unable to invest a significant portion of the net proceeds
raised in our recent offerings on acceptable terms, which would
harm our financial condition and operating
results.
Delays in investing the net proceeds raised in our recent
offerings may cause our performance to be worse than that of
other fully invested BDCs or other lenders or investors pursuing
comparable investment strategies. We cannot assure you that we
will be able to identify any investments that meet our
investment objective or that any investment that we make will
produce a positive return. We may be unable to invest the net
proceeds from our recent offerings on acceptable terms within
the time period that we anticipated or at all, which could harm
our financial condition and operating results.
We anticipate that, depending on market conditions, it may take
a substantial period of time to invest substantially all of the
net proceeds of our recent offerings in securities meeting our
investment objective. During this period, we have and will
continue to invest the net proceeds primarily in cash, cash
equivalents, U.S. government securities, repurchase
agreements and high-quality debt instruments maturing in one
year or less from the time of investment, which may produce
returns that are significantly lower than the returns which we
expect to achieve when our portfolio is fully invested in
securities meeting our investment objective. As a result, any
dividends that we pay during such period may be substantially
lower than the dividends that we may be able to pay when our
portfolio is fully invested in securities meeting our investment
objective. In addition, until such time as the net proceeds from
our recent offerings are invested in securities meeting our
investment objective, the market price for our common stock may
decline. Thus, the return on your investment may be lower than
when, if ever, our portfolio is fully invested in securities
meeting our investment objective.
If, in
the future, we sell common stock at a discount to our net asset
value per share, stockholders who do not participate in such
sale will experience immediate dilution in an amount that may be
material.
At our annual meeting of stockholders held on May 6, 2009,
our stockholders approved our ability to sell an unlimited
number of shares of our common stock at any level of discount
from net asset value per share during the one year period
following such approval. The issuance or sale by us of shares of
our common stock at a discount to net asset value poses a risk
of dilution to our stockholders. In particular, stockholders who
do
43
not purchase additional shares at or below the discounted price
in proportion to their current ownership will experience an
immediate decrease in net asset value per share (as well as in
the aggregate net asset value of their shares if they do not
participate at all). These stockholders will also experience a
disproportionately greater decrease in their participation on
our earnings and assets and their voting power than the increase
we experience in our assets, potential earning power and voting
interests from such issuances or sale. They also may experience
a reduction in the market price of our common stock.
If a
substantial number of shares become available for sale and are
sold in a short period of time, the market price of our common
stock could decline.
As of December 31, 2009, we had 11,702,511 shares of
common stock outstanding. Sales of substantial amounts of our
common stock, or the availability of shares for sale, could
adversely affect the prevailing market price of our common
stock. If this occurs and continues, it could impair our ability
to raise additional capital through the sale of equity
securities should we desire to do so.
Provisions
of the Maryland General Corporation Law and our articles of
incorporation and bylaws could deter takeover attempts and have
an adverse impact on the price of our common
stock.
The Maryland General Corporation Law and our articles of
incorporation and bylaws contain provisions that may have the
effect of discouraging, delaying or making difficult a change in
control of our company or the removal of our incumbent
directors. Specifically, our board of directors may adopt
resolutions to classify our board of directors so that
stockholders do not elect every director on an annual basis.
Also, our articles of incorporation provide that a director may
be removed only for cause by the vote of at least two-thirds of
the votes entitled to be cast for the election of directors
generally. In addition, our bylaws provide that a special
meeting of stockholders may be called by the stockholders only
upon the written request of the stockholders entitled to cast at
least a majority of all the votes entitled to be cast at the
meeting.
In addition, subject to the provisions of the 1940 Act, our
articles of incorporation permit our board of directors, without
stockholder action, to authorize the issuance of shares of stock
in one or more classes or series, including preferred stock.
Subject to compliance with the 1940 Act, our board of directors
may, without stockholder action, amend our articles of
incorporation to increase the number of shares of stock of any
class or series that we have authority to issue. The existence
of these provisions, among others, may have a negative impact on
the price of our common stock and may discourage third party
bids for ownership of our company. These provisions may prevent
any premiums being offered to you for shares of our common stock.
Terrorist
attacks, acts of war or national disasters may affect any market
for our common stock, impact the businesses in which we invest
and harm our business, operating results and financial
condition.
Terrorist acts, acts of war or national disasters may disrupt
our operations, as well as the operations of the businesses in
which we invest. Such acts have created, and continue to create,
economic and political uncertainties and have contributed to
global economic instability. Future terrorist activities,
military or security operations, or natural disasters could
further weaken the domestic/global economies and create
additional uncertainties, which may negatively impact the
businesses in which we invest directly or indirectly and, in
turn, could have a material adverse impact on our business,
operating results and financial condition. Losses from terrorist
attacks and natural disasters are generally uninsurable.
We
could face losses and potential liability if intrusion, viruses
or similar disruptions to our technology jeopardize our
confidential information or that of users of our
technology.
Although we have implemented, and will continue to implement,
security measures, our technology platform is and will continue
to be vulnerable to intrusion, computer viruses or similar
disruptive problems caused by transmission from unauthorized
users. The misappropriation of proprietary information could
expose us to a risk of loss or litigation.
44
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Item 1B.
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Unresolved
Staff Comments.
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Not applicable.
We do not own any real estate or other physical properties
materially important to our operation or any of our
subsidiaries. Currently, we lease approximately
11,027 square feet of office space located at 3700 Glenwood
Avenue, Suite 530, Raleigh, North Carolina 27612. We
believe that our current facilities are adequate for our
business as we intend to conduct it.
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Item 3.
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Legal
Proceedings.
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Neither Triangle Capital Corporation nor any of its subsidiaries
are a party to any pending legal proceedings.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Common
Stock and Holders
Our common stock began trading on the Nasdaq Global Market under
the symbol TCAP on February 15, 2007. Prior to
that date, there was no established public trading market for
our common stock. The following table sets forth the range of
high and low intraday sales prices per share of our common stock
as reported on the Nasdaq Global Market for the periods
indicated.
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High
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Low
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First Quarter of 2008
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$
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13.40
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$
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12.94
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Second Quarter of 2008
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12.25
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11.85
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Third Quarter of 2008
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13.75
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9.91
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Fourth Quarter of 2008
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13.18
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4.00
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First Quarter of 2009
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12.92
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5.21
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Second Quarter of 2009
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12.38
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7.50
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Third Quarter of 2009
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12.77
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10.26
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Fourth Quarter of 2009
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13.28
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10.95
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As of March 1, 2010, there were approximately 72 holders of
record of the common stock. This number does not include
stockholders for whom shares are held in nominee or
street name.
Distributions
Declared
We intend to make distributions on a quarterly basis to our
stockholders of substantially all of our income. We may make
deemed distributions of certain net capital gains to our
stockholders.
45
The following table summarizes our distributions declared during
the years ended December 31, 2008 and 2009:
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Record
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Payment
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Date Declared
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Date
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Date
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Amount
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May 7, 2008
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June 5, 2008
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June 26, 2008
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$
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0.31
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July 21, 2008
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August 14, 2008
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September 4, 2008
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0.35
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October 9, 2008
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October 30, 2008
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November 20, 2008
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0.38
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December 7, 2008
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December 23, 2008
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January 6, 2009
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0.40
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February 1, 2009
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February 27, 2009
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March 13, 2009
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0.05
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March 11, 2009
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March 25, 2009
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April 8, 2009
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0.40
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June 16, 2009
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July 9, 2009
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July 23, 2009
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0.40
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September 23, 2009
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October 8, 2009
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October 22, 2009
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0.41
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December 1, 2009
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December 22, 2009
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January 5, 2010
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0.41
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Each year, a statement on IRS
Form 1099-DIV
identifying the source(s) of the distribution (i.e., paid from
ordinary income, paid from net capital gains on the sale of
securities,
and/or a
return of
paid-in-capital
surplus which is a nontaxable distribution) is mailed to our
stockholders. To the extent that our distributions for a fiscal
year exceed current and accumulated earnings and profits, a
portion of those distributions may be deemed a return of capital
to our stockholders for U.S. federal income tax purposes.
Thus, the source of a distribution to our stockholders may be
the original capital invested by the stockholder rather than our
taxable ordinary income or capital gains. Stockholders should
read any written disclosure accompanying a dividend payment
carefully and should not assume that any distribution is taxable
as ordinary income or capital gains.
The table below shows the detail of our distributions for the
years ended December 31, 2009 and 2008:
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December 31, 2009:
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Ordinary income
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$
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1.62
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97.0
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%
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Capital gains
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0.05
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3.0
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%
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Total reported on tax
Form 1099-DIV
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$
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1.67
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100.0
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%
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December 31, 2008:
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Ordinary income
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$
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1.53
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|
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100.0
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%
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Total reported on tax
Form 1099-DIV
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$
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1.53
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100.0
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%
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Ordinary income is reported on
Form 1099-DIV
as either qualified or non-qualified and capital gains are
reported on
Form 1099-DIV
in various subcategories which have differing tax treatments to
stockholders. Those subcategories are not presented herein.
Distribution
Policy
We generally intend to make distributions on a quarterly basis
to our stockholders of substantially all of our income. In order
to avoid certain excise taxes imposed on RICs, we must
distribute during each calendar year an amount at least equal to
the sum of (1) 98% of our ordinary income for the calendar
year, (2) 98% of our capital gains in excess of capital
losses for the calendar year, and (3) any ordinary income
and net capital gains for the preceding year that were not
distributed during such year. We will not be subject to excise
taxes on amounts on which we are required to pay corporate
income tax (such as retained net capital gains). In order to
obtain the tax benefits applicable to RICs, we will be required
to distribute to our stockholders with respect to each taxable
year at least 90% of our ordinary income and realized net
short-term capital gains in excess of realized net long-term
capital losses. We may retain for investment realized net
long-term capital gains in excess of realized net short-term
capital losses. We may make deemed distributions to our
stockholders of any retained net capital gains. If this happens,
our stockholders will be treated as if they received an actual
distribution of the capital gains we retain and then reinvested
the net after-tax proceeds in our common stock. Our stockholders
also may be eligible to claim a tax credit (or, in certain
circumstances, a
46
tax refund) equal to their allocable share of the tax we paid on
the capital gains deemed distributed to them. Please refer to
Business Material U.S. Federal Income Tax
Considerations included in Item 1 of Part I of
this Annual Report for further information regarding the
consequences of our retention of net capital gains. We may, in
the future, make actual distributions to our stockholders of
some or all realized net long-term capital gains in excess of
realized net short-term capital losses. We can offer no
assurance that we will achieve results that will permit the
payment of any cash distributions and, if we issue senior
securities, we will be prohibited from making distributions if
doing so causes us to fail to maintain the asset coverage ratios
stipulated by the 1940 Act or if distributions are limited by
the terms of any of our borrowings. See
Business Regulation of Business Development
Companies included in Item 1 of Part I of this
Annual Report.
We have adopted a dividend reinvestment plan that provides for
reinvestment of our distributions on behalf of our stockholders,
unless a stockholder elects to receive cash as provided below.
As a result, if our board of directors authorizes, and we
declare, a cash dividend, then our stockholders who have not
opted out of our dividend reinvestment plan will
have their cash dividends automatically reinvested in additional
shares of our common stock, rather than receiving the cash
dividends.
No action will be required on the part of a registered
stockholder to have their cash dividend reinvested in shares of
our common stock. A registered stockholder may elect to receive
an entire dividend in cash by notifying The Bank of New York
Mellon, the Plan Administrator (our transfer agent
and registrar), in writing so that such notice is received by
the plan administrator no later than the record date for
dividends to stockholders. The plan administrator will set up an
account for shares acquired through the plan for each
stockholder who has not elected to receive dividends in cash and
hold such shares in non-certificated form. Upon request by a
stockholder participating in the plan, received in writing not
less than three days prior to the record date, the plan
administrator will, instead of crediting shares to the
participants account, issue a certificate registered in
the participants name for the number of whole shares of
our common stock and a check for any fractional share. Those
stockholders whose shares are held by a broker or other
financial intermediary may receive dividends in cash by
notifying their broker or other financial intermediary of their
election.
We intend to use primarily newly issued shares to implement the
plan, so long as our shares are trading at or above net asset
value. If our shares are trading below net asset value, we
intend to purchase shares in the open market in connection with
our implementation of the plan. If we use newly issued shares to
implement the plan, the number of shares to be issued to a
stockholder is determined by dividing the total dollar amount of
the dividend payable to such stockholder by the market price per
share of our common stock at the close of regular trading on the
Nasdaq Global Market on the dividend payment date. Market price
per share on that date will be the closing price for such shares
on the Nasdaq Global Market or, if no sale is reported for such
day, at the average of their reported bid and asked prices. If
we purchase shares in the open market to implement the plan, the
number of shares to be issued to a stockholder is determined by
dividing the total dollar amount of the dividend payable to such
stockholder by the average price per share for all shares
purchased by the Plan Administrator in the open market in
connection with the dividend. The number of shares of our common
stock to be outstanding after giving effect to payment of the
dividend cannot be established until the value per share at
which additional shares will be issued has been determined and
elections of our stockholders have been tabulated.
There are no brokerage charges or other charges to stockholders
for participating in the plan. We pay the plan
administrators fees under the plan. If a participant
elects by written notice to the plan administrator to have the
plan administrator sell part or all of the shares held by the
plan administrator in the participants account and remit
the proceeds to the participant, the plan administrator is
authorized to deduct a $15.00 transaction fee plus a $0.10 per
share brokerage commission from the proceeds.
Stockholders who receive dividends in the form of stock
generally are subject to the same federal, state and local tax
consequences as are stockholders who elect to receive their
dividends in cash. A stockholders basis for determining
gain or loss upon the sale of stock received in a dividend from
us will be equal to the total dollar amount of the dividend
payable to the stockholder. Any stock received in a dividend
will have a
47
holding period for tax purposes commencing on the day following
the day on which the shares are credited to the
U.S. stockholders account.
Participants may terminate their accounts under the plan by
notifying the plan administrator via its website at
https://www.bnymellon.com/shareowner/isd, by filling out the
transaction request form located at the bottom of their
statement and sending it to the plan administrator at BNY Mellon
Shareowner Services, P.O. Box 358035, Pittsburgh,
Pennsylvania
15252-8015,
or by calling the plan administrator at
(866) 228-7201.
We may terminate the plan upon notice in writing mailed to each
participant at least 30 days prior to any record date for
the payment of any dividend by us. All correspondence concerning
the plan should be directed to the plan administrator by mail at
BNY Mellon Shareowner Services, P.O. Box 358035,
Pittsburgh, Pennsylvania
15252-8015.
Our ability to make distributions will be limited by the asset
coverage requirements under the 1940 Act. For a more detailed
discussion, see Regulation included in Item 1
of Part I of this Annual Report on
Form 10-K.
Securities
Authorized for Issuance Under our Equity Incentive
Plan
Our Board of Directors and sole stockholder approved
Triangles 2007 Equity Incentive Plan (the Original
Plan), effective February 13, 2007, for the purpose
of attracting and retaining the services of executive officers,
directors and other key employees. During our fiscal year ended
December 31, 2007, no equity incentive awards were granted
under the Original Plan, in part due to certain 1940 Act
restrictions which disallow the issuance of certain types of
compensation to a BDCs non-employee directors and
employees without having first obtained exemptive relief. In
2007, we filed a request with the SEC for such exemptive relief
with respect to our ability to issue restricted stock to our
employees and non-employee directors. On March 18, 2008 we
received an order from the SEC authorizing such issuance of
restricted stock to our employees and non-employee directors
pursuant to the terms of the Amended and Restated Plan and as
otherwise set forth in the exemptive order. In 2008, our Board
approved, and the stockholders voted to approve, the Triangle
Capital Corporation Amended and Restated 2007 Equity Incentive
Plan (the Amended and Restated Plan).
The following table provides information regarding the number of
shares of restricted stock authorized and available under the
Amended and Restated Plan as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
Securities to be
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
|
|
|
Issued Upon
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
|
|
|
|
|
Exercise of Outstanding
|
|
|
Outstanding
|
|
|
Compensation Plans
|
|
|
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
(Excluding Securities
|
|
|
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column (a)
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
|
|
|
|
|
|
|
|
650,921
|
(2)
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
650,921
|
|
|
|
|
|
|
|
|
(1) |
|
The Amended and Restated Plan is the only equity compensation
plan currently utilized by the Company. |
|
(2) |
|
The Amended and Restated Plan has an aggregate of
900,000 shares of common stock reserved for issuance. |
48
Sales of
Unregistered Securities
During the year ended December 31, 2009, we issued a total
of 80,569 shares of our common stock under our dividend
reinvestment plan pursuant to an exemption from the registration
requirements of the Securities Act of 1933. The aggregate
offering price for the shares of common stock sold under the
dividend reinvestment plan was approximately $999,872.
Issuer
Purchases of Equity Securities
Pursuant to Section 23(c)(1) of the Investment Company Act
of 1940, we intend to purchase our common stock in the open
market in order to satisfy our Dividend Reinvestment Plan
obligations if, at the time of the distribution of any dividend,
our common stock is trading at a price per share below net asset
value. We did not purchase any shares of our common stock during
the three months ended December 31, 2009.
49
Performance
Graph
The following graph compares the cumulative total return on our
common stock with the cumulative total return of the Triangle
Capital Corporation Peer Group Index and the Nasdaq Composite
Index for the three years ended December 31, 2009. This
comparison assumes $100.00 was invested at the closing price of
our common stock on February 15, 2007 (the date our common
stock began to trade on the Nasdaq Global Market in connection
with our initial public offering) in our common stock and in the
comparison groups and assumes the reinvestment of all cash
dividends on the ex-dividend date prior to any tax effect. The
stock price performance shown on the graph below is not
necessarily indicative of future price performance.
Comparison
of Annual Cumulative Total Return(1)
among Triangle Capital Corporation, the Triangle Capital
Corporation
Peer Group Index, and the Nasdaq Composite Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/15/07
|
|
|
3/31/07
|
|
|
6/30/07
|
|
|
9/30/07
|
|
|
12/31/07
|
Triangle Capital Corporation
|
|
|
|
100.00
|
|
|
|
|
91.00
|
|
|
|
|
95.43
|
|
|
|
|
93.44
|
|
|
|
|
89.40
|
|
Triangle Capital Corporation Peer Group Index(2)
|
|
|
|
100.00
|
|
|
|
|
96.00
|
|
|
|
|
97.13
|
|
|
|
|
96.51
|
|
|
|
|
76.21
|
|
NASDAQ Composite Index
|
|
|
|
100.00
|
|
|
|
|
100.27
|
|
|
|
|
107.82
|
|
|
|
|
111.83
|
|
|
|
|
109.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/08
|
|
|
6/30/08
|
|
|
9/30/08
|
|
|
12/31/08
|
Triangle Capital Corporation
|
|
|
|
85.94
|
|
|
|
|
84.29
|
|
|
|
|
90.74
|
|
|
|
|
83.45
|
|
Triangle Capital Corporation Peer Group Index(2)
|
|
|
|
74.77
|
|
|
|
|
55.09
|
|
|
|
|
53.99
|
|
|
|
|
12.70
|
|
NASDAQ Composite Index
|
|
|
|
94.14
|
|
|
|
|
94.77
|
|
|
|
|
86.70
|
|
|
|
|
65.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/09
|
|
|
6/30/09
|
|
|
9/30/09
|
|
|
12/31/09
|
Triangle Capital Corporation
|
|
|
|
65.96
|
|
|
|
|
93.79
|
|
|
|
|
109.91
|
|
|
|
|
115.08
|
|
Triangle Capital Corporation Peer Group Index(2)
|
|
|
|
8.80
|
|
|
|
|
17.79
|
|
|
|
|
18.96
|
|
|
|
|
18.35
|
|
NASDAQ Composite Index
|
|
|
|
63.09
|
|
|
|
|
75.73
|
|
|
|
|
87.71
|
|
|
|
|
93.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
(1) |
|
From February 15, 2007, the date our common stock began to
trade on the Nasdaq Global Market in connection with our initial
public offering to December 31, 2009. |
|
(2) |
|
The Triangle Capital Corporation Peer Group consists of the
following internally-managed closed-end investment companies
that have elected to be regulated as BDCs under the 1940 Act:
Allied Capital Corporation, American Capital Strategies Ltd.,
Harris & Harris Group, Inc., Hercules Technology
Growth Capital, Inc., Kohlberg Capital Corporation, Main Street
Capital Corporation and MCG Capital Corporation. In our 2007 and
2008 Annual Reports on
Form 10-K,
the Triangle Capital Corporation Peer Group included Patriot
Capital Funding, Inc., which was acquired by Prospect Capital
Corporation in 2009 and as a result is no longer publicly
traded. For 2009, we have added Main Street Capital Corporation
to the Triangle Capital Corporation Peer Group as a replacement
for Patriot Capital Funding, Inc. |
51
|
|
Item 6.
|
Selected
Financial Data.
|
As discussed further in Note 1 to our financial statements
included in Item 8 of this Annual Report on
Form 10-K,
on February 21, 2007, concurrent with the closing of our
initial public offering (the IPO), we acquired the
Fund and TML (the Funds General Partner) in exchange for
shares of our common stock. These acquisitions constituted an
exchange of shares between entities under common control. In
accordance with the guidance on exchanges of shares between
entities under common control contained in FASB Accounting
Standards Codification Topic 805, Business Combinations
(formerly Statement of Financial Accounting Standards
No. 141, Business Combinations), the selected
historical financial and other data below for the year ended
December 31, 2007 are presented as if the acquisition had
occurred as of January 1, 2007. In addition, the selected
historical financial and other data below for the years ended
December 31, 2005 and 2006 are presented on a combined
basis in order to provide comparative information with respect
to prior periods. The selected financial data at and for the
fiscal years ended December 31, 2005, 2006, 2007, 2008 and
2009 have been derived from our financial statements that have
been audited by Ernst & Young LLP, an independent
registered public accounting firm. You should read this selected
financial and other data in conjunction with our
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the financial
statements and notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest, fee and dividend income
|
|
$
|
5,855
|
|
|
$
|
6,443
|
|
|
$
|
10,912
|
|
|
$
|
21,056
|
|
|
$
|
27,149
|
|
Interest income from cash and cash equivalent investments
|
|
|
108
|
|
|
|
280
|
|
|
|
1,824
|
|
|
|
303
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
5,963
|
|
|
|
6,723
|
|
|
|
12,736
|
|
|
|
21,359
|
|
|
|
27,762
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,543
|
|
|
|
1,834
|
|
|
|
2,073
|
|
|
|
4,228
|
|
|
|
6,900
|
|
Amortization of deferred financing fees
|
|
|
90
|
|
|
|
100
|
|
|
|
113
|
|
|
|
255
|
|
|
|
364
|
|
Management fees
|
|
|
1,574
|
|
|
|
1,589
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
58
|
|
|
|
115
|
|
|
|
3,894
|
|
|
|
6,254
|
|
|
|
6,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,265
|
|
|
|
3,638
|
|
|
|
6,313
|
|
|
|
10,737
|
|
|
|
13,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
2,698
|
|
|
|
3,085
|
|
|
|
6,423
|
|
|
|
10,622
|
|
|
|
14,049
|
|
Net realized gain (loss) on investments
Non-Control/Non-Affiliate
|
|
|
(3,500
|
)
|
|
|
6,027
|
|
|
|
(760
|
)
|
|
|
(1,393
|
)
|
|
|
448
|
|
Net realized gain (loss) on investments Affiliate
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on investments Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,829
|
|
|
|
|
|
Net unrealized appreciation (depreciation) of investments
|
|
|
3,975
|
|
|
|
(415
|
)
|
|
|
3,061
|
|
|
|
(4,286
|
)
|
|
|
(10,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on investments
|
|
|
475
|
|
|
|
5,612
|
|
|
|
2,442
|
|
|
|
(2,850
|
)
|
|
|
(9,862
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
(133
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
3,173
|
|
|
$
|
8,697
|
|
|
$
|
8,813
|
|
|
$
|
7,639
|
|
|
$
|
4,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share basic and diluted
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
0.95
|
|
|
$
|
1.54
|
|
|
$
|
1.63
|
|
Net increase in net assets resulting from operations per
share basic and diluted
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
1.31
|
|
|
$
|
1.11
|
|
|
$
|
0.47
|
|
Net asset value per common share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
13.74
|
|
|
$
|
13.22
|
|
|
$
|
11.03
|
|
Dividends declared per common share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
0.98
|
|
|
$
|
1.44
|
|
|
$
|
1.62
|
|
Capital gains distributions declared per common share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.05
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value
|
|
$
|
36,617
|
|
|
$
|
54,247
|
|
|
$
|
113,037
|
|
|
$
|
182,105
|
|
|
$
|
201,318
|
|
Cash and cash equivalents
|
|
|
6,067
|
|
|
|
2,556
|
|
|
|
21,788
|
|
|
|
27,193
|
|
|
|
55,201
|
|
Interest and fees receivable
|
|
|
50
|
|
|
|
135
|
|
|
|
305
|
|
|
|
680
|
|
|
|
677
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
95
|
|
|
|
287
|
|
Deferred offering costs
|
|
|
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
48
|
|
|
|
29
|
|
Deferred financing fees
|
|
|
1,085
|
|
|
|
985
|
|
|
|
999
|
|
|
|
3,546
|
|
|
|
3,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
43,819
|
|
|
$
|
58,944
|
|
|
$
|
136,210
|
|
|
$
|
213,667
|
|
|
$
|
261,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and partners capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
13
|
|
|
$
|
825
|
|
|
$
|
1,144
|
|
|
$
|
1,609
|
|
|
$
|
2,222
|
|
Interest payable
|
|
|
566
|
|
|
|
606
|
|
|
|
699
|
|
|
|
1,882
|
|
|
|
2,334
|
|
Distribution / dividends payable
|
|
|
|
|
|
|
532
|
|
|
|
2,041
|
|
|
|
2,767
|
|
|
|
4,775
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
30
|
|
|
|
59
|
|
Deferred revenue
|
|
|
75
|
|
|
|
25
|
|
|
|
31
|
|
|
|
|
|
|
|
75
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
1,760
|
|
|
|
844
|
|
|
|
577
|
|
SBA-guaranteed debentures payable
|
|
|
31,800
|
|
|
|
31,800
|
|
|
|
37,010
|
|
|
|
115,110
|
|
|
|
121,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,454
|
|
|
|
33,788
|
|
|
|
42,737
|
|
|
|
122,242
|
|
|
|
131,952
|
|
Total partners capital / stockholders equity
|
|
|
11,365
|
|
|
|
25,156
|
|
|
|
93,473
|
|
|
|
91,425
|
|
|
|
129,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital /
stockholders equity
|
|
$
|
43,819
|
|
|
$
|
58,944
|
|
|
$
|
136,210
|
|
|
$
|
213,667
|
|
|
$
|
261,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield on investments
|
|
|
14.2
|
%
|
|
|
13.3
|
%
|
|
|
12.6
|
%
|
|
|
13.2
|
%
|
|
|
13.5
|
%
|
Number of portfolio companies
|
|
|
12
|
|
|
|
19
|
|
|
|
26
|
|
|
|
34
|
|
|
|
37
|
|
Expense ratios (as percentage of average net assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
21.3
|
%
|
|
|
8.3
|
%
|
|
|
4.4
|
%
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
Interest expense and deferred financing fees
|
|
|
21.4
|
|
|
|
9.5
|
|
|
|
2.4
|
|
|
|
4.7
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
42.7
|
%
|
|
|
17.8
|
%
|
|
|
6.8
|
%
|
|
|
11.3
|
%
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The information in this section contains forward-looking
statements that involve risks and uncertainties. Please see
Risk Factors and Special Note Regarding
Forward-Looking Statements for a discussion of the
uncertainties, risks and assumptions associated with these
statements. You should read the following discussion in
conjunction with the combined financial statements and related
notes and other financial information appearing elsewhere in
this Annual Report.
The following discussion is designed to provide a better
understanding of our financial statements, including a brief
discussion of our business, key factors that impacted our
performance and a summary of our operating results. As discussed
further in Note 1 to our financial statements, on
February 21, 2007, concurrent with the closing of our
initial public offering (the IPO), we acquired
Triangle Mezzanine Fund LLLP (the Fund) and the
Funds General Partner, Triangle Mezzanine LLC
(TML) in exchange for shares of our common stock.
These acquisitions constituted an exchange of shares between
entities under common control. In accordance with the guidance
on exchanges of shares between entities under common control
contained in FASB ASC Topic 805, Business Combinations,
(formerly Statement of Financial Accounting Standards
No. 141, Business Combinations), the financial data
and information discussed herein as of and for the year ended
December 31, 2007 are presented as if the acquisition had
occurred as of January 1, 2007. The following discussion
should be read in conjunction with the Financial Statements and
the notes thereto included in Item 8 of this Annual Report
on
Form 10-K.
Historical results and percentage relationships among any
amounts in the financial statements are not necessarily
indicative of trends in operating results for any future periods.
Overview
of our Business
We are a Maryland corporation incorporated on October 10,
2006, for the purpose of acquiring the Fund and TML, raising
capital in the IPO and thereafter operating as an internally
managed BDC under the 1940 Act. The Fund is licensed as an SBIC
by the United States Small Business Administration, or SBA, and
has also elected to be treated as a BDC. We and the Fund invest
primarily in debt instruments, equity investments, warrants and
other securities of lower middle market privately held companies
located in the United States. Upon the consummation of the IPO,
we completed the Formation Transactions described in Item 1
of Part I of this Annual Report, at which time the Fund
became our wholly-owned subsidiary, and the former partners of
the Fund became our stockholders.
Our business is to provide capital to lower middle market
companies in the United States. We define lower middle market
companies as those with annual revenues between
$10.0 million and $100.0 million. We focus on
investments in companies with a history of generating revenues
and positive cash flows, an established market position and a
proven management team with a strong operating discipline. Our
target portfolio company has annual revenues between
$20.0 million and $75.0 million and annual earnings
before interest, taxes, depreciation and amortization, or
EBITDA, between $3.0 million and $20.0 million.
We invest primarily in senior and subordinated debt securities
secured by first and second lien security interests in portfolio
company assets, coupled with equity interests. Our investments
generally range from $5.0 million to $15.0 million per
portfolio company. In certain situations, we have partnered with
other funds to provide larger financing commitments.
We generate revenues in the form of interest income, primarily
from our investments in debt securities, loan origination and
other fees and dividend income. Fees generated in connection
with our debt investments are recognized over the life of the
loan using the effective interest method or, in some cases,
recognized as earned. In addition, we generate revenue in the
form of capital gains, if any, on warrants or other
equity-related securities that we acquire from our portfolio
companies. Our debt investments generally have a term of between
three and seven years and typically bear interest at fixed rates
between 12.0% and 17.0% per annum. Certain of our debt
investments have a form of interest, referred to as payment in
kind, or PIK, interest, that is not paid currently but that is
accrued and added to the loan balance and paid at the end of the
term. In our negotiations with potential portfolio companies, we
generally seek to minimize PIK interest. Cash interest on our
debt investments is generally payable monthly; however, some of
our debt investments pay cash interest
54
on a quarterly basis. As of December 31, 2009 and
December 31, 2008, the weighted average yield on all of our
outstanding debt investments (including PIK interest) was
approximately 14.7% and 14.4%, respectively. The weighted
average yield on all of our outstanding investments (including
equity and equity-linked investments) was approximately 13.5%
and 13.2% as of December 31, 2009 and December 31,
2008, respectively.
The Fund is eligible to sell debentures guaranteed by the SBA to
the capital markets at favorable interest rates and invest these
funds in portfolio companies. We intend to continue to operate
the Fund as an SBIC, subject to SBA approval, and to utilize the
proceeds of the sale of SBA-guaranteed debentures, referred to
herein as SBA leverage, to enhance returns to our stockholders.
Portfolio
Composition
The total value of our investment portfolio was
$201.3 million as of December 31, 2009, as compared to
$182.1 million as of December 31, 2008. As of
December 31, 2009, we had investments in 37 portfolio
companies with an aggregate cost of $209.9 million. As of
December 31, 2008, we had investments in 34 portfolio
companies with an aggregate cost of $180.2 million. As of
both December 31, 2009 and 2008, none of our portfolio
investments represented greater than 10% of the total fair value
of our investment portfolio.
As of December 31, 2009 and December 31, 2008, our
investment portfolio consisted of the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
Cost
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt, Unitranche and
2nd lien
notes
|
|
$
|
179,482,425
|
|
|
|
86
|
%
|
|
$
|
166,087,684
|
|
|
|
83
|
%
|
Senior debt
|
|
|
11,090,514
|
|
|
|
5
|
|
|
|
10,847,886
|
|
|
|
5
|
|
Equity shares
|
|
|
15,778,681
|
|
|
|
8
|
|
|
|
17,182,500
|
|
|
|
9
|
|
Equity warrants
|
|
|
2,715,070
|
|
|
|
1
|
|
|
|
6,250,600
|
|
|
|
3
|
|
Royalty rights
|
|
|
874,400
|
|
|
|
|
|
|
|
949,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
209,941,090
|
|
|
|
100
|
%
|
|
$
|
201,317,970
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt, Unitranche and
2nd lien
notes
|
|
$
|
147,493,871
|
|
|
|
82
|
%
|
|
$
|
143,015,291
|
|
|
|
79
|
%
|
Senior debt
|
|
|
16,269,628
|
|
|
|
9
|
|
|
|
16,269,628
|
|
|
|
9
|
|
Equity shares
|
|
|
13,684,269
|
|
|
|
8
|
|
|
|
17,301,372
|
|
|
|
9
|
|
Equity warrants
|
|
|
1,829,370
|
|
|
|
1
|
|
|
|
4,644,600
|
|
|
|
3
|
|
Royalty rights
|
|
|
874,400
|
|
|
|
|
|
|
|
874,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180,151,538
|
|
|
|
100
|
%
|
|
$
|
182,105,291
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Activity
During the year ended December 31, 2009, we made seven new
investments totaling $43.0 million, additional debt
investments in three existing portfolio companies totaling
$4.1 million and five additional equity investments in
existing portfolio companies totaling approximately
$1.4 million. We also sold two investments in portfolio
companies for approximately $1.9 million, resulting in
realized gains totaling $1.8 million and recognized
realized losses related to restructurings of two portfolio
companies totaling $1.3 million. We had four portfolio
company loans repaid at par in the amount of $13.2 million.
In addition, we received normal principal repayments, partial
loan prepayments and payment in kind (PIK) interest repayments
totaling approximately $9.2 million in the year ended
December 31, 2009.
55
Total portfolio investment activity for the year ended
December 31, 2009 was as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
Fair value of portfolio, January 1, 2009
|
|
$
|
182,105,291
|
|
New investments
|
|
|
48,475,570
|
|
Proceeds from sales of investments
|
|
|
(1,888,384
|
)
|
Loan origination fees received
|
|
|
(952,500
|
)
|
Principal repayments received
|
|
|
(19,543,314
|
)
|
Payment in kind interest earned
|
|
|
5,074,819
|
|
Payment in kind interest payments received
|
|
|
(2,909,804
|
)
|
Accretion/writeoff of loan discounts
|
|
|
421,495
|
|
Accretion of deferred loan origination revenue
|
|
|
663,506
|
|
Net realized gain on investments
|
|
|
448,164
|
|
Net unrealized losses on investments
|
|
|
(10,576,873
|
)
|
|
|
|
|
|
Fair value of portfolio, December 31, 2009
|
|
$
|
201,317,970
|
|
|
|
|
|
|
Weighted average yield on debt investments as of
December 31, 2009
|
|
|
14.7
|
%
|
|
|
|
|
|
Weighted average yield on total investments as of
December 31, 2009
|
|
|
13.5
|
%
|
|
|
|
|
|
During the year ended December 31, 2008, we made twelve new
investments totaling $91.0 million, additional debt
investments in an existing portfolio company of
$1.9 million and four additional equity investments in
existing portfolio companies of approximately $0.2 million.
We also sold three investments in portfolio companies for
approximately $3.6 million, resulting in realized gains
totaling $2.9 million and recognized a realized loss on the
writeoff of one investment totaling $1.5 million. We had
four portfolio company loans repaid at par in the amount of
$12.5 million. In addition, we received normal principal
repayments, partial loan prepayments and payment in kind (PIK)
interest repayments totaling approximately $6.9 million in
the year ended December 31, 2008.
Total portfolio investment activity for the year ended
December 31, 2008 was as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
Fair value of portfolio, January 1, 2008
|
|
$
|
113,036,240
|
|
New investments
|
|
|
93,054,022
|
|
Proceeds from sale of investment
|
|
|
(3,631,876
|
)
|
Loan origination fees received
|
|
|
(1,686,996
|
)
|
Principal repayments received
|
|
|
(17,336,521
|
)
|
Payment in kind interest earned
|
|
|
3,761,786
|
|
Payment in kind interest payments received
|
|
|
(1,978,498
|
)
|
Accretion of loan discounts
|
|
|
169,548
|
|
Accretion of deferred loan origination revenue
|
|
|
484,664
|
|
Realized gains on investments
|
|
|
1,435,608
|
|
Unrealized losses on investments
|
|
|
(5,202,686
|
)
|
|
|
|
|
|
Fair value of portfolio, December 31, 2008
|
|
$
|
182,105,291
|
|
|
|
|
|
|
Weighted average yield on debt investments as of
December 31, 2008
|
|
|
14.4
|
%
|
|
|
|
|
|
Weighted average yield on total investments as of
December 31, 2008
|
|
|
13.2
|
%
|
|
|
|
|
|
56
Non-Accrual
Assets
As of December 31, 2009, the fair value of our non-accrual
assets comprised 3.5% of the total fair value of our portfolio,
and the cost of our non-accrual assets comprised 8.0% of the
total cost of our portfolio. Our non-accrual assets as of
December 31, 2009 are as follows:
Gerli and
Company
In the third quarter of 2008, we recognized an unrealized loss
of $0.3 million on our subordinated note investment in
Gerli and Company (Gerli). This unrealized loss
reduced the fair value of our debt investment in Gerli to
$2.8 million as of September 30, 2008. During the
third quarter of 2008, we continued to receive interest payments
in accordance with our loan agreement. In November 2008, we
placed our debt investment in Gerli on non-accrual status. As a
result, under generally accepted accounting principles
(GAAP), we no longer recognize interest income on
our debt investment in Gerli for financial reporting purposes.
Additionally, in the fourth quarter of 2008, we recognized an
additional unrealized loss on our debt investment in Gerli of
$0.9 million and in the year ended December 31, 2009,
we recognized an additional unrealized loss on our debt
investment in Gerli of $0.5 million. As of
December 31, 2009, the cost of our debt investment in Gerli
is $3.2 million and the fair value of such investment is
$1.6 million.
Fire
Sprinkler Systems, Inc.
In 2008, we recognized an unrealized loss of $1.4 million
on our subordinated note investment in Fire Sprinkler Systems,
Inc. (Fire Sprinkler Systems). This unrealized loss
reduced the fair value of our debt investment in Fire Sprinkler
Systems to $1.0 million as of December 31, 2008.
Through the first nine months of 2008, we continued to receive
interest and principal payments in accordance with our loan
agreement. In October 2008, we placed our debt investment in
Fire Sprinkler Systems on non-accrual status. As a result, under
GAAP, we no longer recognize interest income on our debt
investment in Fire Sprinkler Systems for financial reporting
purposes. In the year ended December 31, 2009, we
recognized an additional unrealized loss on our debt investment
in Fire Sprinkler Systems of $0.3 million. As of
December 31, 2009, the cost of our debt investment in Fire
Sprinkler Systems is $2.4 million and the fair value of
such investment is $0.8 million.
American
De-Rosa Lamparts, LLC and Hallmark Lighting
In 2008, we recognized an unrealized loss of $1.2 million
on our subordinated note investment in American De-Rosa
Lamparts, LLC and Hallmark Lighting (collectively
ADL). This unrealized loss reduced the fair value of
our investment in ADL to $6.9 million as of
December 31, 2008. In the year ended December 31,
2009, we recognized an additional unrealized loss on our
investment in ADL of $3.2 million. As of December 31,
2009, the cost of our investment in ADL was approximately
$8.2 million and the fair value of such investment was
approximately $3.9 million. Through August 31, 2009,
we continued to receive interest payments from ADL in accordance
with the loan agreement. In September 2009, we received
notification from ADLs senior lender that ADL was blocked
from making interest payments to us for a period of six months.
As a result, we placed our investment in ADL on non-accrual
status and under GAAP, we no longer recognize interest income on
our investment in ADL for financial reporting purposes.
FCL
Graphics, Inc. 2nd Lien Note
During the first eight months of 2009, we received cash interest
on our 2nd lien note in FCL at the stated contractual rate
(20% per annum as of September 30, 2009). In September
2009, FCL did not make the scheduled interest payments on its
2nd Lien notes. As a result, we placed our 2nd Lien
note in FCL on non-accrual status and therefore, under GAAP, we
no longer recognized interest income on our 2nd Lien note
investment in FCL for financial reporting purposes. In November
2009, we amended the terms of our note with FCL. The terms of
the amendment provide for cash interest at a rate of LIBOR plus
250 basis points per annum and PIK interest at a rate of 8%
per annum. In addition, we exchanged approximately
$0.4 million of unpaid PIK interest on our FCL 2nd lien
note for common equity in FCL Graphics, resulting in a
$0.4 million
57
realized loss. While we are currently recognizing cash interest
on our 2nd Lien investment in FCL, we have placed the PIK
component of this note on non-accrual status. In the year ended
December 31, 2009, we recognized an unrealized loss on our
2nd Lien note investment in FCL of approximately
$2.2 million, which has a cost as of December 31, 2009
of approximately $3.0 million. The fair value of our
2nd Lien note investment in FCL as of December 31,
2009 is approximately $0.8 million.
Results
of Operations
Comparison
of year ended December 31, 2009 and December 31,
2008
Investment
Income
For the year ended December 31, 2009, total investment
income was $27.8 million, a 30% increase from
$21.4 million of total investment income for the year ended
December 31, 2008. This increase was primarily attributable
to a $4.8 million increase in total loan interest, fee and
dividend income and a $1.3 million increase in total
payment in kind interest income due to a net increase in our
portfolio investments from December 31, 2008 to
December 31, 2009, and a $0.3 million increase in
interest income from cash and cash equivalent investments due to
an increase in average cash balances in 2009 over the 2008 due
to proceeds from our secondary offerings of common stock.
Non-recurring fee income was $0.8 million for the year
ended December 31, 2009 as compared to $0.7 million
for the year ended December 31, 2008.
Expenses
For the year ended December 31, 2009, expenses increased by
28% to $13.7 million from $10.7 million for the year
ended December 31, 2008. The increase in expenses was
primarily attributable to a $2.7 million increase in
interest expense. The increase in interest expense is related to
higher average balances of SBA-guaranteed debentures outstanding
during the year ended December 31, 2009 than in the
comparable period in 2008. In addition, during 2008, a
significant portion of our outstanding SBA-guaranteed debentures
were bearing interest at interim (pre-pooling) interest rates,
which are generally lower than the fixed pooled interest rates.
During 2009, these debentures bore interest at the higher fixed
rates resulting in increased interest expense.
Net
Investment Income
As a result of the $6.4 million increase in total
investment income and the $3.0 million increase in
expenses, net investment income for the year ended
December 31, 2009 was $14.0 million compared to net
investment income of $10.6 million during the year ended
December 31, 2008.
Net
Increase in Net Assets Resulting From Operations
For the year ended December 31, 2009, total net realized
gains on non-control/non-affiliate investments was approximately
$0.4 million, which consisted of realized gains on the
sales of two investments totaling approximately
$1.8 million, partially offset by realized losses on the
restructuring of two other investments totaling approximately
$1.3 million. For the year ended December 31, 2008,
total net realized gains on investments totaled approximately
$1.4 million. Net realized gain on control investments for
the year ended December 31, 2008 was $2.8 million,
which consisted of a realized gain on one investment. For the
year ended December 31, 2008, net realized loss on
non-control/non-affiliate investments was $1.4 million,
which consisted of a realized loss on the writeoff of one
investment of $1.5 million and a realized gain on one
investment of $0.1 million.
In the year ended December 31, 2009, we recorded net
unrealized depreciation of investments, net of income taxes, in
the amount of $10.3 million, comprised primarily of
unrealized depreciation on 15 investments totaling approximately
$17.4 million and unrealized appreciation, net of tax, on
13 other investments totaling approximately $7.3 million.
In addition, we recorded net unrealized depreciation
reclassification adjustments of approximately $0.2 million
related to the realized losses on non-control/non-affiliate
investments noted above. In the year ended December 31,
2008, we recorded net unrealized depreciation of
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investments, net of income taxes, in the amount of
$4.3 million, comprised partially of net unrealized
depreciation reclassification adjustments of approximately
$1.2 million related to the realized gain on control
investments and the realized losses on non-control/non-affiliate
investments noted above. In addition, in the year ended
December 31, 2008, we recorded unrealized appreciation, net
of tax, on eleven other investments totaling $5.6 million
and unrealized depreciation on 17 investments totaling
$8.6 million.
As a result of these events, our net increase in net assets from
operations during the year ended December 31, 2009 was
$4.0 million as compared to $7.6 million for the year
ended December 31, 2008.
Comparison
of year ended December 31, 2008 and December 31,
2007
Investment
Income
For the year ended December 31, 2008, total investment
income was $21.4 million, a 68% increase from
$12.7 million of total investment income for the year ended
December 31, 2007. This increase was primarily attributable
to a $7.9 million increase in total loan interest, fee and
dividend income and a $2.2 million increase in total
payment in kind interest income due to a net increase in our
portfolio investments from December 31, 2007 to
December 31, 2008, partially offset by a $1.5 million
decrease in interest income from cash and cash equivalent
investments due to (i) a significant decrease in average
cash balances in 2008 over the comparable period in 2007 and
(ii) a decrease in overall interest rates. Non-recurring
fee income was $0.7 million for the year ended
December 31, 2008 as compared to $0.5 million for the
year ended December 31, 2007.
Expenses
For the year ended December 31, 2008, expenses increased by
70% to $10.7 million from $6.3 million for the year
ended December 31, 2007. The increase in expenses was
primarily attributable to a $2.4 million increase in
general and administrative expenses and a $2.2 million
increase in interest expense. As a result of the IPO and the
Formation Transactions described in Note 1 to our unaudited
financial statements, we are an internally managed investment
company and on February 21, 2007, we began incurring
general and administrative costs associated with employing our
executive officers, key investment personnel and corporate
professionals and other general corporate overhead costs. As of
December 31, 2008, we had 14 full-time employees, as
compared to 11 full-time employees as of December 31,
2007. In addition, we experienced an increase in general and
administrative costs in 2008 associated with being a
publicly-traded company, such as increased insurance,
accounting, corporate governance and legal costs. The increase
in interest expense is related to higher average balances of
SBA-guaranteed debentures outstanding during the year ended
December 31, 2008 than in the comparable period in 2007.
These increases in general and administrative costs and interest
costs were partially offset by a $0.2 million decrease in
management fees. We incurred no management fees in 2008 compared
to $0.2 million in management fees in 2007.
Net
Investment Income
As a result of the $8.6 million increase in total
investment income and the $4.4 million increase in
expenses, net investment income for the year ended
December 31, 2008 was $10.6 million compared to net
investment income of $6.4 million during the year ended
December 31, 2007.
Net
Increase in Net Assets Resulting From Operations
For the year ended December 31, 2008, total net realized
gains on investments totaled approximately $1.4 million.
Net realized gain on control investments for the year ended
December 31, 2008 was $2.8 million, which consisted of
a realized gain on one investment. For the year ended
December 31, 2008, net realized loss on
non-control/non-affiliate investments was $1.4 million,
which consisted of a realized loss on the writeoff of one
investment of $1.5 million and a realized gain on one
investment of $0.1 million. For the year ended
December 31, 2007, we recognized a realized gain of
$0.1 million on an affiliate investment. In addition,
during the year ended December 31, 2007, net realized loss
on non-control/non-affiliate investments was
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$0.8 million which related to a realized loss on one
investment of $1.4 million, offset by a realized gain on a
second investment of $0.6 million.
In the year ended December 31, 2008, we recorded net
unrealized depreciation of investments, net of income taxes, in
the amount of $4.3 million, comprised partially of net
unrealized depreciation reclassification adjustments of
approximately $1.2 million related to the realized gain on
control investments and the realized losses on
non-control/non-affiliate investments noted above. In addition,
in the year ended December 31, 2008, we recorded unrealized
appreciation, net of tax, on eleven other investments totaling
$5.6 million and unrealized depreciation on 17 investments
totaling $8.6 million. During the year ended
December 31, 2007, we recorded net unrealized appreciation
of investments, net of income taxes, in the amount of
$3.1 million, comprised partially of net unrealized
appreciation/depreciation reclassification adjustments of
approximately $1.1 million related to the realized gain and
loss noted above. In addition, in the year ended
December 31, 2007, we recorded unrealized appreciation, net
of tax, on nine other investments totaling $4.3 million and
unrealized depreciation on 11 investments totaling
$2.3 million.
As a result of these events, our net increase in net assets from
operations during the year ended December 31, 2008 was
$7.6 million as compared to $8.8 million for the year
ended December 31, 2007.
Liquidity
and Capital Resources
We believe that our current cash and cash equivalents on hand,
our available SBA leverage and our anticipated cash flows from
operations will be adequate to meet our cash needs for our daily
operations for at least the next twelve months.
In the future, depending on the valuation of the Funds
assets pursuant to SBA guidelines, the Fund may be limited by
provisions of the Small Business Investment Act of 1958, and SBA
regulations governing SBICs, from making certain distributions
to Triangle Capital Corporation that may be necessary to enable
Triangle Capital Corporation to make the minimum required
distributions to its stockholders and qualify as a RIC.
Cash
Flows
For the year ended December 31, 2009, we experienced a net
increase in cash and cash equivalents in the amount of
$28.0 million. During that period, our operating activities
used $13.4 million in cash, consisting primarily of new
portfolio investments of $48.5 million, partially offset by
net investment income of $14.0 million and repayments of
loans received and proceeds from sales of investments of
$21.4 million. We generated $41.4 million of cash from
financing activities, consisting of proceeds from public
offerings of $47.3 million and proceeds from borrowings
under SBA guaranteed debentures payable of $6.8 million,
offset by financing fees paid of $0.4 million and cash
dividends paid of $12.3 million. At December 31, 2009,
we had $55.2 million of cash and cash equivalents on hand.
For the year ended December 31, 2008, we experienced a net
increase in cash and cash equivalents in the amount of
$5.4 million. During that period, our operating activities
used $60.6 million in cash, consisting primarily of new
portfolio investments of $93.1 million, partially offset by
repayments of loans received and proceeds from sales of
investments of $21.0 million. We generated
$66.1 million of cash from financing activities, consisting
of proceeds from borrowings under SBA guaranteed debentures
payable of $78.1 million, offset by financing fees paid of
$2.8 million and cash dividends paid of $9.2 million.
At December 31, 2008, we had $27.2 million of cash and
cash equivalents on hand.
For the year ended December 31, 2007, we experienced a net
increase in cash and cash equivalents in the amount of
$19.2 million. During that period, our operating activities
used $47.8 million in cash, and we generated
$67.1 million of cash from financing activities, consisting
of (i) proceeds from our IPO of $64.7 million,
(ii) proceeds from the issuance of SBA guaranteed
debentures of $5.2 million and (iii) a decrease in
deferred offering costs of $1.0 million, partially offset
by cash dividends paid of $3.0 million, tax distributions
to partners of $0.7 million and financing fees paid to the
SBA of $0.1 million. At December 31, 2007, we had
$21.8 million of cash and cash equivalents on hand.
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Financing
Transactions
Due to the Funds status as a licensed SBIC, the Fund has
the ability to issue debentures guaranteed by the SBA at
favorable interest rates. Under the Small Business Investment
Act and the SBA rules applicable to SBICs, an SBIC (or group of
SBICs under common control) can have outstanding at any time
debentures guaranteed by the SBA in an amount up to three times
the amount of its regulatory capital, which generally is the
amount raised from private investors. The maximum statutory
limit on the dollar amount of outstanding debentures guaranteed
by the SBA issued by a single SBIC is currently
$150.0 million. Debentures guaranteed by the SBA have a
maturity of ten years, with interest payable semi-annually. The
principal amount of the debentures is not required to be paid
before maturity but may be pre-paid at any time. Debentures
issued prior to September 2006 were subject to pre-payment
penalties during their first five years. Those pre-payment
penalties no longer apply to debentures issued after
September 1, 2006.
In June 2009, Triangle SBIC received a new leverage commitment
from the SBA which increased Triangle SBICs ability to
issue SBA guaranteed debentures up to the maximum statutory
limit of $150.0 million. In addition, we have applied for a
second SBIC license which application is currently being
reviewed by the SBA. If approved, this license would provide us
with the capability to issue an additional $75.0 million of
SBA-guaranteed debentures. As of December 31, 2009,
Triangle SBIC has $121.9 million of SBA guaranteed
debentures outstanding. In addition to the one-time 1.0% fee on
the total commitment from the SBA, the Company also pays a
one-time 2.425% fee on the amount of each debenture issued.
These fees are capitalized as deferred financing costs and are
amortized over the term of the debt agreements using the
effective interest method. The weighted average interest rate
for all SBA guaranteed debentures as of December 31, 2009
was 5.772%. This weighted average interest rate as of
December 31, 2009 includes $115.1 million of pooled
SBA-guaranteed debentures with a weighted average fixed interest
rate of 6.03% and $6.8 million of unpooled SBA-guaranteed
debentures with a weighted average interim interest rate of
1.41%.
Distributions
to Stockholders
We have elected to be treated as a RIC under Subchapter M of the
Internal Revenue Code of 1986, as amended (the Code)
and intend to make the required distributions to our
stockholders as specified therein. In order to qualify as a RIC
and to obtain RIC tax benefits, we must meet certain minimum
distribution,
source-of-income
and asset diversification requirements. If such requirements are
met, then we are generally required to pay income taxes only on
the portion of our taxable income and gains we do not distribute
(actually or constructively) and certain built-in gains. We met
our minimum distribution requirements for 2009, 2008 and 2007
and continually monitor our distribution requirements with the
goal of ensuring compliance with the Code.
The minimum distribution requirements applicable to RICs require
us to distribute to our stockholders at least 90% of our
investment company taxable income (ICTI), as defined
by the Code, each year. Depending on the level of ICTI earned in
a tax year, we may choose to carry forward ICTI in excess of
current year distributions into the next tax year and pay a 4%
excise tax on such excess. Any such carryover ICTI must be
distributed before the end that next tax year through a dividend
declared prior to filing the final tax return related to the
year which generated such ICTI.
ICTI generally differs from net investment income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses. We may be required to
recognize ICTI in certain circumstances in which we do not
receive cash. For example, if we hold debt obligations that are
treated under applicable tax rules as having original issue
discount (such as debt instruments issued with warrants), we
must include in ICTI each year a portion of the original issue
discount that accrues over the life of the obligation,
regardless of whether cash representing such income is received
by us in the same taxable year. We may also have to include in
ICTI other amounts that we have not yet received in cash, such
as 1) PIK interest income and 2) interest income from
investments that have been classified as non-accrual for
financial reporting purposes. Interest income on non-accrual
investments is not recognized for financial reporting purposes,
but generally is recognized in ICTI. Because any original issue
discount or other amounts accrued will be included in our ICTI
for the year of accrual, we may be required to make a
distribution to our
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stockholders in order to satisfy the minimum distribution
requirements, even though we will not have received and may not
ever receive any corresponding cash amount. ICTI also excludes
net unrealized appreciation or depreciation, as investment gains
or losses are not included in taxable income until they are
realized.
Current
Market Conditions
During 2008 and 2009, the debt and equity capital markets in the
United States have been severely impacted by significant
write-offs in the financial services sector relating to subprime
mortgages and the re-pricing of credit risk in the broadly
syndicated bank loan market, among other things. These events,
along with the deterioration of the housing market, have led to
an economic recession in the U.S and abroad, which could be
long-term. Banks, investment companies and others in the
financial services industry have continued to report significant
write-downs in the fair value of their assets, which has led to
the failure of a number of banks and investment companies, a
number of distressed mergers and acquisitions, the government
take-over of the nations two largest government-sponsored
mortgage companies, and the passage of the $700 billion
Emergency Economic Stabilization Act of 2008 in October 2008 and
the American Recovery and Reinvestment Act of 2009 in February
2009. These events have significantly impacted the financial and
credit markets and have reduced the availability of debt and
equity capital for the market as a whole, and for financial
firms in particular. Notwithstanding recent gains across both
the equity and debt markets, these conditions may continue for a
prolonged period of time or worsen in the future. While we have
capacity to issue additional SBA guaranteed debentures as
discussed above, we may not be able to access additional equity
capital, which could result in the slowing of our origination
activity during 2010 and beyond.
In the event that the United States economy remains in a
recession, it is possible that the results of some of the middle
market companies in which we invest could experience further
deterioration, which could ultimately lead to difficulty in
meeting debt service requirements and an increase in defaults.
There can be no assurance that the performance of certain of our
portfolio companies will not be negatively impacted by
challenging economic conditions which could have a negative
impact on our future results.
Critical
Accounting Policies and Use of Estimates
The preparation of our financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses for the periods covered by such financial
statements. We have identified investment valuation and revenue
recognition as our most critical accounting estimates. On an
on-going basis, we evaluate our estimates, including those
related to the matters described below. These estimates are
based on the information that is currently available to us and
on various other assumptions that we believe to be reasonable
under the circumstances. Actual results could differ materially
from those estimates under different assumptions or conditions.
A discussion of our critical accounting policies follows.
Investment
Valuation
The most significant estimate inherent in the preparation of our
financial statements is the valuation of investments and the
related amounts of unrealized appreciation and depreciation of
investments recorded. We have established and documented
processes and methodologies for determining the fair values of
portfolio company investments on a recurring (quarterly) basis.
As discussed below, we have engaged an independent valuation
firm to assist us in our valuation process.
On January 1, 2008, we adopted FASB ASC Topic 820, Fair
Value Measurements and Disclosures (formerly Statement of
Financial Accounting Standards No. 157, Fair Value
Measurements), which defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles and expands disclosures about
fair value measurements.
ASC Topic 820 clarifies that the exchange price is the price in
an orderly transaction between market participants to sell an
asset or transfer a liability in the market in which the
reporting entity would transact for the asset or liability, that
is, the principal or most advantageous market for the asset or
liability. The
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transaction to sell the asset or transfer the liability is a
hypothetical transaction at the measurement date, considered
from the perspective of a market participant that holds the
asset or owes the liability. ASC Topic 820 provides a consistent
definition of fair value which focuses on exit price and
prioritizes, within a measurement of fair value, the use of
market-based inputs over entity-specific inputs. In addition,
ASC Topic 820 provides a framework for measuring fair value and
establishes a three-level hierarchy for fair value measurements
based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels
of valuation hierarchy established by ASC Topic 820 are defined
as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. Our investment
portfolio is comprised of debt and equity instruments of
privately held companies for which quoted prices falling within
the categories of Level 1 and Level 2 inputs are not
available. Therefore, we value all of our investments at fair
value, as determined in good faith by our Board of Directors,
using Level 3 inputs, as further described below. Due to
the inherent uncertainty in the valuation process, our Board of
Directors estimate of fair value may differ significantly
from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
In addition, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the valuations currently assigned.
Debt and equity securities that are not publicly traded and for
which a limited market does not exist are valued at fair value
as determined in good faith by our Board of Directors. There is
no single standard for determining fair value in good faith, as
fair value depends upon circumstances of each individual case.
In general, fair value is the amount that we might reasonably
expect to receive upon the current sale of the security.
We evaluate the investments in portfolio companies using the
most recently available portfolio company financial statements
and forecasts. We also consult with the portfolio companys
senior management to obtain further updates on the portfolio
companys performance, including information such as
industry trends, new product development and other operational
issues. Additionally, we consider some or all of the following
factors:
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financial standing of the issuer of the security;
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comparison of the business and financial plan of the issuer with
actual results;
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the size of the security held as it relates to the liquidity of
the market for such security;
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pending public offering of common stock by the issuer of the
security;
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pending reorganization activity affecting the issuer, such as
merger or debt restructuring;
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ability of the issuer to obtain needed financing;
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changes in the economy affecting the issuer;
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financial statements and reports from portfolio company senior
management and ownership;
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the type of security, the securitys cost at the date of
purchase and any contractual restrictions on the disposition of
the security;
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discount from market value of unrestricted securities of the
same class at the time of purchase;
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special reports prepared by analysts;
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information as to any transactions or offers with respect to the
security
and/or sales
to third parties of similar securities;
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the issuers ability to make payments and the type of
collateral;
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the current and forecasted earnings of the issuer;
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statistical ratios compared to lending standards and to other
similar securities; and
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other pertinent factors.
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In making the good faith determination of the value of debt
securities, we start with the cost basis of the security, which
includes the amortized original issue discount, and
paid-in-kind
(PIK) interest, if any. We also use a risk rating system to
estimate the probability of default on the debt securities and
the probability of loss if there is a default. The risk rating
system covers both qualitative and quantitative aspects of the
business and the securities held. In valuing debt securities, we
utilize an income approach model that considers
factors including, but not limited to, (i) the portfolio
investments current risk rating (discussed below),
(ii) the portfolio companys current trailing twelve
months (TTM) results of operations as compared
to the portfolio companys TTM results of operations as of
the date the investment was made and the portfolio
companys outlook for the next twelve months of operations,
(iii) the portfolio companys current leverage as
compared to its leverage as of the date the investment was made,
and (iv) current pricing and credit metrics for similar
proposed and executed investment transactions. In valuing equity
securities of private companies, we consider valuation
methodologies consistent with industry practice, including
(i) valuation using a valuation model based on original
transaction multiples and the portfolio companys recent
financial performance, (ii) valuation of the securities
based on recent sales in comparable transactions, and
(iii) a review of similar companies that are publicly
traded and the market multiple of their equity securities.
Unrealized appreciation or depreciation on portfolio investments
are recorded as increases or decreases in investments on the
balance sheets and are separately reflected on the statements of
operations in determining net increase or decrease in net assets
resulting from operations.
Duff & Phelps, LLC (Duff &
Phelps), an independent valuation firm, provides third
party valuation consulting services to us, which consist of
certain limited procedures that we identified and requested
Duff & Phelps to perform (hereinafter referred to as
the procedures). We generally request
Duff & Phelps to perform the procedures on each
portfolio company at least once in every calendar year and for
new portfolio companies, at least once in the twelve-month
period subsequent to the initial investment. In certain
instances, we may determine that it is not cost-effective, and
as a result is not in our stockholders best interest, to
request Duff & Phelps to perform the procedures on one
or more portfolio companies. Such instances include, but are not
limited to, situations where the fair value of our investment in
the portfolio company is determined to be insignificant relative
to our total investment portfolio.
For the quarter ended March 31, 2007, we asked
Duff & Phelps to perform the procedures on investments
in five portfolio companies comprising approximately 26% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of March 31,
2007. For the quarter ended June 30, 2007, we asked
Duff & Phelps to perform the procedures on investments
in five portfolio companies comprising approximately 28% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of June 30,
2007. For the quarter ended September 30, 2007, we asked
Duff & Phelps to perform the procedures on investments
in five portfolio companies comprising approximately 29% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of
September 30, 2007. For the quarter ended December 31,
2007, we asked Duff & Phelps to perform the procedures
on investments in six portfolio companies comprising
approximately 23% of the total investments at fair value
(exclusive of the fair value of new investments made during the
quarter) as of December 31, 2007.
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For the quarter ended March 31, 2008, we asked
Duff & Phelps to perform the procedures on investments
in six portfolio companies comprising approximately 35% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of March 31,
2008. For the quarter ended June 30, 2008, we asked
Duff & Phelps to perform the procedures on investments
in five portfolio companies comprising approximately 18% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of June 30,
2008. For the quarter ended September 30, 2008, we asked
Duff & Phelps to perform the procedures on investments
in eight portfolio companies comprising approximately 29% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of
September 30, 2008. For the quarter ended December 31,
2008, we asked Duff & Phelps to perform the procedures
on investments in eight portfolio companies comprising
approximately 34% of the total investments at fair value
(exclusive of the fair value of new investments made during the
quarter) as of December 31, 2008.
For the quarter ended March 31, 2009, we asked
Duff & Phelps to perform the procedures on investments
in seven portfolio companies comprising approximately 26% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of March 31,
2009. For the quarter ended June 30, 2009, we asked
Duff & Phelps to perform the procedures on investments
in six portfolio companies comprising approximately 20% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of June 30,
2009. For the quarter ended September 30, 2009, we asked
Duff & Phelps to perform the procedures on investments
in seven portfolio companies comprising approximately 24% of the
total investments at fair value (exclusive of the fair value of
new investments made during the quarter) as of
September 30, 2009. For the quarter ended December 31,
2009, we asked Duff & Phelps to perform the procedures
on investments in eight portfolio companies comprising
approximately 40% of the total investments at fair value
(exclusive of the fair value of new investments made during the
quarter) as of December 31, 2009.
Upon completion of the procedures, Duff & Phelps
concluded that the fair value, as determined by the Board of
Directors, of those investments subjected to the procedures did
not appear to be unreasonable. Our Board of Directors is
ultimately and solely responsible for determining the fair value
of our investments in good faith.
Revenue
Recognition
Interest
and Dividend Income
Interest income, adjusted for amortization of premium and
accretion of original issue discount, is recorded on the accrual
basis to the extent that such amounts are expected to be
collected. Generally, when interest
and/or
principal payments on a loan become past due, or if we otherwise
do not expect the borrower to be able to service its debt and
other obligations, we will place the loan on non-accrual status
and will generally cease recognizing interest income on that
loan for financial reporting purposes until all principal and
interest have been brought current through payment or due to a
restructuring such that the interest income is deemed to be
collectible. We write off any previously accrued and uncollected
interest when it is determined that interest is no longer
considered collectible. Dividend income is recorded on the
ex-dividend date.
Fee
Income
Loan origination, facility, commitment, consent and other
advance fees received in connection with the origination of a
loan are recorded as deferred income and recognized as income
over the term of the loan. Loan prepayment penalties and loan
amendment fees are recorded into income when received. Any
previously deferred fees are immediately recorded into income
upon prepayment of the related loan.
Payment
in Kind Interest (PIK)
We currently hold, and we expect to hold in the future, some
loans in our portfolio that contain a PIK interest provision.
The PIK interest, computed at the contractual rate specified in
each loan agreement, is
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added to the principal balance of the loan, rather than being
paid to us in cash, and is recorded as interest income. Thus,
the actual collection of PIK interest may be deferred until the
time of debt principal repayment.
To maintain our status as a RIC, this non-cash source of income
must be paid out to stockholders in the form of dividends, even
though we have not yet collected the cash. Generally, when
current cash interest
and/or
principal payments on a loan become past due, or if we otherwise
do not expect the borrower to be able to service its debt and
other obligations, we will place the loan on non-accrual status
and will generally cease recognizing PIK interest income on that
loan for financial reporting purposes until all principal and
interest has been brought current through payment or due to a
restructuring such that the interest income is deemed to be
collectible. We write off any previously accrued and uncollected
PIK interest when it is determined that the PIK interest is no
longer collectible.
Recently
Issued Accounting Standards
In June 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
EITF 03-06-1,
Determining Whether Instruments Granted in Share-based
Payment Transactions are Participating Securities,
which was subsequently incorporated into ASC Topic
260 Earnings Per Share. The June 2008
guidance requires companies to include unvested share-based
payment awards that contain non-forfeitable rights to dividends
in the computation of earnings per share pursuant to the
two-class method. In effect, this standard requires companies to
report basic and diluted earnings per share in two broad
categories. First, companies must report basic and diluted
earnings per share associated with the unvested share-based
payments with non-forfeitable dividend rights. Second, companies
must report separately basic and diluted earnings per share for
their remaining common stock. This standard was effective for
financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years.
We adopted this standard beginning with our financial statements
for the quarter ended March 31, 2009. As required, we
applied this standard retroactively to all reported periods. Our
adoption of this standard did not have a material impact on our
financial position or results of operations.
In May 2009, the FASB issued Statement of Financial Accounting
Standards No. 165, Subsequent Events, which was
later codified as FASB ASC Topic 855, Subsequent Events
(ASC Topic 855). ASC Topic 855 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 Topic
855 is effective for interim periods or fiscal years ending
after June 15, 2009. Our adoption of ASC Topic 855 did not
have a material effect on our financial position or results of
operations.
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 (SFAS 168). The Codification
will become the source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS 168, the
Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will
become non-authoritative. SFAS 168 is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. The adoption of
SFAS 168 only impacted our disclosures regarding
Codification references.
Off-Balance
Sheet Arrangements
We currently have no off-balance sheet arrangements.
Quantitative
and Qualitative Disclosure About Market Risk
Beginning in late 2007, the United States entered a recession,
which many believe could be prolonged. As the economy continued
to deteriorate in 2008, spending by both consumers and
businesses declined significantly, which has impacted the
broader financial and credit markets and has reduced the
availability of debt and equity capital for the market as a
whole and financial firms in particular. This reduction in
spending
66
has had an adverse effect on a number of the industries in which
some of our portfolio companies operate, and on certain of our
portfolio companies as well.
During 2009, we experienced write-downs in our portfolio,
several of which were due to decline in the performance of those
portfolio companies. As of December 31, 2009, the fair
value of our non-accrual assets was approximately
$7.0 million, which comprised approximately 3.5% of the
total fair value of our portfolio, and the cost of our
non-accrual assets was approximately $16.9 million, or 8.0%
of the total cost of our portfolio. In addition to these
non-accrual assets, as of December 31, 2009, we had, on a
fair value basis, approximately $18.0 million of debt
investments, or 8.9% of the total fair value of our portfolio,
which were current with respect to scheduled principal and
interest payments, but which were carried at less than cost. The
cost of these assets as of December 31, 2009 was
approximately $21.8 million, or 10.4% of the total cost of
our portfolio.
Notwithstanding recent gains across both the equity and debt
markets, these conditions may continue for a prolonged period of
time or worsen in the future. In the event that the current
recession continues for a significant time or the economy
deteriorates further, the financial position and results of
operations of certain of the middle-market companies in our
portfolio could be further affected adversely, which ultimately
could lead to difficulty in our portfolio companies meeting debt
service requirements and an increase in defaults. There can be
no assurance that the performance of our portfolio companies
will not be further impacted by economic conditions, which could
have a negative impact on our future results.
In addition, we are subject to interest rate risk. Interest rate
risk is defined as the sensitivity of our current and future
earnings to interest rate volatility, variability of spread
relationships, the difference in re-pricing intervals between
our assets and liabilities and the effect that interest rates
may have on our cash flows. Changes in the general level of
interest rates can affect our net interest income, which is the
difference between the interest income earned on interest
earning assets and our interest expense incurred in connection
with our interest bearing debt and liabilities. Changes in
interest rates can also affect, among other things, our ability
to acquire and originate loans and securities and the value of
our investment portfolio. Our investment income is affected by
fluctuations in various interest rates, including LIBOR and
prime rates. We regularly measure exposure to interest rate risk
and determine whether or not any hedging transactions are
necessary to mitigate exposure to changes in interest rates. As
of December 31, 2009, we were not a party to any hedging
arrangements.
As of December 31, 2009, approximately 92.1%, or
$175.5 million of our debt portfolio investments bore
interest at fixed rates and approximately 7.9%, or
$15.1 million of our debt portfolio investments bore
interest at variable rates. A 200 basis point decrease in
the interest rates on our variable-rate debt investments would
decrease our investment income by approximately
$0.3 million on an annual basis. All of our pooled
SBA-guaranteed debentures bear interest at fixed rates.
Because we currently borrow, and plan to borrow in the future,
money to make investments, our net investment income is
dependent upon the difference between the rate at which we
borrow funds and the rate at which we invest the funds borrowed.
Accordingly, there can be no assurance that a significant change
in market interest rates will not have a material adverse effect
on our net investment income. In periods of rising interest
rates, our cost of funds would increase, which could reduce our
net investment income if there is not a corresponding increase
in interest income generated by our investment portfolio.
Related
Party Transactions
Effective concurrently with the closing of the IPO, TML, the
general partner of the Fund, merged into a wholly-owned
subsidiary of Triangle Capital Corporation. A substantial
majority of the ownership interests of TML at that time were
owned by our Chief Executive Officer, Chief Financial Officer,
Chief Investment Officer and two of our Managing Directors. As a
result of such merger, these five individuals collectively
received shares of our common stock valued at approximately
$6.7 million.
Three members of our management, including our Chief Executive
Officer, collectively own approximately 67% of Triangle Capital
Partners, LLC. As of December 31, 2009, Triangle Capital
Partners, LLC does
67
not own any shares of Triangle Capital Corporations common
stock. Prior to the closing of the IPO, Triangle Capital
Partners, LLC provided management and advisory services to the
Fund pursuant to a management services agreement dated as of
February 3, 2003. Under the terms of this management
services agreement, Triangle Capital Partners, LLC received
approximately $0.2 million in management fees from the Fund
during the year ended December 31, 2007. This agreement
terminated upon the closing of the IPO.
Contractual
Obligations
As of December 31, 2009, our future fixed commitments for
cash payments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 to
|
|
|
2013 to
|
|
|
2015 and
|
|
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
Thereafter
|
|
|
SBA guaranteed debentures payable
|
|
$
|
121,910,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,700,000
|
|
|
$
|
113,210,000
|
|
Interest due on SBA guaranteed debentures payable
|
|
|
56,159,580
|
|
|
|
6,977,249
|
|
|
|
13,901,655
|
|
|
|
13,882,638
|
|
|
|
21,398,038
|
|
Unused commitments to extend credit(1)
|
|
|
4,295,612
|
|
|
|
4,295,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease payments(2)
|
|
|
1,165,113
|
|
|
|
281,409
|
|
|
|
582,336
|
|
|
|
301,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,530,305
|
|
|
$
|
11,554,270
|
|
|
$
|
14,483,991
|
|
|
$
|
22,884,006
|
|
|
$
|
134,608,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have a commitment to extend credit, in the form of loans and
additional equity contributions, to two of our portfolio
companies which are undrawn as of December 31, 2009. Since
this commitment may expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements, however we have chosen to present the amount of
this unused commitment as an obligation in this table. |
|
(2) |
|
We lease our corporate office facility under an operating lease
that terminates on December 31, 2013. We believe that our
existing facilities will be adequate to meet our needs at least
through 2010, and that we will be able to obtain additional
space when, where and as needed on acceptable terms. |
Recent
Developments
On February 4, 2010, our Board of Directors granted 142,499
restricted shares of our common stock to certain employees.
These restricted shares had a total grant date fair value of
approximately $1.7 million, which will be expensed on a
straight-line basis over each respective awards vesting
period.
On February 24, 2010, we invested $10.5 million in
subordinated debt and warrants of Botanical Labs, a manufacturer
of natural health supplements. Under the terms of the
investment, Botanical Labs will pay interest on the subordinated
debt at a rate of 14% per annum.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
See the section entitled Quantitative and Qualitative
Disclosure About Market Risk included in
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 7 of Part II of this Annual Report and
incorporated by reference herein.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
See our Financial Statements included herein and listed in
Item 15(a) of this Annual Report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
Not applicable.
68
|
|
Item 9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Our Chief Executive Officer and
Chief Financial Officer carried out an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by
this report. Based on the evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective. It should be noted that any system of
controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of
the system are met. In addition, the design of any control
system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent
limitations of control systems, there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
Managements
Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of our financial statements for external reporting
purposes in accordance with U.S. generally accepted
accounting principles (GAAP). Internal control over
financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements. Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Management (with the participation of our Chief Executive
Officer and Chief Financial Officer) conducted an evaluation of
the effectiveness of our internal control over financial
reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that
our internal control over financial reporting was effective as
of December 31, 2009.
Our internal control over financial reporting as of
December 31, 2009 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included in Item 15 of Part
of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the fourth quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
69
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
We have adopted a code of ethics for Triangle Capital
Corporation and Triangle Mezzanine Fund LLLP (which we call
our Code of Conduct), which every director, officer
and employee is expected to observe. The Code of Conduct for
Triangle Capital Corporation and Triangle Mezzanine
Fund LLLP is publicly available on our website under
Corporate Governance at the following URL:
http://ir.tcap.com/governance.cfm
and is referenced in this Annual Report as Exhibit 14.1.
We will provide any person, without charge, upon request, a copy
of our Code of Conduct. To receive a copy, please provide a
written request to: Triangle Capital Corporation; Attn: Chief
Compliance Officer, 3700 Glenwood Avenue, Suite 530;
Raleigh, North Carolina; 27612.
Except as set forth above, the information required by this Item
with respect to our directors, executive officers and corporate
governance matters is contained in our definitive Proxy
Statement for our 2010 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Exchange Act and is incorporated
in this Annual Report by reference in response to this Item. Our
Proxy Statement will be filed with the Commission within
120 days after the date of our fiscal year-end, which was
December 31, 2009.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item with respect to
compensation of executive officers and directors is contained in
our definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Exchange
Act and is incorporated in this Annual Report by reference in
response to this Item. Our Proxy Statement will be filed with
the Commission within 120 days after the date of our fiscal
year-end, which was December 31, 2009.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item with respect to security
ownership of certain beneficial owners and management and equity
compensation plans is contained in our definitive Proxy
Statement for our 2010 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Exchange Act and is incorporated
in this Annual Report by reference in response to this Item. Our
Proxy Statement will be filed with the Commission within
120 days after the date of our fiscal year-end, which was
December 31, 2009.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item with respect to certain
relationships and related transactions and director independence
is contained in our definitive Proxy Statement for our 2010
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under
the Exchange Act and is incorporated in this Annual Report by
reference in response to this Item. Our Proxy Statement will be
filed with the Commission within 120 days after the date of
our fiscal year-end, which was December 31, 2009.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The information required by this Item with respect to principal
accountant fees and services is contained in our definitive
Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Exchange Act and is incorporated
in this Annual Report by reference in response to this Item. Our
Proxy Statement will be filed with the Commission within
120 days after the date of our fiscal year-end, which was
December 31, 2009.
70
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)
|
The
following documents are filed as part of this Report:
|
(1) Financial Statements
Triangle Capital Corporation Financial Statements:
|
|
|
|
|
|
|
Page
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
F-1
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
|
|
F-3
|
|
Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007
|
|
|
F-4
|
|
Consolidated Statements of Changes in Net Assets for the years
ended December 31, 2009, 2008 and 2007
|
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
|
|
|
F-6
|
|
Consolidated Schedule of Investments as of December 31, 2009
|
|
|
F-7
|
|
Consolidated Schedule of Investments as of December 31, 2008
|
|
|
F-13
|
|
Notes to Financial Statements
|
|
|
F-17
|
|
(2) Financial Statement Schedules
None.
Schedules that are not listed herein have been omitted because
they are not applicable or the information required to be set
forth therein is included in the Financial Statements or notes
thereto.
(3) List of Exhibits
The exhibits required by Item 601 of
Regulation S-K,
except as otherwise noted, have been filed with previous reports
by the registrant and are herein incorporated by reference.
|
|
|
|
|
Number
|
|
Exhibit
|
|
|
3
|
.1
|
|
Articles of Amendment and Restatement of the Registrant (Filed
as Exhibit (a)(3) to the Registrants Registration
Statement on
Form N-2/N-5
(File
No. 333-138418)
filed with the Securities and Exchange Commission on
December 29, 2006 and incorporated herein by reference).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of the Registrant (Filed as
Exhibit 3.4 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the
Securities and Exchange Commission on February 25, 2009 and
incorporated herein by reference).
|
|
3
|
.3
|
|
Certificate of Limited Partnership of Triangle Mezzanine
Fund LLLP (Filed as Exhibit (a)(4) to the Registrants
Registration Statement on
Form N-2/N-5
(File
No. 333-138418)
filed with the Securities and Exchange Commission on
February 13, 2007 and incorporated herein by reference).
|
|
3
|
.4
|
|
Second Amended and Restated Agreement of Limited Partnership of
Triangle Mezzanine Fund LLLP (Filed as Exhibit 3.4 to
the Registrants Quarterly Report on
Form 10-Q
filed with the Securities and Exchange Commission on
November 11, 2007 and incorporated herein by reference).
|
|
4
|
.1
|
|
Form of Common Stock Certificate (Filed as Exhibit (d) to
the Registrants Registration Statement on
Form N-2/N-5
(File
No. 333-138418)
filed with the Securities and Exchange Commission on
February 15, 2007 and incorporated herein by reference).
|
|
4
|
.2
|
|
Triangle Capital Corporation Dividend Reinvestment Plan (Filed
as Exhibit 4.2 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the
Securities and Exchange Commission on March 12, 2008 and
incorporated herein by reference).
|
|
4
|
.3
|
|
Agreement to Furnish Certain Instruments (Filed as
Exhibit 4.19 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the
Securities and Exchange Commission on February 25, 2009 and
incorporated herein by reference).
|
71
|
|
|
|
|
Number
|
|
Exhibit
|
|
|
10
|
.1
|
|
Triangle Capital Corporation Amended and Restated 2007 Equity
Incentive Plan (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on May 9,
2008 and incorporated herein by reference).
|
|
10
|
.2
|
|
Form of Triangle Capital Corporation Non-employee Director
Restricted Share Award Agreement (Filed as Exhibit 10.2 to
the Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on May 9,
2008 and incorporated herein by reference).
|
|
10
|
.3
|
|
Form of Triangle Capital Corporation Executive Officer
Restricted Share Award Agreement (Filed as Exhibit 10.3 to
the Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on May 9,
2008 and incorporated herein by reference).
|
|
10
|
.4
|
|
Custodian Agreement between the Registrant and U.S. Bank
National Association (Filed as Exhibit 10.7 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2006 filed with the
Securities and Exchange Commission on March 29, 2007 and
incorporated herein by reference).
|
|
10
|
.5
|
|
Amendment to Custody Agreement between the Registrant and U.S.
Bank National Association dated February 5, 2008 (Filed as
Exhibit 10.9 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the
Securities and Exchange Commission on March 12, 2008 and
incorporated herein by reference).
|
|
10
|
.6
|
|
Stock Transfer Agency Agreement between Triangle Capital
Corporation and The Bank of New York (Filed as
Exhibit 10.11 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the
Securities and Exchange Commission on March 12, 2008 and
incorporated herein by reference).
|
|
10
|
.7
|
|
Office Lease Agreement between 3700 Glenwood LLC and Triangle
Capital Corporation dated March 27, 2008 (Filed as Exhibit
(k)(6) to the Registrants Registration Statement on
Form N-2
(File
No. 333-151930)
filed with the Securities and Exchange Commission on
August 13, 2008 and incorporated herein by reference).
|
|
14
|
.1
|
|
Code of Conduct (Filed as Exhibit 14.1 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the
Securities and Exchange Commission on February 25, 2009 and
incorporated herein by reference).
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP.
|
|
31
|
.1
|
|
Chief Executive Officer Certification Pursuant to
Rule 13a-14
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Chief Financial Officer Certification Pursuant to
Rule 13a-14
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Chief Executive Officer Certification pursuant to
Section 1350, Chapter 63 of Title 18, United
States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Chief Financial Officer Certification pursuant to
Section 1350, Chapter 63 of Title 18, United
States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
See Item 15(a)(3) above.
|
|
(c)
|
Financial
Statement Schedules
|
See Item 15(a)(2) above.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 15, 2010
TRIANGLE CAPITAL CORPORATION
|
|
|
|
By:
|
/s/ Garland
S. Tucker, III
|
Name: Garland S. Tucker, III
|
|
|
|
Title:
|
President, Chief Executive Officer and Chairman of the Board of
|
Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Garland
S. Tucker, III
Garland
S. Tucker, III
|
|
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Steven
C. Lilly
Steven
C. Lilly
|
|
Chief Financial Officer, Treasurer, Secretary and Director
(Principal Financial Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ C.
Robert Knox, Jr.
C.
Robert Knox, Jr.
|
|
Controller (Principal Accounting Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Brent
P. W. Burgess
Brent
P. W. Burgess
|
|
Chief Investment Officer and Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ W.
McComb Dunwoody
W.
McComb Dunwoody
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Mark
M. Gambill
Mark
M. Gambill
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Benjamin
S. Goldstein
Benjamin
S. Goldstein
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Simon
B. Rich, Jr.
Simon
B. Rich, Jr.
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ Sherwood
H. Smith, Jr.
Sherwood
H. Smith, Jr.
|
|
Director
|
|
March 15, 2010
|
73
Triangle
Capital Corporation
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-13
|
|
|
|
|
F-17
|
|
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Triangle Capital Corporation
We have audited the accompanying consolidated balance sheets of
Triangle Capital Corporation (the Company), including the
consolidated schedules of investments, as of December 31,
2009 and 2008, and the related consolidated statements of
operations, changes in net assets, and cash flows, and the
consolidated financial highlights for each of the three years in
the period ended December 31, 2009. We have also audited
the accompanying combined financial highlights for each of the
two years in the period ended December 31, 2006. These
financial statements and financial highlights are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements and
financial highlights. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2009 and 2008 by
correspondence with the custodian. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the consolidated financial position of Triangle
Capital Corporation at December 31, 2009 and 2008, the
consolidated results of its operations, changes in net assets,
and its cash flows, and the consolidated financial highlights
for each of the three years in the period ended
December 31, 2009, and the combined financial highlights
for each of the two years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Triangle Capital Corporations internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 10, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 10, 2010
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Triangle Capital Corporation
We have audited Triangle Capital Corporations internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Triangle Capital Corporations management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Triangle Capital Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Triangle Capital Corporation (the
Company), including the consolidated schedules of investments,
as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in net assets,
and cash flows, and the consolidated financial highlights for
each of the three years in the period ended December 31,
2009. We have also audited the accompanying combined financial
highlights for each of the two years in the period ended
December 31, 2006 and our report dated March 10, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 10, 2010
F-2
Triangle
Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Non Control / Non Affiliate investments
(cost of $143,239,223 and $138,413,589 at December 31, 2009
and 2008, respectively)
|
|
$
|
138,281,894
|
|
|
$
|
135,712,877
|
|
Affiliate investments (cost of $47,934,280 and $30,484,491 at
December 31, 2009 and 2008, respectively)
|
|
|
45,735,905
|
|
|
|
33,894,556
|
|
Control investments (cost of $18,767,587 and $11,253,458 at
December 31, 2009 and 2008, respectively)
|
|
|
17,300,171
|
|
|
|
12,497,858
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
|
201,317,970
|
|
|
|
182,105,291
|
|
Cash and cash equivalents
|
|
|
55,200,421
|
|
|
|
27,193,287
|
|
Interest and fees receivable
|
|
|
676,961
|
|
|
|
679,828
|
|
Prepaid expenses and other current assets
|
|
|
286,790
|
|
|
|
95,325
|
|
Deferred financing fees
|
|
|
3,540,492
|
|
|
|
3,545,410
|
|
Property and equipment, net
|
|
|
28,666
|
|
|
|
48,020
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
261,051,300
|
|
|
$
|
213,667,161
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND NET ASSETS
|
Accounts payable and accrued liabilities
|
|
$
|
2,222,177
|
|
|
$
|
1,608,909
|
|
Interest payable
|
|
|
2,333,952
|
|
|
|
1,881,761
|
|
Dividends payable
|
|
|
4,774,534
|
|
|
|
2,766,945
|
|
Taxes payable
|
|
|
59,178
|
|
|
|
30,436
|
|
Deferred revenue
|
|
|
75,000
|
|
|
|
|
|
Deferred income taxes
|
|
|
577,267
|
|
|
|
843,947
|
|
SBA guaranteed debentures payable
|
|
|
121,910,000
|
|
|
|
115,110,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
131,952,108
|
|
|
|
122,241,998
|
|
Net assets:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share
(150,000,000 shares authorized, 11,702,511 and
6,917,363 shares issued and outstanding as of
December 31, 2009 and 2008, respectively)
|
|
|
11,703
|
|
|
|
6,917
|
|
Additional
paid-in-capital
|
|
|
136,769,259
|
|
|
|
87,836,786
|
|
Investment income in excess of distributions
|
|
|
1,070,452
|
|
|
|
2,115,157
|
|
Accumulated realized gains on investments
|
|
|
448,164
|
|
|
|
356,495
|
|
Net unrealized appreciation (depreciation) of investments
|
|
|
(9,200,386
|
)
|
|
|
1,109,808
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
129,099,192
|
|
|
|
91,425,163
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
261,051,300
|
|
|
$
|
213,667,161
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
$
|
11.03
|
|
|
$
|
13.22
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
Triangle
Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest, fee and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non - Control / Non - Affiliate investments
|
|
$
|
16,489,943
|
|
|
$
|
12,381,411
|
|
|
$
|
6,258,670
|
|
Affiliate investments
|
|
|
4,441,399
|
|
|
|
3,478,644
|
|
|
|
1,808,664
|
|
Control investments
|
|
|
1,142,764
|
|
|
|
1,434,687
|
|
|
|
1,323,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan interest, fee and dividend income
|
|
|
22,074,106
|
|
|
|
17,294,742
|
|
|
|
9,391,210
|
|
Paid - in - kind interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non - Control / Non - Affiliate investments
|
|
|
3,114,325
|
|
|
|
2,657,281
|
|
|
|
871,184
|
|
Affiliate investments
|
|
|
1,539,776
|
|
|
|
665,817
|
|
|
|
225,622
|
|
Control investments
|
|
|
420,718
|
|
|
|
438,688
|
|
|
|
424,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid - in - kind interest income
|
|
|
5,074,819
|
|
|
|
3,761,786
|
|
|
|
1,521,114
|
|
Interest income from cash and cash equivalent investments
|
|
|
613,057
|
|
|
|
302,970
|
|
|
|
1,823,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
27,761,982
|
|
|
|
21,359,498
|
|
|
|
12,735,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,900,591
|
|
|
|
4,227,851
|
|
|
|
2,073,311
|
|
Amortization of deferred financing fees
|
|
|
363,818
|
|
|
|
255,273
|
|
|
|
112,660
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
|
232,423
|
|
General and administrative expenses
|
|
|
6,448,999
|
|
|
|
6,254,096
|
|
|
|
3,894,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
13,713,408
|
|
|
|
10,737,220
|
|
|
|
6,312,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
14,048,574
|
|
|
|
10,622,278
|
|
|
|
6,423,209
|
|
Net realized gain (loss) on investments Non
Control / Non -Affiliate
|
|
|
448,164
|
|
|
|
(1,393,139
|
)
|
|
|
(759,634
|
)
|
Net realized gain on investment Affiliate
|
|
|
|
|
|
|
|
|
|
|
141,014
|
|
Net realized gain on investment Control
|
|
|
|
|
|
|
2,828,747
|
|
|
|
|
|
Net unrealized appreciation (depreciation) of investments
|
|
|
(10,310,194
|
)
|
|
|
(4,286,375
|
)
|
|
|
3,061,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on investments before income taxes
|
|
|
(9,862,030
|
)
|
|
|
(2,850,767
|
)
|
|
|
2,442,487
|
|
Provision for taxes
|
|
|
149,841
|
|
|
|
133,010
|
|
|
|
52,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
4,036,703
|
|
|
$
|
7,638,501
|
|
|
$
|
8,813,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share basic and diluted
|
|
$
|
1.63
|
|
|
$
|
1.54
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations per
share basic and diluted
|
|
$
|
0.47
|
|
|
$
|
1.11
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
1.62
|
|
|
$
|
1.44
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital gains distributions declared per common share
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
8,593,143
|
|
|
|
6,877,669
|
|
|
|
6,728,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Triangle
Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
|
|
|
General
|
|
|
Limited
|
|
|
Contribution
|
|
|
Common Stock
|
|
|
Additional
|
|
|
in Excess of
|
|
|
Gains
|
|
|
Appreciation
|
|
|
Total
|
|
|
|
Partners
|
|
|
Partners
|
|
|
Commitment
|
|
|
Number
|
|
|
Par
|
|
|
Paid In
|
|
|
(Less Than)
|
|
|
(Losses) on
|
|
|
(Depreciation) of
|
|
|
Net
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Receivable
|
|
|
of Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Distributions
|
|
|
Investments
|
|
|
Investments
|
|
|
Assets
|
|
|
Balance, January 1, 2007
|
|
$
|
100
|
|
|
$
|
21,250,000
|
|
|
$
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
1,500
|
|
|
$
|
1,570,135
|
|
|
$
|
|
|
|
$
|
2,335,076
|
|
|
$
|
25,156,811
|
|
Public offering of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,770,000
|
|
|
|
4,770
|
|
|
|
64,723,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,728,037
|
|
Formation transactions
|
|
|
(100
|
)
|
|
|
(21,250,000
|
)
|
|
|
|
|
|
|
1,916,660
|
|
|
|
1,917
|
|
|
|
21,248,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,423,209
|
|
|
|
|
|
|
|
|
|
|
|
6,423,209
|
|
Realized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(618,620
|
)
|
|
|
1,111,306
|
|
|
|
492,686
|
|
Net unrealized gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,949,801
|
|
|
|
1,949,801
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,598
|
)
|
|
|
|
|
|
|
|
|
|
|
(52,598
|
)
|
Return of capital and other tax related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649,856
|
)
|
|
|
649,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,103
|
|
|
|
117
|
|
|
|
1,626,095
|
|
|
|
(6,631,758
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,005,546
|
)
|
Tax distribution to partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220,047
|
)
|
|
|
|
|
|
|
|
|
|
|
(220,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
6,803,863
|
|
|
$
|
6,804
|
|
|
$
|
86,949,189
|
|
|
$
|
1,738,797
|
|
|
$
|
(618,620
|
)
|
|
$
|
5,396,183
|
|
|
$
|
93,472,353
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,622,278
|
|
|
|
|
|
|
|
|
|
|
|
10,622,278
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,311
|
|
Realized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,435,608
|
|
|
|
(1,269,437
|
)
|
|
|
166,171
|
|
Net unrealized losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,016,938
|
)
|
|
|
(3,016,938
|
)
|
Provision for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,010
|
)
|
|
|
|
|
|
|
|
|
|
|
(133,010
|
)
|
Return of capital and other tax related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612,399
|
|
|
|
(151,906
|
)
|
|
|
(460,493
|
)
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,961,002
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,961,002
|
)
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,500
|
|
|
|
113
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
6,917,363
|
|
|
$
|
6,917
|
|
|
$
|
87,836,786
|
|
|
$
|
2,115,157
|
|
|
$
|
356,495
|
|
|
$
|
1,109,808
|
|
|
$
|
91,425,163
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,048,574
|
|
|
|
|
|
|
|
|
|
|
|
14,048,574
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701,601
|
|
Realized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448,164
|
|
|
|
(157,316
|
)
|
|
|
290,848
|
|
Net unrealized losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,152,878
|
)
|
|
|
(10,152,878
|
)
|
Provision for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,841
|
)
|
|
|
|
|
|
|
|
|
|
|
(149,841
|
)
|
Return of capital and other tax related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,996
|
)
|
|
|
34,125
|
|
|
|
(4,129
|
)
|
|
|
|
|
|
|
|
|
Dividends/distributions declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,569
|
|
|
|
81
|
|
|
|
999,791
|
|
|
|
(14,977,563
|
)
|
|
|
(352,366
|
)
|
|
|
|
|
|
|
(14,330,057
|
)
|
Public offerings of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,569,000
|
|
|
|
4,569
|
|
|
|
47,328,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,332,682
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,812
|
|
|
|
145
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock withheld for payroll taxes upon vesting of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,533
|
)
|
|
|
(6
|
)
|
|
|
(66,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,900
|
)
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,700
|
)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
11,702,511
|
|
|
$
|
11,703
|
|
|
$
|
136,769,259
|
|
|
$
|
1,070,452
|
|
|
$
|
448,164
|
|
|
$
|
(9,200,386
|
)
|
|
$
|
129,099,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Triangle
Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
4,036,703
|
|
|
$
|
7,638,501
|
|
|
$
|
8,813,098
|
|
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of portfolio investments
|
|
|
(48,475,570
|
)
|
|
|
(93,054,022
|
)
|
|
|
(64,159,172
|
)
|
Repayments received/sales of portfolio investments
|
|
|
21,431,698
|
|
|
|
20,968,397
|
|
|
|
10,470,803
|
|
Loan origination and other fees received
|
|
|
952,500
|
|
|
|
1,686,996
|
|
|
|
1,272,002
|
|
Net realized (gain) loss on investments
|
|
|
(448,164
|
)
|
|
|
(1,435,608
|
)
|
|
|
618,620
|
|
Net unrealized (appreciation) depreciation on investments
|
|
|
10,576,873
|
|
|
|
3,516,855
|
|
|
|
(4,821,366
|
)
|
Deferred income taxes
|
|
|
(266,680
|
)
|
|
|
769,519
|
|
|
|
1,760,259
|
|
Paid - in - kind interest accrued, net of payments received
|
|
|
(2,165,015
|
)
|
|
|
(1,783,288
|
)
|
|
|
(1,280,950
|
)
|
Amortization of deferred financing fees
|
|
|
363,818
|
|
|
|
255,273
|
|
|
|
112,660
|
|
Recognition of loan origination and other fees
|
|
|
(663,506
|
)
|
|
|
(515,289
|
)
|
|
|
(677,615
|
)
|
Accretion of loan discounts
|
|
|
(421,495
|
)
|
|
|
(169,548
|
)
|
|
|
(205,725
|
)
|
Depreciation
|
|
|
22,548
|
|
|
|
16,681
|
|
|
|
7,814
|
|
Stock-based compensation
|
|
|
701,601
|
|
|
|
275,311
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees receivable
|
|
|
2,867
|
|
|
|
(374,669
|
)
|
|
|
(170,340
|
)
|
Prepaid expenses and other current assets
|
|
|
(191,465
|
)
|
|
|
(47,848
|
)
|
|
|
(47,477
|
)
|
Accounts payable and accrued liabilities
|
|
|
688,268
|
|
|
|
464,687
|
|
|
|
349,239
|
|
Interest payable
|
|
|
452,191
|
|
|
|
1,183,026
|
|
|
|
92,439
|
|
Taxes payable
|
|
|
28,742
|
|
|
|
(22,162
|
)
|
|
|
52,598
|
|
Payable to Triangle Capital Partners, LLC
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,374,086
|
)
|
|
|
(60,627,188
|
)
|
|
|
(47,843,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,194
|
)
|
|
|
(30,535
|
)
|
|
|
(41,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,194
|
)
|
|
|
(30,535
|
)
|
|
|
(41,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under SBA guaranteed debentures payable
|
|
|
6,800,000
|
|
|
|
78,100,000
|
|
|
|
5,210,000
|
|
Financing fees paid
|
|
|
(358,900
|
)
|
|
|
(2,801,524
|
)
|
|
|
(126,342
|
)
|
Proceeds from public offerings, net of expenses
|
|
|
47,332,682
|
|
|
|
|
|
|
|
64,728,037
|
|
Change in deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
1,020,646
|
|
Common stock withheld for payroll taxes upon vesting of
restricted stock
|
|
|
(66,900
|
)
|
|
|
|
|
|
|
|
|
Cash dividends/distributions paid
|
|
|
(12,322,468
|
)
|
|
|
(9,235,216
|
)
|
|
|
(2,964,387
|
)
|
Distribution to partners
|
|
|
|
|
|
|
|
|
|
|
(751,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
41,384,414
|
|
|
|
66,063,260
|
|
|
|
67,116,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
28,007,134
|
|
|
|
5,405,537
|
|
|
|
19,231,248
|
|
Cash and cash equivalents, beginning of year
|
|
|
27,193,287
|
|
|
|
21,787,750
|
|
|
|
2,556,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
55,200,421
|
|
|
$
|
27,193,287
|
|
|
$
|
21,787,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,448,400
|
|
|
$
|
3,044,825
|
|
|
$
|
1,980,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of non-cash financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid
|
|
$
|
4,774,534
|
|
|
$
|
2,766,945
|
|
|
$
|
2,041,159
|
|
See accompanying notes.
F-6
TRIANGLE
CAPITAL CORPORATION
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
Principal
|
|
|
|
|
|
Fair
|
|
Portfolio Company
|
|
Industry
|
|
Investment(1)(2)
|
|
Amount
|
|
|
Cost
|
|
|
Value(3)
|
|
|
Non - Control / Non - Affiliate Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambient Air Corporation (AA) and Peaden-Hobbs
Mechanical, LLC (PHM) (5%)*
|
|
Specialty Trade
Contractors
|
|
Subordinated Note-AA
(12% Cash,
2% PIK, Due 03/11)
|
|
$
|
3,236,386
|
|
|
$
|
3,173,098
|
|
|
$
|
3,173,098
|
|
|
|
|
|
Subordinated Note-AA
(14% Cash,
4% PIK, Due 03/11)
|
|
|
1,982,791
|
|
|
|
1,965,757
|
|
|
|
1,965,757
|
|
|
|
|
|
Common Stock-PHM
(128,571 shares)
|
|
|
|
|
|
|
128,571
|
|
|
|
106,900
|
|
|
|
|
|
Common Stock
Warrants-AA
(455 shares)
|
|
|
|
|
|
|
142,361
|
|
|
|
656,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,219,177
|
|
|
|
5,409,787
|
|
|
|
5,902,455
|
|
American De-Rosa Lamparts, LLC and Hallmark Lighting (3%)*
|
|
Wholesale and
Distribution
|
|
Subordinated Note
(11.5% Cash,
3.75% PIK, Due 10/13)
|
|
|
8,861,819
|
|
|
|
8,244,709
|
|
|
|
3,893,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,861,819
|
|
|
|
8,244,709
|
|
|
|
3,893,299
|
|
American Direct Marketing Resources, LLC (3%)*
|
|
Direct Marketing
Services
|
|
Subordinated Note
(12% Cash, 3% PIK,
Due 03/15)
|
|
|
4,157,458
|
|
|
|
4,088,475
|
|
|
|
4,088,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,157,458
|
|
|
|
4,088,475
|
|
|
|
4,088,475
|
|
Art Headquarters, LLC (2%)*
|
|
Retail, Wholesale
and Distribution
|
|
Subordinated Note
(12% Cash,
2% PIK, Due 01/10)
|
|
|
2,116,822
|
|
|
|
2,116,822
|
|
|
|
2,116,822
|
|
|
|
|
|
Membership unit
warrants (15% of units
(150 units))
|
|
|
|
|
|
|
40,800
|
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,116,822
|
|
|
|
2,157,622
|
|
|
|
2,336,822
|
|
Assurance Operations Corporation (2%)*
|
|
Auto Components /
Metal Fabrication
|
|
Senior Note
(6% Cash, Due 06/11)
|
|
|
2,484,000
|
|
|
|
2,034,000
|
|
|
|
2,034,000
|
|
|
|
|
|
Common Stock
(300 shares)
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,484,000
|
|
|
|
2,334,000
|
|
|
|
2,034,000
|
|
CRS Reprocessing, LLC (2%)*
|
|
Fluid Reprocessing
Services
|
|
Subordinated Note
(12% Cash, 2% PIK,
Due 11/14)
|
|
|
3,005,333
|
|
|
|
2,929,233
|
|
|
|
2,929,233
|
|
|
|
|
|
Common Unit Warrant
(107 Units)
|
|
|
|
|
|
|
23,600
|
|
|
|
23,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,005,333
|
|
|
|
2,952,833
|
|
|
|
2,952,833
|
|
CV Holdings, LLC (9%)*
|
|
Specialty
Healthcare Products
|
|
Subordinated Note
(12% Cash, 4% PIK,
Due 09/13)
|
|
|
11,221,670
|
|
|
|
10,391,652
|
|
|
|
10,391,652
|
|
|
|
Manufacturer
|
|
Royalty rights
|
|
|
|
|
|
|
874,400
|
|
|
|
949,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,221,670
|
|
|
|
11,266,052
|
|
|
|
11,340,952
|
|
F-7
TRIANGLE
CAPITAL CORPORATION
Consolidated
Schedule of Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
Principal
|
|
|
|
|
|
Fair
|
|
Portfolio Company
|
|
Industry
|
|
Investment(1)(2)
|
|
Amount
|
|
|
Cost
|
|
|
Value(3)
|
|
|
Electronic Systems Protection, Inc. (3%)*
|
|
Power Protection
Systems
|
|
Subordinated Note
(12% Cash, 2% PIK,
Due 12/15)
|
|
$
|
3,120,913
|
|
|
$
|
3,096,783
|
|
|
$
|
2,869,000
|
|
|
|
Manufacturing
|
|
Senior Note
(8.3% Cash,
Due 01/14)
|
|
|
895,953
|
|
|
|
895,953
|
|
|
|
895,953
|
|
|
|
|
|
Common Stock
(500 shares)
|
|
|
|
|
|
|
285,000
|
|
|
|
31,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,016,866
|
|
|
|
4,277,736
|
|
|
|
3,796,253
|
|
Energy Hardware Holdings, LLC (0%)*
|
|
Machined Parts
Distribution
|
|
Voting Units
(4,833 units)
|
|
|
|
|
|
|
4,833
|
|
|
|
572,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,833
|
|
|
|
572,300
|
|
Fire Sprinkler Systems, Inc. (1%)*
|
|
Specialty Trade
Contractors
|
|
Subordinated Notes
(11%-12.5% PIK,
Due 04/11)
|
|
|
2,765,917
|
|
|
|
2,369,744
|
|
|
|
750,000
|
|
|
|
|
|
Common Stock
(295 shares)
|
|
|
|
|
|
|
294,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,765,917
|
|
|
|
2,664,368
|
|
|
|
750,000
|
|
Frozen Specialties, Inc. (6%)*
|
|
Frozen Foods
Manufacturer
|
|
Subordinated Note
(13% Cash, 5% PIK,
Due 07/14)
|
|
|
7,662,863
|
|
|
|
7,523,924
|
|
|
|
7,523,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,662,863
|
|
|
|
7,523,924
|
|
|
|
7,523,924
|
|
Garden Fresh Restaurant Corp. (3%)*
|
|
Restaurant
|
|
2nd Lien Note
(7.8% Cash,
Due 12/11)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
Membership Units
(5,000 units)
|
|
|
|
|
|
|
500,000
|
|
|
|
811,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
3,500,000
|
|
|
|
3,811,300
|
|
Gerli & Company (1%)*
|
|
Specialty Woven
Fabrics
Manufacturer
|
|
Subordinated Note
(0.69% PIK,
Due 08/11)
|
|
|
3,630,774
|
|
|
|
3,124,893
|
|
|
|
1,442,000
|
|
|
|
|
|
Subordinated Note
(6.25% Cash, 11.75%
PIK, Due 08/11)
|
|
|
122,389
|
|
|
|
120,000
|
|
|
|
120,000
|
|
|
|
|
|
Common Stock Warrants
(56,559 shares)
|
|
|
|
|
|
|
83,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,753,163
|
|
|
|
3,328,307
|
|
|
|
1,562,000
|
|
Grindmaster-Cecilware Corp. (4%)*
|
|
Food Services
Equipment
Manufacturer
|
|
Subordinated Note
(11% Cash, 3% PIK,
Due 03/15)
|
|
|
5,800,791
|
|
|
|
5,689,665
|
|
|
|
5,689,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,800,791
|
|
|
|
5,689,665
|
|
|
|
5,689,665
|
|
Inland Pipe Rehabilitation Holding Company LLC (11%)*
|
|
Cleaning and Repair
Services
|
|
Subordinated Note
(14% Cash, Due 01/14)
|
|
|
8,108,641
|
|
|
|
7,279,341
|
|
|
|
7,279,341
|
|
|
|
|
|
Subordinated Note
(18% Cash,
Due 01/14)
|
|
|
3,750,000
|
|
|
|
3,699,679
|
|
|
|
3,699,679
|
|
|
|
|
|
Membership Interest
Purchase Warrant (2.9)%
|
|
|
|
|
|
|
853,500
|
|
|
|
3,742,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,858,641
|
|
|
|
11,832,520
|
|
|
|
14,721,920
|
|
F-8
TRIANGLE
CAPITAL CORPORATION
Consolidated
Schedule of Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
Principal
|
|
|
|
|
|
Fair
|
|
Portfolio Company
|
|
Industry
|
|
Investment(1)(2)
|
|
Amount
|
|
|
Cost
|
|
|
Value(3)
|
|
|
Jenkins Service, LLC (7%)*
|
|
Restoration Services
|
|
Subordinated Note
(10.25% Cash, 7.25%
PIK, Due 04/14)
|
|
$
|
7,515,221
|
|
|
$
|
7,392,334
|
|
|
$
|
7,392,334
|
|
|
|
|
|
Convertible Note
(10%, Due 04/14)
|
|
|
1,375,000
|
|
|
|
1,342,799
|
|
|
|
1,342,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,890,221
|
|
|
|
8,735,133
|
|
|
|
8,735,133
|
|
Library Systems & Services, LLC (2%)*
|
|
Municipal Business
Services
|
|
Subordinated Note
(12% Cash, Due 03/11)
|
|
|
1,000,000
|
|
|
|
972,768
|
|
|
|
972,768
|
|
|
|
|
|
Common Stock Warrants
(112 shares)
|
|
|
|
|
|
|
58,995
|
|
|
|
1,242,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,031,763
|
|
|
|
2,215,568
|
|
Novolyte Technologies, Inc. (6%)*
|
|
Specialty
Manufacturing
|
|
Subordinated Note
(12% Cash, 5.5% PIK,
Due 04/15)
|
|
|
7,366,289
|
|
|
|
7,230,970
|
|
|
|
7,230,970
|
|
|
|
|
|
Preferred Units
(600 units)
|
|
|
|
|
|
|
600,000
|
|
|
|
545,900
|
|
|
|
|
|
Common Units
(22,960 units)
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,366,289
|
|
|
|
7,980,970
|
|
|
|
7,776,870
|
|
Syrgis Holdings, Inc. (3%)*
|
|
Specialty Chemical
Manufacturer
|
|
Senior Notes
(7.75%-10.75% Cash,
Due 08/12-02/14)
|
|
|
3,337,740
|
|
|
|
3,314,933
|
|
|
|
3,314,933
|
|
|
|
|
|
Common Units
(2,114 units)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
447,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,337,740
|
|
|
|
4,314,933
|
|
|
|
3,762,733
|
|
TBG Anesthesia Management, LLC (6%)*
|
|
Physician
Management Services
|
|
Senior Note
(14% Cash, Due11/14)
|
|
|
8,000,000
|
|
|
|
7,579,320
|
|
|
|
7,579,320
|
|
|
|
|
|
Warrant (263 shares)
|
|
|
|
|
|
|
276,100
|
|
|
|
276,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000,000
|
|
|
|
7,855,420
|
|
|
|
7,855,420
|
|
TrustHouse Services Group, Inc. (4%)*
|
|
Food Management Services
|
|
Subordinated Note
(12% Cash, 2% PIK,
Due 09/15)
|
|
|
4,351,628
|
|
|
|
4,282,621
|
|
|
|
4,282,621
|
|
|
|
|
|
Class A Units
(1,495 units)
|
|
|
|
|
|
|
475,000
|
|
|
|
409,700
|
|
|
|
|
|
Class B Units
(79 units)
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,351,628
|
|
|
|
4,782,621
|
|
|
|
4,692,321
|
|
Tulsa Inspection Resources, Inc. (TIR) and Regent
TIR Partners, LLC (RTIR) (4%)*
|
|
Pipeline Inspection
Services
|
|
Subordinated Note
(14% Cash,
Due 03/14)
|
|
|
5,000,000
|
|
|
|
4,625,242
|
|
|
|
4,625,242
|
|
|
|
|
|
Common Units-
RTIR (11 units)
|
|
|
|
|
|
|
200,000
|
|
|
|
8,000
|
|
|
|
|
|
Common Stock Warrants-
TIR (7 shares)
|
|
|
|
|
|
|
321,000
|
|
|
|
34,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,146,242
|
|
|
|
4,667,942
|
|
Twin-Star International, Inc. (4%)*
|
|
Consumer Home
Furnishings
|
|
Subordinated Note
(12% Cash, 3% PIK,
Due 04/14)
|
|
|
4,500,000
|
|
|
|
4,450,037
|
|
|
|
4,168,000
|
|
|
  |