10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 3, 2010
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33130
Triangle Capital Corporation
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
06-1798488 (I.R.S. Employer Identification No.) |
3700 Glenwood Avenue, Suite 530 Raleigh, North Carolina (Address of principal executive offices) |
27612 (Zip Code) |
Registrants telephone number, including area code: (919) 719-4770
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
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 whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(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 number of shares outstanding of the registrants Common Stock on November 2, 2010 was
14,885,134.
TRIANGLE CAPITAL CORPORATION
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
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EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 | ||||||||
EXHIBIT 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIANGLE CAPITAL CORPORATION
Consolidated Balance Sheets
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Investments at fair value: |
||||||||
NonControl / NonAffiliate investments (cost
of $180,441,851 and $143,239,223 at September 30,
2010 and December 31, 2009, respectively) |
$ | 180,835,768 | $ | 138,281,894 | ||||
Affiliate investments (cost of $46,610,233 and $47,934,280
at September 30, 2010 and December 31, 2009,
respectively) |
35,987,510 | 45,735,905 | ||||||
Control investments (cost of $20,107,190 and $18,767,587
at September 30, 2010 and December 31, 2009,
respectively) |
23,755,121 | 17,300,171 | ||||||
Total investments at fair value |
240,578,399 | 201,317,970 | ||||||
Cash and cash equivalents |
74,087,213 | 55,200,421 | ||||||
Interest and fees receivable |
603,892 | 676,961 | ||||||
Prepaid expenses and other current assets |
240,009 | 286,790 | ||||||
Deferred financing fees |
4,355,344 | 3,540,492 | ||||||
Property and equipment, net |
45,802 | 28,666 | ||||||
Total assets |
$ | 319,910,659 | $ | 261,051,300 | ||||
Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 1,627,793 | $ | 2,222,177 | ||||
Interest payable |
524,319 | 2,333,952 | ||||||
Dividends payable |
| 4,774,534 | ||||||
Taxes payable |
49,573 | 59,178 | ||||||
Deferred revenue |
47,500 | 75,000 | ||||||
Deferred income taxes |
211,187 | 577,267 | ||||||
SBA guaranteed debentures payable |
139,021,466 | 121,910,000 | ||||||
Total liabilities |
141,481,838 | 131,952,108 | ||||||
Net Assets |
||||||||
Common stock, $0.001 par value per share (150,000,000
shares authorized, 14,885,134 and 11,702,511 shares
issued and outstanding as of September 30, 2010 and
December 31, 2009, respectively) |
14,885 | 11,703 | ||||||
Additional paid-in capital |
182,663,381 | 136,769,259 | ||||||
Investment income in excess of distributions |
195,415 | 1,070,452 | ||||||
Accumulated realized gains on investments |
2,347,198 | 448,164 | ||||||
Net unrealized depreciation of investments |
(6,792,058 | ) | (9,200,386 | ) | ||||
Total net assets |
178,428,821 | 129,099,192 | ||||||
Total liabilities and net assets |
$ | 319,910,659 | $ | 261,051,300 | ||||
Net asset value per share |
$ | 11.99 | $ | 11.03 | ||||
See accompanying notes.
3
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Operations
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Investment income: |
||||||||||||||||
Loan interest, fee and dividend income: |
||||||||||||||||
NonControl / NonAffiliate investments |
$ | 6,654,541 | $ | 3,850,305 | $ | 16,673,386 | $ | 12,252,053 | ||||||||
Affiliate investments |
1,044,088 | 1,374,819 | 3,152,758 | 3,215,690 | ||||||||||||
Control investments |
333,993 | 232,575 | 1,056,463 | 713,553 | ||||||||||||
Total loan interest, fee and dividend income |
8,032,622 | 5,457,699 | 20,882,607 | 16,181,296 | ||||||||||||
Paymentinkind interest income: |
||||||||||||||||
NonControl / NonAffiliate investments |
1,338,018 | 711,882 | 3,301,525 | 2,322,402 | ||||||||||||
Affiliate investments |
231,525 | 600,532 | 797,448 | 978,568 | ||||||||||||
Control investments |
117,419 | 122,738 | 377,276 | 286,816 | ||||||||||||
Total paymentinkind interest income |
1,686,962 | 1,435,152 | 4,476,249 | 3,587,786 | ||||||||||||
Interest income from cash and cash equivalent
investments |
67,501 | 203,792 | 207,283 | 408,464 | ||||||||||||
Total investment income |
9,787,085 | 7,096,643 | 25,566,139 | 20,177,546 | ||||||||||||
Expenses: |
||||||||||||||||
Interest expense |
1,864,442 | 1,749,593 | 5,442,426 | 5,137,159 | ||||||||||||
Amortization of deferred financing fees |
469,394 | 90,500 | 665,455 | 268,810 | ||||||||||||
General and administrative expenses |
1,840,794 | 1,538,693 | 5,493,495 | 4,766,841 | ||||||||||||
Total expenses |
4,174,630 | 3,378,786 | 11,601,376 | 10,172,810 | ||||||||||||
Net investment income |
5,612,455 | 3,717,857 | 13,964,763 | 10,004,736 | ||||||||||||
Net realized gain (loss) on investments
Non-Control/Non-Affiliate |
1,210,481 | | (1,623,104 | ) | 848,164 | |||||||||||
Net realized gain (loss) on investment Affiliate |
(19,100 | ) | | 3,522,138 | | |||||||||||
Net unrealized appreciation (depreciation) of
investments |
358,936 | (4,504,933 | ) | 2,408,328 | (15,028,496 | ) | ||||||||||
Total net gain (loss) on investments before income taxes |
1,550,317 | (4,504,933 | ) | 4,307,362 | (14,180,332 | ) | ||||||||||
Income tax benefit (provision) |
20,410 | 8,417 | (72,334 | ) | (38,277 | ) | ||||||||||
Net increase (decrease) in net assets resulting from
operations |
$ | 7,183,182 | $ | (778,659 | ) | $ | 18,199,791 | $ | (4,213,873 | ) | ||||||
Net investment income per share basic and diluted |
$ | 0.46 | $ | 0.41 | $ | 1.16 | $ | 1.25 | ||||||||
Net increase (decrease) in net assets resulting from
operations per share basic and diluted |
$ | 0.59 | $ | (0.09 | ) | $ | 1.51 | $ | (0.53 | ) | ||||||
Dividends declared per common share |
$ | 0.41 | $ | 0.41 | $ | 1.23 | $ | 1.21 | ||||||||
Distributions of capital gains declared per common share |
$ | | $ | | $ | | $ | 0.05 | ||||||||
Weighted average number of shares outstanding basic
and diluted |
12,258,614 | 9,129,192 | 12,047,852 | 8,024,933 | ||||||||||||
See accompanying notes.
4
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Changes in Net Assets
Net | ||||||||||||||||||||||||||||
Investment | Accumulated | Unrealized | ||||||||||||||||||||||||||
Common Stock | Additional | Income | Realized | Appreciation | Total | |||||||||||||||||||||||
Number | Par | Paid In | in Excess of | Gains on | (Depreciation) of | Net | ||||||||||||||||||||||
of Shares | Value | Capital | Distributions | Investments | Investments | Assets | ||||||||||||||||||||||
Balance, January 1, 2009 |
6,917,363 | $ | 6,917 | $ | 87,836,786 | $ | 2,115,157 | $ | 356,495 | $ | 1,109,808 | $ | 91,425,163 | |||||||||||||||
Net investment income |
| | | 10,004,736 | | | 10,004,736 | |||||||||||||||||||||
Net realized gains on investments |
| | | | 848,164 | (557,316 | ) | 290,848 | ||||||||||||||||||||
Stock-based compensation |
| | 512,448 | | | | 512,448 | |||||||||||||||||||||
Net unrealized losses on investments |
| | | | | (14,471,180 | ) | (14,471,180 | ) | |||||||||||||||||||
Provision for taxes |
| | | (38,277 | ) | | | (38,277 | ) | |||||||||||||||||||
Dividends/distributions declared |
| | | (10,179,533 | ) | (352,366 | ) | | (10,531,899 | ) | ||||||||||||||||||
Public offering of common stock |
2,775,000 | 2,775 | 27,088,473 | | | | 27,091,248 | |||||||||||||||||||||
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, September 30, 2009 |
9,827,942 | $ | 9,828 | $ | 115,370,671 | $ | 1,902,083 | $ | 852,293 | $ | (13,918,688 | ) | $ | 104,216,187 | ||||||||||||||
Investment | Accumulated | Net | ||||||||||||||||||||||||||
Common Stock | Additional | Income in | Realized | Unrealized | Total | |||||||||||||||||||||||
Number | Par | Paid In | Excess of | Gains on | Depreciation of | Net | ||||||||||||||||||||||
of Shares | Value | Capital | Distributions | Investments | Investments | Assets | ||||||||||||||||||||||
Balance, January 1, 2010 |
11,702,511 | $ | 11,703 | $ | 136,769,259 | $ | 1,070,452 | $ | 448,164 | $ | (9,200,386 | ) | $ | 129,099,192 | ||||||||||||||
Net investment income |
| | | 13,964,763 | | | 13,964,763 | |||||||||||||||||||||
Stock-based compensation |
| | 848,623 | | | | 848,623 | |||||||||||||||||||||
Net realized gains on investments |
| | | | 1,899,034 | (729,858 | ) | 1,169,176 | ||||||||||||||||||||
Net unrealized gains on investments |
| | | | | 3,138,186 | 3,138,186 | |||||||||||||||||||||
Provision for taxes |
| | | (72,334 | ) | | | (72,334 | ) | |||||||||||||||||||
Dividends/distributions declared |
288,296 | 288 | 4,033,216 | (14,767,466 | ) | | | (10,733,962 | ) | |||||||||||||||||||
Public offerings of common stock |
2,760,000 | 2,760 | 41,247,329 | | | | 41,250,089 | |||||||||||||||||||||
Issuance of restricted stock |
152,944 | 153 | (153 | ) | | | | | ||||||||||||||||||||
Common stock withheld for payroll
taxes upon vesting of restricted
stock |
(18,617 | ) | (19 | ) | (234,893 | ) | | | | (234,912 | ) | |||||||||||||||||
Balance, September 30, 2010 |
14,885,134 | $ | 14,885 | $ | 182,663,381 | $ | 195,415 | $ | 2,347,198 | $ | (6,792,058 | ) | $ | 178,428,821 | ||||||||||||||
See accompanying notes.
5
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Cash Flows
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 18,199,791 | $ | (4,213,873 | ) | |||
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash used in operating activities: |
||||||||
Purchases of portfolio investments |
(88,215,260 | ) | (27,943,735 | ) | ||||
Repayments received/sales of portfolio investments |
53,975,274 | 9,289,106 | ||||||
Loan origination and other fees received |
1,713,818 | 540,000 | ||||||
Net realized gain on investments |
(1,899,034 | ) | (848,164 | ) | ||||
Net unrealized depreciation (appreciation) of investments |
(2,042,248 | ) | 15,434,615 | |||||
Deferred income taxes |
(366,080 | ) | (406,120 | ) | ||||
Paymentinkind interest accrued, net of payments received |
(1,249,763 | ) | (2,008,357 | ) | ||||
Amortization of deferred financing fees |
665,455 | 268,810 | ||||||
Accretion of loan origination and other fees |
(1,065,703 | ) | (443,135 | ) | ||||
Accretion of loan discounts |
(477,513 | ) | (306,075 | ) | ||||
Accretion of discount on SBA guaranteed debentures payable |
7,548 | | ||||||
Depreciation expense |
13,569 | 16,711 | ||||||
Stock-based compensation |
848,623 | 512,448 | ||||||
Changes in operating assets and liabilities: |
||||||||
Interest and fees receivable |
73,069 | 314,296 | ||||||
Prepaid expenses |
46,781 | (180,972 | ) | |||||
Accounts payable and accrued liabilities |
(594,384 | ) | (158,034 | ) | ||||
Interest payable |
(1,809,633 | ) | (1,311,242 | ) | ||||
Deferred revenue |
(27,500 | ) | 112,500 | |||||
Taxes payable |
(9,605 | ) | (5,537 | ) | ||||
Net cash used in operating activities |
(22,212,795 | ) | (11,336,758 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(30,705 | ) | (3,194 | ) | ||||
Net cash used in investing activities |
(30,705 | ) | (3,194 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under SBA guaranteed debentures payable |
39,403,918 | | ||||||
Repayments of SBA guaranteed debentures payable |
(22,300,000 | ) | | |||||
Financing fees paid |
(1,480,307 | ) | (194,000 | ) | ||||
Proceeds from public stock offerings, net of expenses |
41,250,089 | 27,091,248 | ||||||
Common stock withheld for payroll taxes upon vesting of restricted stock |
(234,912 | ) | (66,900 | ) | ||||
Cash dividends paid |
(15,508,496 | ) | (8,917,022 | ) | ||||
Cash distributions paid |
| (352,366 | ) | |||||
Net cash provided by financing activities |
41,130,292 | 17,560,960 | ||||||
Net increase in cash and cash equivalents |
18,886,792 | 6,221,008 | ||||||
Cash and cash equivalents, beginning of period |
55,200,421 | 27,193,287 | ||||||
Cash and cash equivalents, end of period |
$ | 74,087,213 | $ | 33,414,295 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 7,244,511 | $ | 6,448,401 | ||||
See accompanying notes.
6
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
September 30, 2010
September 30, 2010
Portfolio Company | Industry | Type of Investment (1) (2) |
Principal Amount | Cost | Fair Value (3) |
|||||||||||||
NonControl / NonAffiliate Investments: |
||||||||||||||||||
Ambient
Air Corporation (AA) and Peaden-Hobbs |
Specialty Trade | Subordinated Note-AA (15% Cash, 3% PIK, Due 06/13) | $ | 4,292,160 | $ | 4,251,028 | $ | 4,251,028 | ||||||||||
Mechanical, LLC
(PHM) (3%)* |
Contractors | Common Stock-PHM (128,571 shares) | 128,571 | 91,600 | ||||||||||||||
Common Stock Warrants-AA (455 shares) | 142,361 | 519,400 | ||||||||||||||||
4,292,160 | 4,521,960 | 4,862,028 | ||||||||||||||||
American De-Rosa Lamparts, LLC and Hallmark Lighting |
Wholesale and Distribution | Subordinated Note (5% PIK, Due 10/13) | 5,405,772 | 5,139,064 | 3,985,700 | |||||||||||||
(2%)* |
Membership Units (6,516 Units) | 350,000 | | |||||||||||||||
5,405,772 | 5,489,064 | 3,985,700 | ||||||||||||||||
Assurance Operations Corporation (0%)* |
Metal Fabrication | Common Stock (517 shares) | 516,867 | 437,800 | ||||||||||||||
516,867 | 437,800 | |||||||||||||||||
Botanical Laboratories, Inc. (6%)* |
Nutritional Supplement | Senior Notes (14% Cash, Due 02/15) | 10,500,000 | 9,815,941 | 9,815,941 | |||||||||||||
Manufacturing and | Common Unit Warrants (998,680 Units) | 474,600 | 339,900 | |||||||||||||||
Distribution | ||||||||||||||||||
10,500,000 | 10,290,541 | 10,155,841 | ||||||||||||||||
Carolina Beer and Beverage, LLC (8%)* |
Beverage Manufacturing | Subordinated Note (12% Cash, 4% PIK, Due 02/16) | 12,735,053 | 12,483,571 | 12,483,571 | |||||||||||||
and Packaging | Class A Units (11,974 Units) | 1,077,615 | 1,077,615 | |||||||||||||||
Class B Units (11,974 Units) | 119,735 | 119,735 | ||||||||||||||||
12,735,053 | 13,680,921 | 13,680,921 | ||||||||||||||||
CRS Reprocessing, LLC (5%)* |
Fluid Reprocessing | Subordinated Note (12% Cash, 2% PIK, Due 11/14) | 8,080,595 | 7,909,563 | 7,909,563 | |||||||||||||
Services | Common Unit Warrant (174 Units) | 44,904 | 772,500 | |||||||||||||||
8,080,595 | 7,954,467 | 8,682,063 | ||||||||||||||||
CV Holdings, LLC (7%)* |
Specialty Healthcare | Subordinated Note (12% Cash, 4% PIK, Due 09/13) | 11,566,685 | 10,874,605 | 10,874,605 | |||||||||||||
Products | Royalty rights | 874,400 | 1,028,500 | |||||||||||||||
Manufacturer | ||||||||||||||||||
11,566,685 | 11,749,005 | 11,903,105 | ||||||||||||||||
Electronic Systems Protection, Inc. (2%)* |
Power Protection | Subordinated Note (12% Cash, 2% PIK, Due 12/15) | 3,167,962 | 3,145,998 | 3,145,998 | |||||||||||||
Systems Manufacturing | Senior Note (8.3% Cash, Due 01/14) | 842,486 | 842,486 | 842,486 | ||||||||||||||
Common Stock (500 shares) | 285,000 | 170,800 | ||||||||||||||||
4,010,448 | 4,273,484 | 4,159,284 | ||||||||||||||||
Energy Hardware Holdings, LLC (0%)* |
Machined Parts Distribution | Voting Units (4,833 units) | 4,833 | 532,800 | ||||||||||||||
4,833 | 532,800 | |||||||||||||||||
7
Table of Contents
Portfolio Company | Industry | Type of Investment (1) (2) |
Principal Amount | Cost |
Fair Value (3) |
||||||||||||||
Frozen Specialties, Inc. (4%)* | Frozen Foods Manufacturer | Subordinated Note (13% Cash, 5% PIK, Due 07/14) | $ | 7,958,357 | $ | 7,837,394 | $ | 7,837,394 | |||||||||||
7,958,357 | 7,837,394 | 7,837,394 | |||||||||||||||||
Garden Fresh Restaurant Corp. (0%)* |
Restaurant | Membership Units (5,000 units) | 500,000 | 788,300 | |||||||||||||||
500,000 | 788,300 | ||||||||||||||||||
Gerli & Company (1%)* |
Specialty Woven | Subordinated Note (0.69% PIK, Due 08/11) | 3,709,115 | 3,151,856 | 1,809,000 | ||||||||||||||
Fabrics Manufacturer | Subordinated Note (6.25% Cash, 11.75% PIK, Due 08/11) | 131,594 | 120,000 | 120,000 | |||||||||||||||
Royalty rights | | 119,200 | |||||||||||||||||
Common Stock Warrants (56,559 shares) | 83,414 | | |||||||||||||||||
3,840,709 | 3,355,270 | 2,048,200 | |||||||||||||||||
Great Expressions Group Holdings, LLC (3%)* |
Dental Practice | Subordinated Note (12% Cash, 4% PIK, Due 08/15) | 4,561,311 | 4,496,165 | 4,496,165 | ||||||||||||||
Management | Class A Units (225 Units) | 450,000 | 450,000 | ||||||||||||||||
4,561,311 | 4,946,165 | 4,946,165 | |||||||||||||||||
Grindmaster-Cecilware Corp. (3%)* |
Food Services Equipment | Subordinated Note (11% Cash, 3% PIK, Due 03/15) | 5,933,762 | 5,834,909 | 5,834,909 | ||||||||||||||
Manufacturer | Royalty rights | | 221,500 | ||||||||||||||||
5,933,762 | 5,834,909 | 6,056,409 | |||||||||||||||||
Hatch Chile Co., LLC (3%)* |
Food Products Distributer | Senior Note (19% Cash, Due 07/15) | 4,500,000 | 4,390,993 | 4,390,993 | ||||||||||||||
Subordinated Note (14% Cash, Due 07/15) | 1,000,000 | 831,381 | 831,381 | ||||||||||||||||
Unit Purchase Warrant (5,265 Units) | 149,800 | 149,800 | |||||||||||||||||
5,500,000 | 5,372,174 | 5,372,174 | |||||||||||||||||
Inland Pipe Rehabilitation Holding Company LLC (8%)* |
Cleaning and Repair | Subordinated Note (10% Cash, 4% PIK, Due 01/14) | 8,274,920 | 7,577,898 | 7,577,898 | ||||||||||||||
Services | Subordinated Note (10% Cash, 8% PIK, Due 01/14) | 3,905,108 | 3,856,581 | 3,856,581 | |||||||||||||||
Subordinated Note (10% Cash, 5% PIK, Due 01/14) | 306,302 | 306,302 | 306,302 | ||||||||||||||||
Membership Interest Purchase Warrant (2.9%) | 853,500 | 3,272,000 | |||||||||||||||||
12,486,330 | 12,594,281 | 15,012,781 | |||||||||||||||||
Library Systems & Services, LLC (3%)* |
Municipal Business | Subordinated Note (12.5% Cash, 4.5% PIK, Due 06/15) | 5,323,500 | 5,171,787 | 5,171,787 | ||||||||||||||
Services | Common Stock Warrants (112 shares) | 58,995 | 575,800 | ||||||||||||||||
5,323,500 | 5,230,782 | 5,747,587 |
8
Table of Contents
Portfolio Company | Industry | Type of Investment (1) (2) |
Principal Amount | Cost |
Fair Value (3) |
|||||||||||||||
Media Temple, Inc. (7%)* |
Web Hosting Services | Subordinated Note (12% Cash, 4% PIK, Due 04/15) | $ | 8,800,000 | $ | 8,616,959 | $ | 8,616,959 | ||||||||||||
Convertible Note (8% Cash, 4% PIK, Due 04/15) | 3,200,000 | 2,642,547 | 2,642,547 | |||||||||||||||||
Common Stock Purchase Warrant (28,000 Shares) | 536,000 | 536,000 | ||||||||||||||||||
12,000,000 | 11,795,506 | 11,795,506 | ||||||||||||||||||
|
||||||||||||||||||||
Minco Technology Labs, LLC (3%)* |
Semiconductor Distribution | Subordinated Note (13% Cash, 3.25% PIK, Due 05/16) | 5,060,188 | 4,938,707 | 4,938,707 | |||||||||||||||
Class A Units (5,000 Units) | 500,000 | 500,000 | ||||||||||||||||||
5,060,188 | 5,438,707 | 5,438,707 | ||||||||||||||||||
|
||||||||||||||||||||
Novolyte Technologies, Inc. (5%)* |
Specialty Manufacturing | Subordinated Note (12% Cash, 5.5% PIK, Due 04/15) | 7,677,817 | 7,569,278 | 7,569,278 | |||||||||||||||
Preferred Units (641 units) | 640,818 | 640,818 | ||||||||||||||||||
Common Units (24,522 units) | 160,204 | 116,882 | ||||||||||||||||||
7,677,817 | 8,370,300 | 8,326,978 | ||||||||||||||||||
|
||||||||||||||||||||
Syrgis Holdings, Inc. (2%)* |
Specialty Chemical Manufacturer | Senior Notes (7.75%-10.75% Cash, Due 08/12-02/14) | 3,016,269 | 2,999,103 | 2,999,103 | |||||||||||||||
Common Units (2,114 units) | 1,000,000 | 945,400 | ||||||||||||||||||
3,016,269 | 3,999,103 | 3,944,503 | ||||||||||||||||||
|
||||||||||||||||||||
TBG Anesthesia Management, LLC (4%)* |
Physician Management Services | Senior Note (14% Cash, Due 11/14) | 7,500,000 | 7,128,899 | 7,128,899 | |||||||||||||||
Warrant (263 shares) | 276,100 | 334,400 | ||||||||||||||||||
7,500,000 | 7,404,999 | 7,463,299 | ||||||||||||||||||
|
||||||||||||||||||||
TrustHouse Services Group, Inc. (3%)* |
Food Management Services | Subordinated Note (12% Cash, 2% PIK, Due 09/15) | 4,417,962 | 4,356,393 | 4,356,393 | |||||||||||||||
Class A Units (1,495 units) | 475,000 | 448,400 | ||||||||||||||||||
Class B Units (79 units) | 25,000 | | ||||||||||||||||||
4,417,962 | 4,856,393 | 4,804,793 | ||||||||||||||||||
|
||||||||||||||||||||
Tulsa Inspection Resources, Inc. (TIR) and Regent |
Pipeline Inspection Services | Subordinated Note (14% Cash, Due 03/14) | 5,000,000 | 4,676,512 | 4,676,512 | |||||||||||||||
TIR Partners, LLC (RTIR) (3%)* |
Subordinated Note (17.5% Cash, Due 03/14) | 810,588 | 795,163 | 795,163 | ||||||||||||||||
Common Units RTIR (11 units) | 200,000 | | ||||||||||||||||||
Common Stock Warrants - TIR (7 shares) | 321,000 | | ||||||||||||||||||
5,810,588 | 5,992,675 | 5,471,675 | ||||||||||||||||||
|
||||||||||||||||||||
Twin-Star International, Inc. (3%)* |
Consumer Home Furnishings Manufacturer | Subordinated Note (12% Cash, 1% PIK, Due 04/14) | 4,500,000 | 4,459,091 | 4,459,091 | |||||||||||||||
Senior Note (4.53%, Due 04/13) | 1,174,751 | 1,174,751 | 1,174,751 | |||||||||||||||||
5,674,751 | 5,633,842 | 5,633,842 |
9
Table of Contents
Portfolio Company | Industry | Type of Investment (1) (2) |
Principal Amount | Cost |
Fair Value (3) |
|||||||||||
Wholesale Floors, Inc. (1%)*
|
Commercial Services | Subordinated Note (12.5% Cash, 1.5% PIK, Due 06/14) | $ | 3,581,667 | $ | 3,381,196 | $ | 2,463,700 | ||||||||
Membership Interest Purchase Warrant (4.0%) | 132,800 | | ||||||||||||||
3,581,667 | 3,513,996 | 2,463,700 | ||||||||||||||
Yellowstone Landscape Group, Inc. (6%)*
|
Landscaping Services | Subordinated Note (12% Cash, 3% PIK, Due 04/14) | 11,550,741 | 11,367,315 | 11,367,315 | |||||||||||
11,550,741 | 11,367,315 | 11,367,315 | ||||||||||||||
Zoom Systems (4%)*
|
Retail Kiosk Operator | Subordinated Note (12.5 Cash, 1.5% PIK, Due 12/14) | 8,094,155 | 7,916,898 | 7,916,898 | |||||||||||
8,094,155 | 7,916,898 | 7,916,898 | ||||||||||||||
Subtotal NonControl / NonAffiliate Investments
|
176,578,820 | 180,441,851 | 180,835,768 | |||||||||||||
Affiliate Investments: |
||||||||||||||||
AP Services, Inc. (4%)*
|
Fluid Sealing Supplies and Services | Subordinated Note (12% Cash, 2% PIK, Due 09/15) | 5,805,156 | 5,689,156 | 5,689,156 | |||||||||||
Class A Units (933 Units) | 933,333 | 933,333 | ||||||||||||||
Class B Units (496 Units) | | | ||||||||||||||
5,805,156 | 6,622,489 | 6,622,489 | ||||||||||||||
Asset Point, LLC (3%)*
|
Asset Management Software Provider | Senior Note (12% Cash, 5% PIK, Due 03/13) | 5,683,331 | 5,625,993 | 5,625,993 | |||||||||||
Senior Note (12% Cash, 2% PIK, Due 07/15) | 602,102 | 602,102 | 602,102 | |||||||||||||
Membership Units (10 units) | 500,000 | | ||||||||||||||
6,285,433 | 6,728,095 | 6,228,095 | ||||||||||||||
Axxiom Manufacturing, Inc. (0%)*
|
Industrial Equipment Manufacturer | Common Stock (34,100 shares) | 200,000 | 860,900 | ||||||||||||
Common Stock Warrant (1,000 shares) | | 25,200 | ||||||||||||||
200,000 | 886,100 | |||||||||||||||
Brantley Transportation, LLC (Brantley Transportation) and Pine
|
Oil and Gas Services | Subordinated Note Brantley Transportation (14% Cash, Due 12/12) | 3,800,000 | 3,732,141 | 3,201,400 | |||||||||||
Street Holdings, LLC (Pine
Street) (4) (2%)*
|
Common Unit Warrants Brantley Transportation (4,560 common units) | 33,600 | | |||||||||||||
Preferred Units Pine Street (200 units) | 200,000 | | ||||||||||||||
Common Unit Warrants Pine Street (2,220 units) | | | ||||||||||||||
3,800,000 | 3,965,741 | 3,201,400 | ||||||||||||||
Dyson Corporation (1%)*
|
Custom Forging and Fastener Supplies | Class A Units (1,000,000 units) | 1,000,000 | 2,124,300 | ||||||||||||
1,000,000 | 2,124,300 | |||||||||||||||
Equisales, LLC (4%)*
|
Energy Products and Services | Subordinated Note (13% Cash, 4% PIK, Due 04/12) | 6,061,543 | 6,014,208 | 6,014,208 | |||||||||||
Class A Units (500,000 units) | 480,900 | 698,100 | ||||||||||||||
6,061,543 | 6,495,108 | 6,712,308 |
10
Table of Contents
Portfolio Company | Industry | Type of Investment (1) (2) |
Principal Amount | Cost | Fair Value (3) |
|||||||||||
Genapure Corporation (0%)*
|
Lab Testing Services | Genapure Common Stock (5,594 shares) | $ | 563,602 | $ | 534,000 | ||||||||||
563,602 | 534,000 | |||||||||||||||
Technology Crops International (3%)*
|
Supply Chain Management Services | Subordinated Note (12% Cash, 5% PIK, Due 03/15) | $ | 5,266,020 | 5,179,719 | 5,179,719 | ||||||||||
Common Units (50 Units) | 500,000 | 463,100 | ||||||||||||||
5,266,020 | 5,679,719 | 5,642,819 | ||||||||||||||
Waste Recyclers Holdings, LLC (3%)*
|
Environmental and Facilities Services | Subordinated Note (8% Cash, 7.5% PIK, Due 08/13) | 4,658,891 | 4,063,755 | 4,035,999 | |||||||||||
Subordinated Note (3% Cash, 12.5% PIK, Due 08/13) | 7,958,076 | 7,125,569 | | |||||||||||||
Class A Preferred Units (300 Units) |
2,251,100 | | ||||||||||||||
Class B Preferred Units (985,372 Units) | 985,372 | | ||||||||||||||
Common Unit Purchase Warrant (1,170,083 Units) | 748,900 | | ||||||||||||||
Common Units (153,219 Units) |
180,783 | | ||||||||||||||
12,616,967 | 15,355,479 | 4,035,999 | ||||||||||||||
Subtotal Affiliate Investments
|
39,835,119 | 46,610,233 | 35,987,510 |
11
Table of Contents
Fair | ||||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Principal Amount | Cost | Value (3) | |||||||||||
Control Investments: |
||||||||||||||||
FCL Graphics, Inc. (1%)*
|
Commercial Printing Services | Senior Note (3.79% Cash, 2% PIK, Due 9/11) | $ | 1,501,481 | $ | 1,498,438 | $ | 1,498,438 | ||||||||
Senior Note (7.79% Cash, 2% PIK, Due 9/11) | 2,034,809 | 2,030,365 | 1,094,300 | |||||||||||||
2nd Lien Note (2.79% Cash, 8% PIK, Due 12/11) | 3,400,234 | 2,995,771 | | |||||||||||||
Preferred Shares (35,000 shares) | | | ||||||||||||||
Common Shares (4,000 shares) | | | ||||||||||||||
Members Interests (3,839 Units) | | | ||||||||||||||
6,936,524 | 6,524,574 | 2,592,738 | ||||||||||||||
Fire Sprinkler Systems, Inc. (0%)*
|
Specialty Trade Contractors | Subordinated Notes (2% PIK, Due 04/11) | 2,884,296 | 2,455,569 | 750,000 | |||||||||||
Common Stock (295 shares) | 294,624 | | ||||||||||||||
2,884,296 | 2,750,193 | 750,000 | ||||||||||||||
Fischbein, LLC (11%)*
|
Packaging and Materials Handling Equipment Manufacturer | Subordinated Note (13% Cash, 5.5% PIK, Due 05/13) | 5,002,291 | 4,917,670 | 4,917,670 | |||||||||||
Class A-1 Common Units (52.5% of Units) | 558,140 | 2,032,600 | ||||||||||||||
Class A Common Units (4,200,000 units) | 4,200,000 | 12,305,500 | ||||||||||||||
5,002,291 | 9,675,810 | 19,255,770 | ||||||||||||||
Weave Textiles, LLC (1%)*
|
Specialty Woven Fabrics Manufacturer | Senior Note (12% PIK, Due 01/11) | 301,613 | 301,613 | 301,613 | |||||||||||
Membership Units (425 units) | 855,000 | 855,000 | ||||||||||||||
301,613 | 1,156,613 | 1,156,613 | ||||||||||||||
Subtotal Control Investments
|
15,124,724 | 20,107,190 | 23,755,121 | |||||||||||||
Total Investments, September 30, 2010 (135%)*
|
$ | 231,538,663 | $ | 247,159,274 | $ | 240,578,399 | ||||||||||
* | Value as a percent of net assets | |
(1) | All debt investments are income producing. Common stock, preferred stock and all warrants are nonincome producing. | |
(2) | Disclosures of interest rates on notes include cash interest rates and paymentinkind (PIK) interest rates. | |
(3) | All investments are restricted as to resale and were valued at fair value as determined in good faith by the Board of Directors. | |
(4) | Pine Street Holdings, LLC is the majority owner of Brantley Transportation, LLC and its sole business purpose is its ownership of Brantley Transportation, LLC. |
See accompanying notes.
12
Table of Contents
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2009
December 31, 2009
Type of Investment | Principal | Fair | ||||||||||||||
Portfolio Company | Industry | (1) (2) | Amount | Cost | Value (3) | |||||||||||
NonControl / NonAffiliate 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 | ||||||||||||||
Electronic Systems
Protection, Inc. (3%)*
|
Power Protection Systems Manufacturing |
Subordinated Note (12% Cash, 2% PIK, Due 12/15) |
3,120,913 | 3,096,783 | 2,869,000 | |||||||||||
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 |
13
Table of Contents
Type of Investment | Principal | Fair | ||||||||||||||
Portfolio Company | Industry | (1) (2) | Amount | Cost | Value (3) | |||||||||||
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 |
Subordinated Note (0.69% PIK, Due 08/11) | 3,630,774 | 3,124,893 | 1,442,000 | |||||||||||
Manufacturer | 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 | ||||||||||||||
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 | Subordinated Note (12% Cash, Due 03/11) |
1,000,000 | 972,768 | 972,768 | |||||||||||
Services | 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 |
14
Table of Contents
Type of Investment | Principal | Fair | ||||||||||||||
Portfolio Company | Industry | (1) (2) | Amount | Cost | Value (3) | |||||||||||
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 |
Senior Note (14% Cash, Due11/14) |
8,000,000 | 7,579,320 | 7,579,320 | |||||||||||
Services | 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 Manufacturer |
Subordinated Note (12% Cash, 3% PIK, Due 04/14) |
4,500,000 | 4,450,037 | 4,168,000 | |||||||||||
Senior Note (4.29%, Due 04/13) | 1,287,564 | 1,287,564 | 1,145,000 | |||||||||||||
5,787,564 | 5,737,601 | 5,313,000 | ||||||||||||||
Wholesale Floors, Inc. (3%)*
|
Commercial Services | Subordinated Note (12.5%Cash, 1.5% PIK, Due 06/14) | 3,500,000 | 3,363,335 | 3,363,335 | |||||||||||
Membership Interest Purchase Warrant (4.0%) | 132,800 | 39,800 | ||||||||||||||
3,500,000 | 3,496,135 | 3,403,135 | ||||||||||||||
Yellowstone Landscape Group,
Inc. (9%)*
|
Landscaping Services | Subordinated Note (12% Cash, 3% PIK, Due 04/14) |
11,294,699 | 11,080,907 | 11,080,907 | |||||||||||
11,294,699 | 11,080,907 | 11,080,907 | ||||||||||||||
Zoom Systems (6%)*
|
Retail Kiosk Operator |
Subordinated Note (12.5% Cash, 1.5% PIK, Due 12/14) |
8,002,667 | 7,802,667 | 7,802,667 | |||||||||||
8,002,667 | 7,802,667 | 7,802,667 | ||||||||||||||
Subtotal NonControl / NonAffiliate Investments | 142,455,328 | 143,239,223 | 138,281,894 |
15
Table of Contents
Type of Investment | Principal | Fair | ||||||||||||||
Portfolio Company | Industry | (1) (2) | Amount | Cost | Value (3) | |||||||||||
Affiliate Investments: |
||||||||||||||||
Asset Point, LLC (4%)*
|
Asset Management Software |
Subordinated Note (12% Cash, 7% PIK, Due 03/13) |
$ | 5,417,830 | $ | 5,346,346 | $ | 5,346,346 | ||||||||
Provider | Membership Units (10 units) |
500,000 | 173,600 | |||||||||||||
5,417,830 | 5,846,346 | 5,519,946 | ||||||||||||||
Axxiom Manufacturing, Inc.
(0%)*
|
Industrial Equipment | Common Stock (34,100 shares) |
200,000 | 542,400 | ||||||||||||
Manufacturer | Common Stock Warrant (1,000 shares) |
| 14,000 | |||||||||||||
200,000 | 556,400 | |||||||||||||||
Brantley Transportation, LLC
(Brantley Transportation)
and Pine Street Holdings, LLC
(Pine Street)
|
Oil and Gas Services | Subordinated Note Brantley Transportation (14% Cash, Due 12/12) | 3,800,000 | 3,713,247 | 1,400,000 | |||||||||||
(4) (1%)*
|
Common Unit Warrants Brantley Transportation (4,560 common units) | 33,600 | | |||||||||||||
Preferred Units Pine Street (200 units) | 200,000 | | ||||||||||||||
Common Unit Warrants Pine Street (2,220 units) | | | ||||||||||||||
3,800,000 | 3,946,847 | 1,400,000 | ||||||||||||||
Dyson Corporation (10%)*
|
Custom Forging and Fastener Supplies | Subordinated Note (12% Cash, 3% PIK, Due 12/13) |
10,000,000 | 9,833,080 | 9,833,080 | |||||||||||
Class A Units (1,000,000 units) | 1,000,000 | 2,634,700 | ||||||||||||||
10,000,000 | 10,833,080 | 12,467,780 | ||||||||||||||
Equisales, LLC (6%)*
|
Energy Products and Services | Subordinated Note (13% Cash, 4% PIK, Due 04/12) |
6,547,511 | 6,479,476 | 6,479,476 | |||||||||||
Class A Units (500,000 units) | 500,000 | 1,375,700 | ||||||||||||||
6,547,511 | 6,979,476 | 7,855,176 | ||||||||||||||
Flint Acquisition Corporation (2%)* |
Specialty Chemical | Preferred Stock (9,875 shares) |
308,333 | 2,571,600 | ||||||||||||
Manufacturer | ||||||||||||||||
308,333 | 2,571,600 | |||||||||||||||
Genapure Corporation (0%)*
|
Lab Testing Services | Genapure Common Stock (5,594 shares) |
563,602 | 641,300 | ||||||||||||
563,602 | 641,300 | |||||||||||||||
Technology Crops International (4%)* |
Supply Chain Management Services |
Subordinated Note (12% Cash, 5% PIK, Due 03/15) |
5,070,492 | 4,973,767 | 4,973,767 | |||||||||||
Common Units (50 Units) |
500,000 | 500,000 | ||||||||||||||
5,070,492 | 5,473,767 | 5,473,767 |
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Type of Investment | Principal | Fair | ||||||||||||||
Portfolio Company | Industry | (1) (2) | Amount | Cost | Value (3) | |||||||||||
Waste Recyclers Holdings, LLC (7%)* |
Environmental and Facilities Services | Subordinated Note (8% Cash, 7.5% PIK, Due 08/13) | $ | 4,116,978 | $ | 4,048,936 | $ | 4,048,936 | ||||||||
Subordinated Note (3% Cash, 12.5% PIK, Due 08/13) | 5,734,318 | 5,666,275 | 4,920,000 | |||||||||||||
Class A Preferred Units (300 Units) | 2,251,100 | | ||||||||||||||
Class B Preferred Units (886,835 Units) | 886,835 | 281,000 | ||||||||||||||
Common Unit Purchase Warrant (1,170,083 Units) |
748,900 | | ||||||||||||||
Common Units (153,219 Units) |
180,783 | | ||||||||||||||
9,851,296 | 13,782,829 | 9,249,936 | ||||||||||||||
Subtotal Affiliate Investments
|
40,687,129 | 47,934,280 | 45,735,905 | |||||||||||||
Control Investments: |
||||||||||||||||
FCL Graphics, Inc. (3%)*
|
Commercial Printing Services |
Senior Note (3.76% Cash, 2% PIK, Due 9/11) | 1,562,891 | 1,558,472 | 1,514,200 | |||||||||||
Senior Note (7.76% Cash, 2% PIK, Due 9/11) | 2,005,114 | 1,999,592 | 1,943,800 | |||||||||||||
2nd Lien Note (2.76% Cash, 8% PIK, Due 12/11) | 3,200,672 | 2,994,352 | 823,000 | |||||||||||||
Preferred Shares (35,000 shares) |
| | ||||||||||||||
Common Shares (4,000 shares) |
| | ||||||||||||||
Members Interests (3,839 Units) |
| | ||||||||||||||
6,768,677 | 6,552,416 | 4,281,000 | ||||||||||||||
Fischbein, LLC (10%)*
|
Packaging and Materials Handling | Subordinated Note (12% Cash, 6.5% PIK, Due 05/13) | 7,595,671 | 7,490,171 | 7,490,171 | |||||||||||
Equipment Manufacturer | Class A-1 Common Units (52.5% of Units) | 525,000 | 1,122,300 | |||||||||||||
Class A Common Units (4,200,000 units) | 4,200,000 | 4,406,700 | ||||||||||||||
7,595,671 | 12,215,171 | 13,019,171 | ||||||||||||||
Subtotal Control Investments
|
14,364,348 | 18,767,587 | 17,300,171 | |||||||||||||
Total Investments, December 31, 2009 (156%)* | $ | 197,506,805 | $ | 209,941,090 | $ | 201,317,970 | ||||||||||
* | Value as a percent of net assets | |
(1) | All debt investments are income producing. Common stock, preferred stock and all warrants are nonincome producing. | |
(2) | Disclosures of interest rates on subordinated notes include cash interest rates and paymentinkind (PIK) interest rates. | |
(3) | All investments are restricted as to resale and were valued at fair value as determined in good faith by the Board of Directors. | |
(4) | Pine Street Holdings, LLC is the majority owner of Brantley Transportation, LLC and its sole business purpose is its ownership of Brantley Transportation, LLC. |
See accompanying notes.
17
Table of Contents
TRIANGLE CAPITAL CORPORATION
Notes to Unaudited Consolidated Financial Statements
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization
Triangle Capital Corporation and its wholly owned subsidiaries, including Triangle Mezzanine
Fund LLLP (the Fund) and Triangle Mezzanine Fund II LP (Fund II) (collectively, the Company)
operate as a Business Development Company (BDC) under the Investment Company Act of 1940 (the
1940 Act). The Fund and Fund II are specialty finance limited partnerships formed to make
investments primarily in middle market companies located throughout the United States. On September
11, 2003, the Fund was licensed to operate as a Small Business Investment Company (SBIC) under
the authority of the United States Small Business Administration (SBA). On May 26, 2010, Fund II
obtained its license to operate as an SBIC. As SBICs, both the Fund and Fund II are subject to a
variety of regulations concerning, among other things, the size and nature of the companies in
which they may invest and the structure of those investments.
The Company currently operates as a closedend, nondiversified investment company and has
elected to be treated as a BDC under the 1940 Act. The Company is internally managed by its
executive officers under the supervision of its board of directors. The Company does not pay
management or advisory fees, but instead incurs the operating costs associated with employing
executive management and investment and portfolio management professionals.
Basis of Presentation
The financial statements of the Company include the accounts of the Company and its
wholly-owned subsidiaries, including the Fund and Fund II. Neither the Fund nor Fund II
consolidates portfolio company investments. The effects of all intercompany transactions between
the Company and its subsidiaries have been eliminated in consolidation.
The accompanying unaudited financial statements are presented in conformity with United States
generally accepted accounting principles (U.S. GAAP) for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in
accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments, consisting
solely of normal recurring accruals considered necessary for the fair presentation of financial
statements for the interim period, have been included. The current periods results of operations
are not necessarily indicative of results that ultimately may be achieved for the year. Therefore,
the unaudited financial statements and notes should be read in conjunction with the audited
financial statements and notes thereto for the period ended December 31, 2009. Financial
statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that
affect the amounts and disclosures reported in the consolidated financial statements and
accompanying notes. Such estimates and assumptions could change in the future as more information
becomes known, which could impact the amounts reported and disclosed herein.
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820). This update improves
disclosure requirements related to Fair Value Measurements and Disclosures-Overall Subtopic
(Subtopic 820-10) of the FASB Standards Codification, originally issued as FASB Statement No.
157, Fair Value Measurements. These improved disclosure requirements will provide a greater level
of disaggregated information and more robust disclosures about valuation techniques and inputs to
fair value measurements. The Company adopted these changes beginning with its financial statements
for the quarter ended March 31, 2010. The adoption of these changes did not have a material impact
on the Companys financial position or results of operations.
18
Table of Contents
2. INVESTMENTS
Summaries of the composition of the Companys investment portfolio at cost and fair value as a
percentage of total investments are shown in the following tables:
Percentage of Total | Percentage of Total | |||||||||||||||
Cost | Portfolio | Fair Value | Portfolio | |||||||||||||
September 30, 2010: |
||||||||||||||||
Subordinated debt,
Unitranche and
2nd lien
notes |
$ | 213,445,647 | 86 | % | $ | 197,646,525 | 82 | % | ||||||||
Senior debt |
8,846,756 | 4 | 7,910,691 | 3 | ||||||||||||
Equity shares |
20,136,497 | 8 | 27,126,983 | 11 | ||||||||||||
Equity warrants |
3,855,974 | 2 | 6,525,000 | 3 | ||||||||||||
Royalty rights |
874,400 | | 1,369,200 | 1 | ||||||||||||
$ | 247,159,274 | 100 | % | $ | 240,435,061 | 100 | % | |||||||||
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 | % | |||||||||
During the three months ended September 30, 2010, the Company made three new investments
totaling approximately $26.1 million and four investments in existing portfolio companies totaling
approximately $3.9 million. During the nine months ended September 30, 2010, the Company made nine
new investments totaling approximately $69.7 million and twelve investments in existing portfolio
companies totaling approximately $18.5 million.
During the three months ended September 30, 2009, the Company made three new investments
totaling $18.8 million. During the nine months ended September 30, 2009, the Company made four new
investment totaling $24.0 million and five investments in existing portfolio companies totaling
approximately $4.0 million.
Valuation of Investments
The Company has established and documented processes and methodologies for determining the
fair values of portfolio company investments on a recurring basis in accordance with FASB ASC Topic
820, Fair Value Measurements and Disclosures (ASC Topic 820). Under ASC Topic 820, a financial
instruments categorization within the valuation hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. 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.
The Companys 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, the Company values all of its investments at fair value, as
determined in good faith by the Board of Directors (Level 3 inputs, as further described below).
Due to the inherent uncertainty in the valuation process, the 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 the 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 the Company might
reasonably expect to receive upon the current sale of the security.
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Management evaluates the investments in portfolio companies using the most recent
portfolio company financial statements and forecasts. Management also consults 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.
In making the good faith determination of the value of debt securities, the Company starts
with the cost basis of the security, which includes the amortized original issue discount, and
paymentinkind (PIK) interest, if any. The Company also uses 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, management utilizes 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 and the portfolio companys anticipated results 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, (iv) publicly available information regarding current pricing and
credit metrics for similar proposed and executed investment transactions of private companies and,
(v) when management believes a relevant comparison exists, current pricing and credit metrics for
similar proposed and executed investment transactions of publicly traded debt.
In valuing equity securities of private companies, the Company considers valuation
methodologies consistent with industry practice, including but not limited to (i) valuation using a
valuation model based on original transaction multiples and the portfolio companys recent
financial performance, (ii) publicly available information regarding the valuation of the
securities based on recent sales in comparable transactions of private companies and, (iii) when
management believes there are comparable companies that are publicly traded, a review of these
publicly traded companies and the market multiple of their equity securities.
The following table presents the Companys financial instruments carried at fair value as of
September 30, 2010 and December 31, 2009, on the consolidated balance sheet by ASC Topic 820
valuation hierarchy, as previously described:
Fair Value at September 30, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Portfolio company investments |
$ | | $ | | $ | 240,578,399 | $ | 240,578,399 | ||||||||
$ | | $ | | $ | 240,578,399 | $ | 240,578,399 | |||||||||
Fair Value at December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Portfolio company investments |
$ | | $ | | $ | 201,317,970 | $ | 201,317,970 | ||||||||
$ | | $ | | $ | 201,317,970 | $ | 201,317,970 | |||||||||
The following table reconciles the beginning and ending balances of our portfolio company
investments measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the nine months ended September 30, 2010 and 2009:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Fair value of portfolio, beginning of period |
$ | 201,317,970 | $ | 182,105,291 | ||||
New investments |
88,215,263 | 27,943,735 | ||||||
Loan origination fees received |
(1,713,818 | ) | (540,000 | ) | ||||
Proceeds from sale of investment |
(5,416,123 | ) | (1,888,384 | ) | ||||
Net gains on sale of investment |
1,899,034 | 848,164 | ||||||
Principal repayments received |
(48,559,151 | ) | (7,400,722 | ) | ||||
Paymentinkind interest earned |
4,476,251 | 3,587,786 | ||||||
Paymentinkind interest received |
(3,226,488 | ) | (1,579,429 | ) | ||||
Accretion of loan discounts |
477,513 | 306,075 | ||||||
Accretion of deferred loan origination
revenue |
1,065,703 | 443,135 | ||||||
Unrealized gains (losses) on investments |
2,042,245 | (15,434,615 | ) | |||||
Fair value of portfolio, end of period |
$ | 240,578,399 | $ | 188,391,036 | ||||
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All realized and unrealized gains and losses are included in earnings (changes in net assets)
and are reported on separate line items within the Companys statements of operations. Net pre-tax
unrealized gains on investments of $884,000 and $1,452,000, respectively, during the three and nine
months ended September 30, 2010 are related to portfolio company investments that were still held
by the Company as of September 30, 2010. Net pre-tax unrealized losses on investments of
$4,580,000 and $15,509,000, respectively, during the three and nine months ended September 30, 2009
are related to portfolio company investments that were still held by the Company as of September
30, 2009.
Duff & Phelps, LLC (Duff & Phelps), an independent valuation firm, provides third party
valuation consulting services to the Company which consist of certain limited procedures that the
Company 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, 2010, the Company asked Duff & Phelps to perform the
procedures on investments in seven portfolio companies comprising approximately 25% of the total
investments at fair value (exclusive of the fair value of new investments made during the quarter)
as of March 31, 2010. For the quarter ended June 30, 2010, the Company 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 June 30, 2010. For the quarter ended September 30, 2010, the Company asked Duff &
Phelps to perform the procedures on investments in eight 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 September 30, 2010.
For the quarter ended March 31, 2009, the Company 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, the Company 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, the Company 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.
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. The Board of Directors of Triangle Capital Corporation is ultimately and solely
responsible for determining the fair value of the Companys investments in good faith.
Warrants
When originating a debt security, the Company will sometimes receive warrants or other
equityrelated securities from the borrower. The Company determines the cost basis of the warrants
or other equityrelated securities received based upon their respective fair values on the date of
receipt in proportion to the total fair value of the debt and warrants or other equityrelated
securities received. Any resulting difference between the face amount of the debt and its recorded
fair value resulting from the assignment of value to the warrant or other equity instruments is
treated as original issue discount and accreted into interest income over the life of the loan.
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Realized gains or losses are recorded upon the sale or liquidation of investments and
calculated as the difference between the net proceeds from the sale or liquidation, if any, and the
cost basis of the investment using the specific identification method. Unrealized appreciation or
depreciation reflects the difference between the fair value of the investments and the cost basis
of the investments.
Investment Classification
In accordance with the provisions of the 1940 Act, the Company classifies investments by level
of control. As defined in the 1940 Act, Control Investments are investments in those companies
that the Company is deemed to Control. Affiliate Investments are investments in those companies
that are Affiliated Companies of the Company, as defined in the 1940 Act, other than Control
Investments. NonControl/NonAffiliate Investments are those that are neither Control
Investments nor Affiliate Investments. Generally, under the 1940 Act, the Company is deemed to
control a company in which it has invested if the Company owns more than 25.0% of the voting
securities of such company or has greater than 50.0% representation on its board. The Company is
deemed to be
an affiliate of a company in which the Company has invested if it owns between 5.0% and 25.0%
of the voting securities of such company.
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Table of Contents
Investment 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 the
Company otherwise does not expect the borrower to be able to service its debt and other
obligations, the Company will place the loan on non-accrual status and will generally cease
recognizing interest income on that loan 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. The Company writes off any previously accrued and uncollected interest when it is
determined that interest is no longer considered collectible. Dividend income is recorded on the
exdividend date.
Fee Income
Loan origination, facility, commitment, consent and other advance fees received in connection
with loan agreements are recorded as deferred income and recognized as income over the term of the
loan. Loan prepayment penalties and loan amendment fees are generally recorded into income when the
respective prepayment or loan amendment occurs. Any previously deferred fees are immediately
recorded into income upon prepayment of the related loan.
Payment-in-Kind Interest
The Company holds loans in its portfolio that contain a paymentinkind (PIK) interest
provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is
added to the principal balance of the loan 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 the Companys status as a Regulated Investment Company (RIC) under Subchapter M
of the Internal Revenue Code of 1986, as Amended (the Code), this non-cash source of income must
be paid out to stockholders in the form of dividends, even though the Company has not yet collected
the cash. Generally, when current cash interest and/or principal payments on a loan become past
due, or if the Company otherwise does not expect the borrower to be able to service its debt and
other obligations, the Company 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 have been brought current through payment or through a restructuring such that the
interest income is deemed to be collectible. The Company writes off any accrued and uncollected
PIK interest when it is determined that the PIK interest is no longer collectible.
Concentration of Credit Risk
The Companys investees are generally lower middlemarket companies in a variety of
industries. At both September 30, 2010 and December 31, 2009, there were no individual investments
greater than 10% of the fair value of the Companys portfolio. Income, consisting of interest,
dividends, fees, other investment income, and realization of gains or losses on equity interests,
can fluctuate dramatically upon repayment of an investment or sale of an equity interest and in any
given year can be highly concentrated among several investees.
The Companys investments carry a number of risks including, but not limited to: 1) investing
in lower middle market companies which have a limited operating history and financial resources; 2)
investing in senior subordinated debt which ranks equal to or lower than debt held by other
investors; 3) holding investments that are not publicly traded and are subject to legal and other
restrictions on resale and other risks common to investing in below investment grade debt and
equity instruments.
3. INCOME TAXES
Triangle Capital Corporation has elected for federal income tax purposes to be treated as a
RIC under Subchapter M of the Code. As a RIC, so long as certain minimum distribution,
source-of-income and asset diversification requirements are met, income taxes are generally
required to be paid only on the portion of taxable income and gains that are not distributed
(actually or constructively) and on certain built-in gains.
The Company has certain wholly owned taxable subsidiaries (the Taxable Subsidiaries)
each of which holds one or more of the Companys portfolio investments that are listed on the
Consolidated Schedule of Investments. The Taxable Subsidiaries are consolidated for financial
reporting purposes, such that the Companys consolidated financial statements reflect the Companys
investments in the portfolio companies owned by the Taxable Subsidiaries. The purpose of the
Taxable Subsidiaries is to permit the Company to hold
certain portfolio companies that are organized as limited liability companies (LLCs) (or
other forms of passthrough entities) while satisfying the RIC tax requirement that at least 90%
of the RICs gross revenue for income tax purposes must
22
Table of Contents
consist of qualifying investment income. Absent the Taxable Subsidiaries, a proportionate
amount of any gross income of an LLC (or other passthrough entity) portfolio investment would
flow through directly to the RIC. To the extent that such income did not consist of qualifying
investment income, it could jeopardize the Companys ability to qualify as a RIC and therefore
cause the Company to incur significant amounts of federal income taxes. When LLCs (or other
pass-through entities) are owned by the Taxable Subsidiaries, their income is taxed to the Taxable
Subsidiaries and does not flow through to the RIC, thereby helping the Company preserve its 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 is reflected in the Companys Statements of Operations.
For federal income tax purposes, the cost of investments owned at September 30, 2010 was
approximately $249.5 million.
4. LONGTERM DEBT
At September 30, 2010 and December 31, 2009, the Company had the following debentures
guaranteed by the SBA outstanding:
Prioritized Return | September 30, | December 31, | ||||||||||||
Issuance/Pooling Date | Maturity Date | (Interest) Rate | 2010 | 2009 | ||||||||||
SBA Debentures: |
||||||||||||||
September 22, 2004 |
September 1, 2014 | 5.539 | % | $ | | $ | 8,700,000 | |||||||
March 23, 2005 |
March 1, 2015 | 5.893 | % | | 13,600,000 | |||||||||
September 28, 2005 |
September 1, 2015 | 5.796 | % | 9,500,000 | 9,500,000 | |||||||||
March 28, 2007 |
March 1, 2017 | 6.231 | % | 4,000,000 | 4,000,000 | |||||||||
March 26, 2008 |
March 1, 2018 | 6.191 | % | 6,410,000 | 6,410,000 | |||||||||
September 24, 2008 |
September 1, 2018 | 6.580 | % | 4,840,000 | 4,840,000 | |||||||||
September 24, 2008 |
September 1, 2018 | 6.442 | % | 46,060,000 | 46,060,000 | |||||||||
March 25, 2009 |
March 1, 2019 | 5.337 | % | 22,000,000 | 22,000,000 | |||||||||
March 24, 2010 |
March 1, 2020 | 4.825 | % | 6,800,000 | 6,800,000 | |||||||||
September 22, 2010 |
September 1, 2020 | 3.932 | % | 8,690,000 | | |||||||||
September 22, 2010 |
September 1, 2020 | 3.621 | % | 19,400,000 | | |||||||||
September 22, 2010 |
September 1, 2020 | 3.500 | % | 4,500,000 | | |||||||||
SBA LMI Debentures: |
||||||||||||||
September 14, 2010 |
March 1, 2016 | 2.508 | % | 6,821,466 | | |||||||||
$ | 139,021,466 | $ | 121,910,000 | |||||||||||
Interest payments on SBA debentures are payable semiannually. There are no principal
payments required on these issues prior to maturity. Debentures issued prior to September 2006 were
subject to prepayment penalties during their first five years. Those prepayment penalties no
longer apply to debentures issued after September 1, 2006. The Companys SBA Low or Moderate
Income (LMI) debentures are five-year deferred interest debentures that are issued at a discount
to par. The accretion of discount on SBA LMI debentures is included in interest expense in the
Companys consolidated financial statements.
Under the Small Business Investment Act and current SBA policy applicable to SBICs, an SBIC
(or group of SBICs under common control) can have outstanding at any time SBA guaranteed debentures
up to three times the amount of its regulatory capital. As of September 30, 2010, the maximum
statutory limit on the dollar amount of outstanding SBA guaranteed debentures that can be issued by
a single SBIC is $150.0 million and by a group of SBICs under common control is $225.0 million. As
of September 30, 2010, the Fund has issued $127.7 million of SBA guaranteed debentures and has the
current capacity to issue up to the statutory maximum of $150.0 million, subject to SBA approval.
As of September 30, 2010, Fund II has issued $12.3 million in face amount of SBA guaranteed
debentures, has a leverage commitment from the SBA to issue up to $53.4 million of SBA guaranteed
debentures, and has the capacity to issue up to the statutory maximum of $75.0 million, subject to
SBA approval. In addition to a onetime 1.0% fee on the total commitment from the SBA, the
Company also pays a onetime 2.425% fee on the amount of each SBA debenture issued and a one-time
2.0% fee on the amount of each SBA LMI 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 rates for all SBA guaranteed debentures as of September 30,
2010, and December 31, 2009 were 5.29% and 5.77%, respectively. As of September 30, 2010, all
SBA-guaranteed debentures have been pooled and assigned fixed 10-year rates. The weighted average
interest rate as of December 31, 2009 included $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%.
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5. EQUITY-BASED COMPENSATION
The Companys Board of Directors and stockholders have approved the Triangle Capital
Corporation Amended and Restated 2007 Equity Incentive Plan (the Plan), under which there are
900,000 shares of the Companys Common Stock authorized for issuance. Under the Plan, the Board of
Directors (or Compensation Committee, if delegated administrative authority by the Board of
Directors) may award stock options, restricted stock or other stock based incentive awards to
executive officers, employees and directors. Equity-based awards granted under the Plan to
independent directors generally will vest over a one-year period and equity-based awards granted
under the Plan to executive officers and employees generally will vest ratably over a four-year
period.
The Company accounts for its equity-based compensation plan using the fair value method, as
prescribed by ASC Topic 718, Stock Compensation. Accordingly, for restricted stock awards, we
measure the grant date fair value based upon the market price of our common stock on the date of
the grant and amortize this fair value to compensation expense over the requisite service period or
vesting term.
The following table presents information with respect to the Plan for the nine months ended
September 30, 2010 and 2009:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
Weighted-Average | Weighted-Average | |||||||||||||||
Grant-Date Fair | Grant-Date Fair | |||||||||||||||
Number of Shares | Value per Share | Number of Shares | Value per Share | |||||||||||||
Unvested shares, beginning of
period |
219,813 | $ | 10.76 | 110,800 | $ | 11.11 | ||||||||||
Shares granted during the period |
152,944 | $ | 12.01 | 144,812 | $ | 10.58 | ||||||||||
Shares vested during the period |
(70,059 | ) | $ | 10.72 | (35,799 | ) | $ | 11.11 | ||||||||
Unvested shares, end of period |
302,698 | $ | 11.40 | 219,813 | $ | 10.76 | ||||||||||
In the three and nine months ended September 30, 2010, the Company recognized equity-based
compensation expense of approximately $0.3 million and $0.8 million, respectively. In the three
and nine months ended September 30, 2009, the Company recognized equity-based compensation expense
of approximately $0.2 million and $0.5 million, respectively. This expense is included in general
and administrative expenses in the Companys consolidated statements of operations.
As of September 30, 2010, there was approximately $2.8 million of total unrecognized
compensation cost, related to the Companys non-vested restricted shares. This cost is expected to
be recognized over a weighted-average period of approximately 2.5 years.
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6. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the nine months ended September 30,
2010 and 2009:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Per share data: |
||||||||
Net asset value at beginning of period |
$ | 11.03 | $ | 13.22 | ||||
Net investment income(1) |
1.16 | 1.25 | ||||||
Net realized gains on investments(1) |
0.16 | 0.11 | ||||||
Net unrealized appreciation (depreciation) on investments(1) |
0.20 | (1.87 | ) | |||||
Total increase (decrease) from investment operations(1) |
1.52 | (0.51 | ) | |||||
Cash dividends/distributions declared |
(1.23 | ) | (1.26 | ) | ||||
Shares issued pursuant to Dividend Reinvestment Plan |
0.05 | | ||||||
Common stock offerings |
0.67 | (0.65 | ) | |||||
Stock-based compensation |
0.07 | 0.06 | ||||||
Income tax provision(1) |
(0.01 | ) | | |||||
Grant of restricted shares |
(0.14 | ) | (0.20 | ) | ||||
Other(2) |
0.03 | (0.06 | ) | |||||
Net asset value at end of period |
$ | 11.99 | $ | 10.60 | ||||
Market value at end of period(3) |
$ | 15.98 | $ | 12.34 | ||||
Shares outstanding at end of period |
14,885,134 | 9,827,942 | ||||||
Net assets at end of period |
$ | 178,428,821 | $ | 104,216,187 | ||||
Average net assets |
$ | 133,569,376 | $ | 94,993,552 | ||||
Ratio of total expenses to average net assets (annualized) |
12 | % | 14 | % | ||||
Ratio of net investment income to average net assets
(annualized) |
14 | % | 14 | % | ||||
Portfolio turnover ratio |
25 | % | 5 | % | ||||
Total Return(4) |
42 | % | 33 | % |
(1) | Weighted average basic per share data. | |
(2) | Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date. | |
(3) | Represents the closing price of the Companys common stock on the last day of the period. | |
(4) | Total return equals the change in the ending market value of the Companys common stock during the period, plus dividends declared per share during the period, divided by the market value of the Companys common stock on the first day of the period. Total return is not annualized. |
7. SUBSEQUENT EVENT
In October 2010, the Company invested $10.8 million in Infrastructure Corporation of
America (ICA) consisting of subordinated debt with warrants. ICA maintains public
transportation infrastructure, including roadways, bridges, toll ways, rest areas and
welcome centers. This investment is in support of ICAs acquisition of full-service
engineering firm Florence & Hutcheson, which adds planning, design-build, civil,
geotechnical, environmental, construction engineering and inspection, and water resources to
ICAs existing services. Under the terms of the investments, ICA will pay interest on the
subordinated debt at a rate of 13% per annum.
In October 2010, the Company invested $6.0 million in subordinated debt of McKenzie
Sports Products, LLC (McKenzie). McKenzie is the largest designer and manufacturer of
taxidermy forms and supplies used to mount hunting and fishing trophies in the United
States. Under the terms of the investments, McKenzie will pay interest on the subordinated
debt at a rate of 14% per annum.
In October 2010, in connection with a restructuring of Waste Recyclers Holdings, LLC (Waste
Recyclers), the Company exchanged subordinated notes in Waste Recyclers with a cost of
approximately $11.2 million for Preferred Units in Waste Recyclers with a fair value of
approximately $4.0 million. In connection with this restructuring, the Company recognized a
net realized loss of approximately $7.4 million related to the exchange.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is designed to provide a better understanding of our unaudited
consolidated financial statements, including a brief discussion of our business, key factors that
impacted our performance and a summary of our operating results. The following discussion should be
read in conjunction with the Unaudited Financial Statements and the notes thereto included in Item
1 of this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes
thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31, 2009. 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.
Forward-Looking Statements
Some of the statements in this Quarterly 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
Quarterly 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 herein and in Item 1A entitled Risk Factors in Part I of
our Annual Report on Form 10-K for the year ended December 31, 2009. Other factors that could cause
actual results to differ materially include changes in the economy, risks associated with possible
disruption due to terrorism in our operations or the economy generally, 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 Quarterly 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.
Overview of Our Business
We are a Maryland corporation which has elected to be treated and operates as an internally
managed business development company, or BDC, under the Investment Company Act of 1940, or 1940
Act. Our wholly owned subsidiaries, Triangle Mezzanine Fund LLLP, or the Fund, and Triangle
Mezzanine Fund II LP, or Fund II, are licensed as small business investment companies, or SBICs, by
the United States Small Business Administration, or SBA. In addition, the Fund has also elected to
be treated as a BDC under the 1940 Act. We, the Fund and Fund II invest primarily in debt
instruments, equity investments, warrants and other securities of lower middle market privately
held companies located in the United States.
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 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 and $100.0 million and
annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $3.0 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 to $15.0 million per portfolio company. In certain situations, we
partner 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 is instead 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 on a quarterly basis. As of September 30, 2010, and December
31, 2009, the weighted average
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yield on our outstanding debt investments other than non-accrual debt investments (including
PIK interest) was approximately 15.1% and 14.7%, respectively. The weighted average yield on all of
our outstanding investments (including equity and equity-linked investments but excluding
non-accrual debt investments) was approximately 13.7% and 13.5% as of September 30, 2010 and
December 31, 2009, respectively. The weighted average yield on all of our outstanding investments
(including equity and equity-linked investments and non-accrual debt investments) was approximately
12.1% and 12.5% as of September 30, 2010 and December 31, 2009, respectively.
The Fund and Fund II are eligible to sell debentures guaranteed by the SBA in the capital
markets at favorable interest rates and invest these funds in portfolio companies. We intend to
continue to operate the Fund and Fund II as SBICs, 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 $240.6 million as of September 30, 2010, as
compared to $201.3 million as of December 31, 2009. As of September 30, 2010, we had investments
in 41 portfolio companies with an aggregate cost of $247.2 million. As of December 31, 2009, we
had investments in 37 portfolio companies with an aggregate cost of $209.9 million. As of both
September 30, 2010 and December 31, 2009, none of our portfolio investments represented greater
than 10% of the total fair value of our investment portfolio.
As of September 30, 2010 and December 31, 2009, our investment portfolio consisted of the
following investments:
Percentage of Total | Percentage of Total | |||||||||||||||
Cost | Portfolio | Fair Value | Portfolio | |||||||||||||
September 30, 2010: |
||||||||||||||||
Subordinated debt,
Unitranche and
2nd lien
notes |
$ | 213,445,647 | 86 | % | $ | 197,646,525 | 82 | % | ||||||||
Senior debt |
8,846,756 | 4 | 7,910,691 | 3 | ||||||||||||
Equity shares |
20,136,497 | 8 | 27,126,983 | 11 | ||||||||||||
Equity warrants |
3,855,974 | 2 | 6,525,000 | 3 | ||||||||||||
Royalty rights |
874,400 | | 1,369,200 | 1 | ||||||||||||
$ | 247,159,274 | 100 | % | $ | 240,578,399 | 100 | % | |||||||||
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 | % | |||||||||
Investment Activity
During the three months ended September 30, 2010, we made three new investments totaling
approximately $26.1 million and four debt investments in existing portfolio companies totaling
approximately $3.9 million. In addition, we sold one equity investment in a portfolio company for
proceeds of approximately $1.3 million, resulting in a realized gain of approximately $0.3 million.
We also sold a convertible note investment in a portfolio company for proceeds of approximately
$2.3 million, resulting in a realized gain of approximately $0.9 million. We had four portfolio
company loans repaid at par totaling approximately $25.9 million and received normal principal
repayments and partial loan prepayments totaling approximately $2.8 million in the three months
ended September 30, 2010.
During the nine months ended September 30, 2010, we made nine new investments totaling
approximately $69.7 million, eight additional debt investments in existing portfolio companies
totaling approximately $17.8 million and five additional equity investments in existing portfolio
companies totaling approximately $0.7 million. In addition, we sold three equity investments in
portfolio companies for total proceeds of approximately $5.4 million, resulting in realized gains
totaling approximately $4.0 million, and converted a subordinated debt investment in one portfolio
company to equity, resulting in a realized loss of approximately $3.0 million. We also sold a
convertible note investment in a portfolio company for proceeds of approximately $2.3 million,
resulting in a realized gain of approximately $0.9 million. We had nine portfolio company loans
repaid at par totaling approximately $43.0 million and received normal principal repayments and
partial loan prepayments totaling approximately $3.3 million in the nine months ended September 30,
2010.
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During the three months ended September 30, 2009, we made three new investments totaling
approximately $18.8 million. We received normal principal repayments and partial loan prepayments
totaling approximately $2.5 million in the three months ended September 30, 2009.
During the nine months ended September 30, 2009, we made four new investment totaling
approximately $24.0 million and five additional investments in existing portfolio companies
totaling approximately $4.0 million. We sold investments in two portfolio companies for total
proceeds of approximately $1.9 million, resulting in realized gains totaling approximately $1.8
million and recognized a realized loss of approximately $1.0 million related to the restructuring
of a portfolio company. In addition, we received a full repayment from one portfolio company
totaling approximately $2.0 million and received partial repayments of loans from five portfolio
companies totaling approximately $4.4 million. In addition, we received normal principal
repayments totaling approximately $1.0 million in the nine months ended September 30, 2009.
Total portfolio investment activity for the nine months ended September 30, 2010 and 2009 was
as follows:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
Fair value of portfolio, beginning of period |
$ | 201,317,970 | $ | 182,105,291 | ||||
New investments |
88,215,263 | 27,943,735 | ||||||
Loan origination fees received |
(1,713,818 | ) | (540,000 | ) | ||||
Proceeds from sale of investment |
(5,416,123 | ) | (1,888,384 | ) | ||||
Net gains on sale of investment |
1,899,034 | 848,164 | ||||||
Principal repayments received |
(48,559,151 | ) | (7,400,722 | ) | ||||
Paymentinkind interest earned |
4,476,251 | 3,587,786 | ||||||
Paymentinkind interest received |
(3,226,488 | ) | (1,579,429 | ) | ||||
Accretion of loan discounts |
477,513 | 306,075 | ||||||
Accretion of deferred loan origination revenue |
1,065,703 | 443,135 | ||||||
Unrealized gains (losses) on investments |
2,042,245 | (15,434,615 | ) | |||||
Fair value of portfolio, end of period |
$ | 240,578,399 | $ | 188,391,036 | ||||
Weighted average yield on debt investments at end of period(1) |
15.1 | % | 14.4 | % | ||||
Weighted average yield on total investments at end of period(1) |
13.7 | % | 13.3 | % | ||||
Weighted average yield on total investments at end of period |
12.1 | % | 12.4 | % | ||||
(1) | Excludes non-accrual debt investments. |
Non-Accrual Assets
As of September 30, 2010, the fair value of our non-accrual assets was approximately $13.2
million, which comprised 5.5% of the total fair value of our portfolio, and the cost of our
non-accrual assets was approximately $28.4 million, which comprised 11.5% of the total cost of our
portfolio. Our non-accrual assets as of September 30, 2010 are as follows:
Gerli and Company
In November 2008, we placed our debt investment in Gerli and Company, or Gerli, on non-accrual
status. As a result, under generally accepted accounting principles in the United States, or U.S.
GAAP, we no longer recognize interest income on our debt investment in Gerli for financial
reporting purposes. During 2008, we recognized an unrealized loss on our debt investment in Gerli
of $1.2 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. In the nine months ended September 30, 2010,
we recognized an unrealized gain on our debt investment in Gerli of approximately $0.3 million. As
of September 30, 2010, the cost of our debt investment in Gerli is $3.3 million and the fair value
of such investment is $1.9 million.
Fire Sprinkler Systems, Inc.
In October 2008, we placed our debt investment in Fire Sprinkler Systems, Inc., or Fire
Sprinkler Systems, on non-accrual status. As a result, under U.S. GAAP, we no longer recognize
interest income on our debt investment in Fire Sprinkler Systems for financial reporting purposes.
During 2008, we recognized an unrealized loss of $1.4 million on our subordinated note investment
in Fire Sprinkler Systems. 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 and in the nine
months ended September 30, 2010, we recognized an additional unrealized loss on our debt investment
in Fire Sprinkler Systems of $0.1 million. As of September 30, 2010, the cost of our debt
investment in Fire
Sprinkler Systems is $2.5 million and the fair value of such investment is $0.8 million.
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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, or collectively, ADL. This unrealized loss
reduced the fair value of our investment in ADL to $6.9 million as of December 31, 2008. 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. As a result, we placed our investment in ADL on
non-accrual status and under U.S. GAAP, we no longer recognize interest income on our investment in
ADL for financial reporting purposes. In the year ended December 31, 2009, we recognized an
additional unrealized loss on our investment in ADL of $3.2 million and in the first quarter of
2010, we recognized an unrealized gain on our investment in ADL of approximately $0.1 million. In
June 2010, we converted approximately $3.0 million of our subordinated debt in ADL to equity as
part of a restructuring, resulting in realized loss of approximately $3.0 million. As of September
30, 2010, the cost of our investment in ADL was approximately $5.1 million and the fair value of
such investment was approximately $4.0 million.
FCL Graphics, Inc. 2nd Lien Note
During the first eight months of 2009, we received cash interest on our 2nd Lien note in FCL
Graphics, Inc., or 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 U.S. 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 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 and in the first nine months of 2010, we recognized an unrealized loss on our 2nd Lien note
investment in FCL of approximately $0.8 million. As of September 30, 2010, the cost of our 2nd Lien
note investment in FCL was approximately $3.0 million and the fair value of our 2nd Lien note
investment in FCL was zero.
Waste Recyclers Holdings, LLC
In 2009, in an effort to address liquidity and working capital constraints at Waste Recyclers
Holdings, LLC, or Waste Recyclers, we restructured our debt investments in Waste Recyclers to
provide for a lower rate of current cash interest and a higher rate of PIK interest. In addition,
in 2009, we recognized an unrealized loss on our debt investments in Waste Recyclers of
approximately $0.7 million. We continued to receive scheduled cash interest payments from Waste
Recyclers during 2009. In March 2010, Waste Recyclers did not make its scheduled cash interest
payments for the first quarter of 2010 and in April 2010, we received notification from Waste
Recyclers senior lender that Waste Recyclers was blocked from making interest payments to us for a
period of 180 days. As a result, we placed our debt investments in Waste Recyclers on non-accrual
status and under U.S. GAAP, we no longer recognize interest income on our debt investments in Waste
Recyclers for financial reporting purposes. In the first nine months of 2010, we recognized an
unrealized loss on our debt investments in Waste Recyclers of
approximately $6.4 million. As of
September 30, 2010, the cost of our debt investments in Waste Recyclers was approximately $11.2
million and the fair value of our debt investments in Waste Recyclers was approximately $4.0
million.
Wholesale Floors, Inc.
During the first seven months of 2010, we received cash and PIK interest on our subordinated
note investment in Wholesale Floors, Inc., or Wholesale Floors. We did not receive scheduled
interest payments from Wholesale Floors in August and September 2010 and in October 2010, we
received notification from Wholesale Floors senior lender that Wholesale Floors was blocked from
making interest payments to us. As a result, we placed our debt investments in Wholesale Floors on
non-accrual status and under U.S. GAAP, we no longer recognize interest income on our debt
investments in Wholesale Floors for financial reporting purposes. In the first nine months of
2010, we recognized an unrealized loss on our subordinated note investment in Wholesale Floors of
approximately $0.9 million. As of September 30, 2010, the cost of our debt investment in Wholesale
Floors was approximately $3.4 million and the fair value of our debt investment in Wholesale Floors
was approximately $2.5 million.
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We are currently involved in discussions with the Wholesale Floors investor group regarding
various restructuring alternatives. While there can be no assurance that these discussions will
result in terms that are acceptable to us, the Wholesale Floors investor group is working
diligently toward an acceptable restructuring.
Results of Operations
Comparison of three months ended September 30, 2010 and September 30, 2009
Investment Income
For the three months ended September 30, 2010, total investment income was $9.8 million, a 38%
increase from $7.1 million of total investment income for the three months ended September 30,
2009. This increase was primarily attributable to a $2.8 million increase in total loan interest,
fee and dividend income (including PIK interest income). The increase in total loan interest, fee
and dividend income was due to 1) a net increase in our portfolio investments from September 30,
2009, to September 30, 2010, and 2) an increase in non-recurring fee income of approximately $0.8
million, offset by a decrease in interest income from cash and cash equivalent investments of $0.1
million which resulted from lower average cash balances and lower interest rates in the third
quarter of 2010 as compared to the corresponding period in 2009. Non-recurring fee income was
approximately $1.0 million for the three months ended September 30, 2010 as compared to $0.2
million for the three months ended September 30, 2009.
Expenses
For the three months ended September 30, 2010, expenses increased by 24% to $4.2 million from
$3.4 million for the three months ended September 30, 2009. The increase in expenses was primarily
attributable to a $0.4 million increase in amortization of deferred financing fees associated with
the early repayment of certain SBA guaranteed debentures in the third quarter of 2010. The
increase in expenses was also partially attributable to a $0.1 million increase in interest expense
and a $0.3 million increase in general and administrative expenses. The increase in interest
expense is related to higher average balances of SBA-guaranteed debentures outstanding during the
three months ended September 30, 2010 than in the comparable period in 2009. The increase in
general and administrative costs in the third quarter of 2010 as compared to the third quarter of
2009 was primarily related to increased compensation costs (including equity-based compensation).
Net Investment Income
As a result of the $2.7 million increase in total investment income and the $0.8 million
increase in expenses, net investment income for the three months ended September 30, 2010 was $5.6
million compared to net investment income of $3.7 million during the three months ended September
30, 2009.
Net Increase/Decrease in Net Assets Resulting From Operations
In the three months ended September 30, 2010, we realized a gain on the sale of one
non-control/non-affiliate investment of approximately $0.3 million and a realized gain of $0.9
million on the repayment of a convertible note from another non-control/non-affiliate investment.
In addition, during the three months ended September 30, 2010, we recorded net unrealized
appreciation of investments totaling approximately $0.4 million, comprised of 1) unrealized
appreciation on 15 investments totaling approximately $5.2 million, 2) unrealized depreciation on
14 investments totaling approximately $4.2 million and 3) unrealized depreciation reclassification
adjustments totaling approximately $0.6 million related to the two realized gains discussed above.
During the three months ended September 30, 2009, we recorded net unrealized depreciation of
investments in the amount of $4.5 million, comprised of unrealized depreciation on 17 investments
totaling $5.5 million offset by unrealized appreciation on nine investments totaling $1.0 million.
As a result of these events, our net increase in net assets from operations was $7.2 million
for the three months ended September 30, 2010 as compared to a net decrease in net assets from
operations of $0.8 million for the three months ended September 30, 2009.
Comparison of nine months ended September 30, 2010 and September 30, 2009
Investment Income
For the nine months ended September 30, 2010, total investment income was $25.6 million, a 27%
increase from $20.2 million of
total investment income for the nine months ended September 30, 2009. This increase was
primarily attributable to a $5.6 million increase in total loan interest, fee and dividend income
(including PIK interest income). The increase in total loan interest, fee and dividend income was
due to 1) a net increase in our portfolio investments from September 30, 2009 to September 30,
2010, and 2) an increase in non-recurring fee income of approximately $1.5 million, offset by a
decrease in interest income from cash and cash
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equivalent investments of $0.2 million which
resulted from lower average cash balances and lower interest rates in the first nine months of 2010
as compared to the corresponding period in 2009. Non-recurring fee income was approximately $2.0
million for the nine months ended September 30, 2010, as compared to approximately $0.5 million for
the nine months ended September 30, 2009.
Expenses
For the nine months ended September 30, 2010, expenses increased by 14% to $11.6 million from
$10.2 million for the nine months ended September 30, 2009. The increase in expenses was primarily
attributable to a $0.4 million increase in amortization of deferred financing fees associated with
the early repayment of certain SBA guaranteed debentures in the third quarter of 2010. The
increase in expenses was also partially attributable to a $0.3 million increase in interest expense
and a $0.7 million increase in general and administrative expenses. The increase in interest
expense is related to higher average balances of SBA-guaranteed debentures outstanding during the
nine months ended September 30, 2010 than in the comparable period in 2009. The increase in
general and administrative costs in the first nine months of 2010 was primarily related to
increased compensation costs (including equity-based compensation).
Net Investment Income
As a result of the $5.4 million increase in total investment income and the $1.4 million
increase in expenses, net investment income for the nine months ended September 30, 2010 was $14.0
million compared to net investment income of $10.0 million during the nine months ended September
30, 2009.
Net Increase/Decrease in Net Assets Resulting From Operations
In the nine months ended September 30, 2010, we realized a gain on the sale of one affiliate
investment of approximately $3.5 million, a gain on the sale of two non-control/non-affiliate
investments totaling approximately $0.5 million, a realized loss on the partial conversion of one
non-control/non-affiliate debt investment to equity of approximately $3.0 million and a realized
gain of $0.9 million on the repayment of a convertible note from another non-control/non-affiliate
investment. In addition, during the nine months ended September 30, 2010, we recorded net
unrealized appreciation of investments totaling approximately $2.4 million, comprised of 1)
unrealized appreciation on 17 investments totaling approximately $15.5 million, 2) unrealized
depreciation on 17 investments totaling approximately $12.3 million and 3) $0.8 million in net
unrealized depreciation reclassification adjustments related to the realized gains and realized
loss noted above.
In the nine months ended September 30, 2009, we recorded net realized gains of $0.8 million,
consisting primarily of 1) a realized gain on the sale of one investment of $1.8 million and 2) a
loss on the recapitalization of another investment of $0.9 million. In the nine months ended
September 30, 2009, we recorded net unrealized depreciation of investments in the amount of $15.0
million, comprised of net unrealized depreciation reclassification adjustments totaling $0.6
million related to the sale of one investment and the recapitalization of another investment noted
above, as well as unrealized depreciation on 17 investments totaling $17.8 million and unrealized
appreciation on 11 investments totaling $3.3 million.
As a result of these events, our net increase in net assets from operations was $18.2 million
for the nine months ended September 30, 2010 as compared to a net decrease in net assets from
operations of $4.2 million during the nine months ended September 30, 2009.
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 and Fund IIs assets pursuant
to SBA guidelines, the Fund and Fund II 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 Regulated Investment
Company, or RIC.
Cash Flows
For the nine months ended September 30, 2010, we experienced a net increase in cash and cash
equivalents in the amount of $18.9 million. During that period, our operating activities used
$22.2 million in cash, consisting primarily of new portfolio
investments of $88.2 million, partially offset by repayments received from portfolio companies
and proceeds from the sale of investments totaling $54.0 million. In addition, financing
activities provided $41.1 million of cash, consisting primarily of proceeds from a public stock
offering of $41.3 million, borrowings under SBA guaranteed debentures payable of $39.4 million,
offset by cash dividends paid in the amount of $15.5 million, repayments of SBA guaranteed
debentures of $22.3 million and financing fees paid in the amount of $1.5 million. At September
30, 2010, we had $74.1 million of cash and cash equivalents on hand.
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For the nine months ended September 30, 2009, we experienced a net increase in cash and cash
equivalents in the amount of $6.2 million. During that period, our operating activities used $11.3
million in cash, consisting primarily of purchases of investments totaling $27.9 million, offset by
sales/repayments of portfolio investments of $9.3 million. In the nine months ended September 30,
2009, financing activities provided $17.6 million of cash, consisting of proceeds from our public
stock offerings of $27.1 million, net of cash dividends and distributions to stockholders totaling
$9.3 million. At September 30, 2009, we had $33.4 million of cash and cash equivalents on hand.
Financing Transactions
Due to the Funds and Fund IIs status as licensed SBICs, the Fund and Fund II have 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 and by a group of SBICs
under common control is $225.0 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.
As of September 30, 2010, the Fund has issued $127.7 million of SBA guaranteed debentures and
has the current capacity to issue up to the statutory maximum of $150.0 million, subject to SBA
approval. As of September 30, 2010, Fund II has issued $12.3 million in face amount of SBA
guaranteed debentures, has a leverage commitment from the SBA to issue up to $53.4 million of SBA
guaranteed debentures, and has the capacity to issue up to the statutory maximum of $75.0 million,
subject to SBA approval. 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 (2.0% for
SBA LMI debentures). 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 September 30, 2010 was 5.29%. As of September 30,
2010, all SBA guaranteed debentures have been pooled and assigned fixed 10-year interest rates.
Distributions to Stockholders
We have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended, or 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 each year at least 90% of our investment company taxable income, or ICTI, as defined
by the Code. 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 of the 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 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.
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Current Market Conditions
Since the beginning of 2008, 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 factors. 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 passage of 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 the remainder of 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.
Recent Developments
In October 2010, we invested $10.8 million in Infrastructure Corporation of America, or
ICA, consisting of subordinated debt with warrants. ICA maintains public transportation
infrastructure, including roadways, bridges, toll ways, rest areas and welcome centers.
This investment is in support of ICAs acquisition of full-service engineering firm Florence
& Hutcheson, which adds planning, design-build, civil, geotechnical, environmental,
construction engineering and inspection, and water resources to ICAs existing services.
Under the terms of the investments, ICA will pay interest on the subordinated debt at a rate
of 13% per annum.
In October 2010, we invested $6.0 million in subordinated debt of McKenzie Sports Products,
LLC, or McKenzie. McKenzie is the largest designer and manufacturer of taxidermy forms and
supplies used to mount hunting and fishing trophies in the United States. Under the terms of the
investments, McKenzie will pay interest on the subordinated debt at a rate of 14% per annum.
In October 2010, in connection with a restructuring of Waste Recyclers Holdings, LLC, or Waste
Recyclers, we exchanged subordinated notes in Waste Recyclers with a cost of approximately $11.2
million for Preferred Units in Waste Recyclers with a fair value of
approximately $4.0 million. In
connection with this restructuring, we recognized a net realized loss
of approximately $7.4 million
related to the exchange.
Critical Accounting Policies and Use of Estimates
The preparation of our unaudited 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, or
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 to 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 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
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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:
| financial standing of the issuer of the security; | ||
| comparison of the business and financial plan of the issuer with actual results; | ||
| the size of the security held as it relates to the liquidity of the market for such security; | ||
| pending public offering of common stock by the issuer of the security; | ||
| pending reorganization activity affecting the issuer, such as merger or debt restructuring; | ||
| ability of the issuer to obtain needed financing; | ||
| changes in the economy affecting the issuer; | ||
| financial statements and reports from portfolio company senior management and ownership; | ||
| the type of security, the securitys cost at the date of purchase and any contractual restrictions on the disposition of the security; | ||
| discount from market value of unrestricted securities of the same class at the time of purchase; | ||
| special reports prepared by analysts; | ||
| information as to any transactions or offers with respect to the security and/or sales to third parties of similar securities; | ||
| the issuers ability to make payments and the type of collateral; | ||
| the current and forecasted earnings of the issuer; | ||
| statistical ratios compared to lending standards and to other similar securities; and | ||
| other pertinent factors. |
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 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
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 anticipated results 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, (iv) publicly available information regarding current pricing and credit
metrics for similar proposed and executed investment transactions of private companies and, (v)
when management believes a relevant comparison exists, current pricing and credit metrics for
similar proposed and executed investment transactions of publicly traded debt.
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In valuing equity securities of private companies, we consider valuation methodologies
consistent with industry practice, including but not limited to (i) valuation using a valuation
model based on original transaction multiples and the portfolio companys recent financial
performance, (ii) publicly available information regarding the valuation of the securities based on
recent sales in comparable transactions of private companies and, (iii) when management believes
there are comparable companies that are publicly traded, a review of these publicly traded
companies 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, or 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, 2010, we asked Duff & Phelps to perform the procedures on
investments in seven portfolio companies comprising approximately 25% of the total investments at
fair value (exclusive of the fair value of new investments made during the quarter) as of March 31,
2010. For the quarter ended June 30, 2010, 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 June 30,
2010. For the quarter ended September 30, 2010, we asked Duff & Phelps to perform the procedures
on investments in eight 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
September 30, 2010. 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 an 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 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.
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We may have to include in our taxable income, or ICTI, PIK 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. As a result, we may be required to make a distribution to our 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.
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting
Standards Update No. 2010-06, Fair Value Measurements and Disclosures, or Topic 820. This update
improves disclosure requirements related to Fair Value Measurements and Disclosures-Overall
Subtopic, or Subtopic 820-10 of the FASB Standards Codification, originally issued as FASB
Statement No. 157, Fair Value Measurements. These improved disclosure requirements will provide a
greater level of disaggregated information and more robust disclosures about valuation techniques
and inputs to fair value measurements. We adopted these changes beginning with its financial
statements for the quarter ended March 31, 2010. The adoption of these changes did not have a
material impact on our financial position or results of operations.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Beginning
in late 2007, the United States entered a recession, and 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 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
declines in the operating performance of certain portfolio companies. In the first nine months of
2010, the fair value of our portfolio as a whole remained relatively flat with the fair value as of
December 31, 2009.
As of September 30, 2010, the fair value of our non-accrual assets was approximately $13.2
million, which comprised approximately 5.5% of the total fair value of our portfolio, and the cost
of our non-accrual assets was approximately $28.4 million, or 11.5% of the total cost of our
portfolio. In addition to these non-accrual assets, as of September 30, 2010, we had, on a fair
value basis, approximately $4.3 million of debt investments, or 1.8% 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 September 30, 2010 was approximately
$5.8 million, or 2.3% of the total cost of our portfolio.
While the equity and debt markets have recently improved, these stressed conditions may
continue for a prolonged period of time or worsen in the future. In the event that 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 lead to 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
September 30, 2010, we were not a party to
any hedging arrangements.
As of September 30, 2010, approximately 94.8%, or $210.8 million of our debt portfolio
investments bore interest at fixed rates and approximately 5.2%, or $11.5 million of our debt
portfolio investments bore interest at variable rates, which are either Prime-based or LIBOR-based.
A 200 basis point increase or decrease in the interest rates on our variable-rate debt investments
would increase or decrease, as applicable, our investment income by approximately $0.2 million on
an annual basis. All of our pooled SBA-guaranteed debentures bear interest at fixed rates.
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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.
Item 4. 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 of
1934 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the third
quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Neither Triangle Capital Corporation nor any of its subsidiaries is currently a party to any
material pending legal proceedings.
Item 1A. Risk Factors.
In addition to the other information set forth in this report and the risk factor below, you
should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, which could materially affect our
business, financial condition or operating results. The risks described herein or in our Annual
Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.
Recent healthcare reform legislation may affect our revenue and financial condition.
On March 23, 2010, the President of the United States signed into law the Patient Protection
and Affordable Care Act of 2010 and on March 30, 2010, the President signed into law the Health
Care and Education Reconciliation Act, which in part modified the Patient Protection and Affordable
Care Act. Together, the two Acts serve as the primary vehicle for comprehensive health care reform
in the United States. The Acts are intended to reduce the number of individuals in the United
States without health insurance and effect significant other changes to the ways in which health
care is organized, delivered and reimbursed. The complexities and ramifications of the new
legislation are significant, and will be implemented in a phased approach beginning in 2010 and
concluding in 2018. At this time, the effects of health care reform and its impact on our
operations and on the business, revenues and financial condition of our portfolio companies are not
yet known. Accordingly, the reform could adversely affect the cost of providing healthcare
coverage generally and could adversely affect the financial success of both the portfolio companies
in which we invest and us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
During the nine months ended September 30, 2010, we issued a total of 288,296 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 $4,033,504.
Issuer Purchases of Equity Securities
During the nine months ended September 30, 2010, there were elections by employees to
surrender 18,617 shares of common stock upon vesting of shares of restricted stock to cover tax
withholding obligations. The aggregate purchase price for the shares
of common stock was $234,912.
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 to satisfy our Dividend
Reinvestment Plan obligations during the nine months ended September 30, 2010.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. [Removed and Reserved.]
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
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). | |
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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRIANGLE CAPITAL CORPORATION |
||||
Date: November 3, 2010 | /s/ Garland S. Tucker III | |||
Garland S. Tucker III | ||||
President, Chief Executive Officer and
Chairman of the Board of Directors |
||||
Date: November 3, 2010 | /s/ Steven C. Lilly | |||
Steven C. Lilly | ||||
Chief Financial Officer and Director | ||||
Date: November 3, 2010 | /s/ C. Robert Knox, Jr. | |||
C. Robert Knox, Jr. | ||||
Principal Accounting Officer | ||||
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EXHIBIT INDEX
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). | |
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. |