10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 5, 2008
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 June 30, 2008
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 | 06-1798488 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
3600 Glenwood Avenue, Suite 104 Raleigh, North Carolina (Address and zip code of principal executive offices) |
27612 (Zip Code) |
Registrants telephone number, including area code: (919) 719-4770
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 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 o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
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 August 1, 2008 was 6,917,363.
TRIANGLE CAPITAL CORPORATION
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TRIANGLE CAPITAL CORPORATION
Consolidated Balance Sheets
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Investments at fair value: |
||||||||
NonControl / NonAffiliate investments (cost
of $115,624,742 and $66,129,119 at June 30, 2008 and
December 31, 2007, respectively) |
$ | 114,911,243 | $ | 68,388,014 | ||||
Affiliate investments (cost of $30,085,414 and $24,023,264
at June 30, 2008 and December 31, 2007, respectively) |
32,661,279 | 24,576,462 | ||||||
Control investments (cost of $13,388,794 and $15,727,418
at June 30, 2008 and December 31, 2007, respectively) |
18,411,040 | 20,071,764 | ||||||
Total investments at fair value |
165,983,562 | 113,036,240 | ||||||
Cash and cash equivalents |
18,706,661 | 21,787,750 | ||||||
Interest and fees receivable |
459,990 | 305,159 | ||||||
Prepaid expenses and other current assets |
160,989 | 47,477 | ||||||
Deferred financing fees |
2,716,415 | 999,159 | ||||||
Property and equipment, net |
39,911 | 34,166 | ||||||
Total assets |
$ | 188,067,528 | $ | 136,209,951 | ||||
Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 737,742 | $ | 1,144,222 | ||||
Interest payable |
1,084,994 | 698,735 | ||||||
Dividends payable |
| 2,041,159 | ||||||
Income taxes payable |
| 52,598 | ||||||
Deferred revenue |
| 30,625 | ||||||
Deferred income taxes |
2,128,499 | 1,760,259 | ||||||
SBA guaranteed debentures payable |
89,110,000 | 37,010,000 | ||||||
Total liabilities |
93,061,235 | 42,737,598 | ||||||
Net Assets |
||||||||
Common stock, $0.001 par value per share (150,000,000
shares authorized, 6,917,363 and 6,803,863 shares issued
and outstanding as of June 30, 2008 and December 31, 2007,
respectively) |
6,917 | 6,804 | ||||||
Additional paid-in capital |
87,013,500 | 86,949,189 | ||||||
Investment income in excess of distributions |
3,848,381 | 1,738,797 | ||||||
Accumulated realized losses on investments |
(618,620 | ) | (618,620 | ) | ||||
Net unrealized appreciation of investments |
4,756,115 | 5,396,183 | ||||||
Total net assets |
95,006,293 | 93,472,353 | ||||||
Total liabilities and net assets |
$ | 188,067,528 | $ | 136,209,951 | ||||
Net asset value per share |
$ | 13.73 | $ | 13.74 | ||||
See accompanying notes.
3
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Statements of Operations
Unaudited Statements of Operations
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
June 30, 2008 | June 30, 2007 | June 30, 2008 | June 30, 2007 | |||||||||||||
(Consolidated) | (Consolidated) | (Consolidated) | (Combined) | |||||||||||||
Investment income: |
||||||||||||||||
Loan interest, fee and dividend income: |
||||||||||||||||
NonControl / NonAffiliate investments |
$ | 2,797,958 | $ | 1,349,014 | $ | 4,719,727 | $ | 2,504,636 | ||||||||
Affiliate investments |
886,815 | 519,000 | 1,635,581 | 793,614 | ||||||||||||
Control investments |
391,761 | 408,023 | 879,195 | 483,741 | ||||||||||||
Total loan interest, fee and dividend income |
4,076,534 | 2,276,037 | 7,234,503 | 3,781,991 | ||||||||||||
Paidinkind interest income: |
||||||||||||||||
NonControl / NonAffiliate investments |
572,169 | 202,009 | 868,805 | 376,805 | ||||||||||||
Affiliate investments |
170,962 | 66,292 | 313,514 | 95,542 | ||||||||||||
Control investments |
130,912 | 108,365 | 260,307 | 151,313 | ||||||||||||
Total paidinkind interest income |
874,043 | 376,666 | 1,442,626 | 623,660 | ||||||||||||
Interest income from cash and cash equivalent
investments |
69,514 | 634,521 | 206,946 | 993,689 | ||||||||||||
Total investment income |
5,020,091 | 3,287,224 | 8,884,075 | 5,399,340 | ||||||||||||
Expenses: |
||||||||||||||||
Interest expense |
898,995 | 521,026 | 1,460,810 | 1,020,717 | ||||||||||||
Amortization of deferred financing fees |
56,028 | 28,108 | 96,169 | 55,216 | ||||||||||||
Management fees |
| | | 232,423 | ||||||||||||
General and administrative expenses |
1,522,626 | 1,094,092 | 2,870,959 | 1,642,256 | ||||||||||||
Total expenses |
2,477,649 | 1,643,226 | 4,427,938 | 2,950,612 | ||||||||||||
Net investment income |
2,542,442 | 1,643,998 | 4,456,137 | 2,448,728 | ||||||||||||
Net realized loss on investment Non Control /
NonAffiliate |
| | | (1,464,224 | ) | |||||||||||
Net unrealized appreciation (depreciation) of
investments |
381,815 | 586,086 | (640,068 | ) | 2,311,415 | |||||||||||
Total net gain (loss) on investments before income
taxes |
381,815 | 586,086 | (640,068 | ) | 847,191 | |||||||||||
Income tax expense |
75,750 | | 202,171 | | ||||||||||||
Net increase in net assets resulting from operations |
$ | 2,848,507 | $ | 2,230,084 | $ | 3,613,898 | $ | 3,295,919 | ||||||||
Net investment income per share basic and diluted |
$ | 0.37 | $ | 0.25 | $ | 0.65 | $ | 0.37 | ||||||||
Net increase in net assets resulting from
operations per share basic and diluted |
$ | 0.41 | $ | 0.33 | $ | 0.53 | $ | 0.49 | ||||||||
Weighted average number of shares outstanding
basic and diluted |
6,871,215 | 6,687,773 | 6,837,539 | 6,687,269 | ||||||||||||
See accompanying notes.
4
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Statements of Changes in Net Assets
Unaudited Statements of Changes in Net Assets
Investment | Accumulated | Net | ||||||||||||||||||||||||||||||||||
Income | Realized | Unrealized | ||||||||||||||||||||||||||||||||||
General | Limited | Common Stock | Additional | in Excess of | Gains | Appreciation | Total | |||||||||||||||||||||||||||||
Partners | Partners | Number | Par | Paid In | (Less Than) | (Losses) on | (Depreciation) of | Net | ||||||||||||||||||||||||||||
Capital | Capital | of Shares | Value | Capital | Distributions | Investments | Investments | Assets | ||||||||||||||||||||||||||||
Balance, January 1, 2007 |
$ | 100 | $ | 21,250,000 | 100 | $ | | $ | 1,500 | $ | 1,570,135 | $ | | $ | 2,335,076 | $ | 25,156,811 | |||||||||||||||||||
Public offering of common
stock |
| | 4,770,000 | 4,770 | 64,723,267 | | | | 64,728,037 | |||||||||||||||||||||||||||
Formation transactions |
(100 | ) | (21,250,000 | ) | 1,916,660 | 1,917 | 21,248,183 | | | | | |||||||||||||||||||||||||
Net investment income |
| | | | | 2,448,728 | | | 2,448,728 | |||||||||||||||||||||||||||
Realized loss on investment |
| | | | | | (1,464,224 | ) | 1,464,224 | | ||||||||||||||||||||||||||
Net unrealized gains on
investments |
| | | | | | | 847,191 | 847,191 | |||||||||||||||||||||||||||
Dividends paid |
| | 46,102 | 46 | 644,919 | (1,003,014 | ) | | | (358,049 | ) | |||||||||||||||||||||||||
Tax distribution to partners |
| | | | | (220,047 | ) | | | (220,047 | ) | |||||||||||||||||||||||||
Balance, June 30, 2007 |
$ | | $ | | 6,732,862 | $ | 6,733 | $ | 86,617,869 | $ | 2,795,802 | $ | (1,464,224 | ) | $ | 4,646,491 | $ | 92,602,671 | ||||||||||||||||||
Investment | Accumulated | Net | ||||||||||||||||||||||||||
Income | Realized | Unrealized | ||||||||||||||||||||||||||
Common Stock | Additional | in Excess of | Gains | Appreciation | Total | |||||||||||||||||||||||
Number | Par | Paid In | (Less Than) | (Losses) on | (Depreciation) of | Net | ||||||||||||||||||||||
of Shares | Value | Capital | Distributions | Investments | Investments | Assets | ||||||||||||||||||||||
Balance, January 1, 2008 |
6,803,863 | $ | 6,804 | $ | 86,949,189 | $ | 1,738,797 | $ | (618,620 | ) | $ | 5,396,183 | $ | 93,472,353 | ||||||||||||||
Net investment income |
| | | 4,456,137 | | | 4,456,137 | |||||||||||||||||||||
Stock-based compensation |
| | 64,424 | | | | 64,424 | |||||||||||||||||||||
Income tax expense |
| | | (202,171 | ) | | | (202,171 | ) | |||||||||||||||||||
Net unrealized losses on
investments |
| | | | | (640,068 | ) | (640,068 | ) | |||||||||||||||||||
Dividends paid |
| | | (2,144,382 | ) | | | (2,144,382 | ) | |||||||||||||||||||
Issuance of restricted stock |
113,500 | 113 | (113 | ) | | | | | ||||||||||||||||||||
Balance, June 30, 2008 |
6,917,363 | $ | 6,917 | $ | 87,013,500 | $ | 3,848,381 | $ | (618,620 | ) | $ | 4,756,115 | $ | 95,006,293 | ||||||||||||||
See accompanying notes.
5
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Unaudited Statements of Cash Flows
Six Months Ended | Six Months Ended | |||||||
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
(Consolidated) | (Combined) | |||||||
Cash flows from operating activities: |
||||||||
Net increase in net assets resulting from operations |
$ | 3,613,898 | $ | 3,295,919 | ||||
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by (used in) operating
activities: |
||||||||
Purchases of portfolio investments |
(57,312,359 | ) | (29,413,602 | ) | ||||
Repayments received/sales of portfolio investments |
4,620,159 | 1,534,111 | ||||||
Loan origination and other fees received |
1,091,996 | 642,125 | ||||||
Net realized loss on investments |
| 1,464,224 | ||||||
Net unrealized depreciation (appreciation) of investments |
271,828 | (2,311,415 | ) | |||||
Deferred income taxes |
368,240 | | ||||||
Paidinkind interest accrued, net of payments received |
(1,389,162 | ) | (498,684 | ) | ||||
Amortization of deferred financing fees |
96,169 | 55,216 | ||||||
Recognition of loan origination and other fees |
(210,778 | ) | (243,975 | ) | ||||
Accretion of loan discounts |
(49,631 | ) | (106,248 | ) | ||||
Depreciation expense |
6,813 | 2,064 | ||||||
Stock-based compensation |
64,424 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Interest and fees receivable |
(154,831 | ) | 5,612 | |||||
Prepaid expenses and other current assets |
(113,512 | ) | (50,637 | ) | ||||
Accounts payable and accrued liabilities |
(406,480 | ) | (324,523 | ) | ||||
Interest payable |
386,259 | 71,570 | ||||||
Income taxes payable |
(52,598 | ) | | |||||
Receivable from / payable to Triangle Capital Partners, LLC |
| (48,687 | ) | |||||
Net cash provided by (used in) operating activities |
(49,169,565 | ) | (25,926,930 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(12,558 | ) | (23,561 | ) | ||||
Net cash used in investing activities |
(12,558 | ) | (23,561 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under SBA guaranteed debentures payable |
52,100,000 | 4,000,000 | ||||||
Financing fees paid |
(1,813,425 | ) | (97,000 | ) | ||||
Proceeds from initial public offering, net of expenses |
| 64,728,037 | ||||||
Change in deferred offering costs |
| 1,020,646 | ||||||
Cash dividends paid |
(4,185,541 | ) | (358,049 | ) | ||||
Tax distribution to partners |
| (751,613 | ) | |||||
Net cash provided by financing activities |
46,101,034 | 68,542,021 | ||||||
Net increase (decrease) in cash and cash equivalents |
(3,081,089 | ) | 42,591,530 | |||||
Cash and cash equivalents, beginning of period |
21,787,750 | 2,556,502 | ||||||
Cash and cash equivalents, end of period |
$ | 18,706,661 | $ | 45,148,032 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 1,074,552 | $ | 949,148 | ||||
See accompanying notes.
6
Table of Contents
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
June 30, 2008
Unaudited Consolidated Schedule of Investments
June 30, 2008
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
NonControl / NonAffiliate Investments: |
||||||||||||||||
Ambient Air Corporation (6%)* |
Specialty Trade Contractors | Subordinated Note (12%, Due 03/11) |
$ | 3,144,654 | $ | 3,016,789 | $ | 3,016,789 | ||||||||
Subordinated Note (14%, Due 03/11) |
1,872,075 | 1,838,115 | 1,838,115 | |||||||||||||
Common Stock Warrants (455 shares) | 142,361 | 892,700 | ||||||||||||||
5,016,729 | 4,997,265 | 5,747,604 | ||||||||||||||
American De-Rosa Lamparts, LLC and Hallmark Lighting (8%)* |
Wholesale and Distribution | Subordinated Note (15.25%, Due 10/13) |
8,052,586 | 7,897,900 | 7,897,900 | |||||||||||
8,052,586 | 7,897,900 | 7,897,900 | ||||||||||||||
APO Newco, LLC (5%)* |
Commercial and Consumer Marketing Products | Subordinated Note (14%, Due 03/13) |
4,359,004 | 4,265,799 | 4,265,799 | |||||||||||
Unit purchase warrant (87,302 Class C units) | 25,200 | 273,100 | ||||||||||||||
4,359,004 | 4,290,999 | 4,538,899 | ||||||||||||||
ARC Industries, LLC (3%)* |
Remediation Services | Subordinated Note (19%, Due 11/10) |
2,464,919 | 2,439,537 | 2,439,537 | |||||||||||
2,464,919 | 2,439,537 | 2,439,537 | ||||||||||||||
Art Headquarters, LLC (2%)* |
Retail, Wholesale and Distribution | Subordinated Note (14%, Due 01/10) |
2,333,488 | 2,299,257 | 2,075,900 | |||||||||||
Membership unit warrants (15% of units (150 units)) | 40,800 | | ||||||||||||||
2,333,488 | 2,340,057 | 2,075,900 | ||||||||||||||
Assurance Operations Corporation (4%)* |
Auto Components / Metal Fabrication | Subordinated Note (17%, Due 03/12) |
3,925,915 | 3,879,225 | 3,646,900 | |||||||||||
Common Stock (57 shares) | 257,143 | 48,500 | ||||||||||||||
3,925,915 | 4,136,368 | 3,695,400 | ||||||||||||||
Bruce Plastics, Inc. (0%)* |
Plastic Component Manufacturing | Subordinated Note (14%, Due 10/11) |
1,500,000 | 1,385,076 | | |||||||||||
Common Stock Warrants (12% of common stock) | 108,534 | | ||||||||||||||
1,500,000 | 1,493,610 | | ||||||||||||||
CV Holdings, LLC (6%)* |
Specialty Healthcare Products Manufacturer | Subordinated Note (16%, Due 03/10) |
5,129,230 | 5,094,457 | 5,094,457 | |||||||||||
Royalty rights | | 274,600 | ||||||||||||||
5,129,230 | 5,094,457 | 5,369,057 | ||||||||||||||
Cyrus Networks, LLC (6%)* |
Data Center Services Provider | Senior Note (6%, Due 07/13) |
4,747,722 | 4,731,423 | 4,731,423 | |||||||||||
2nd Lien
Note (10%, Due 01/14) |
1,026,385 | 1,026,385 | 1,026,385 | |||||||||||||
Revolving Line of Credit (6%) | 253,144 | 253,144 | 253,144 | |||||||||||||
6,027,251 | 6,010,952 | 6,010,952 | ||||||||||||||
DataPath, Inc. (1%)* |
Satellite Communication Manufacturer | Common Stock (210,263 shares) | 101,500 | 636,700 | ||||||||||||
101,500 | 636,700 |
7
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Eastern Shore Ambulance, Inc. (1%)* |
Specialty Health Care Services | Subordinated Note (13%, Due 03/11) |
$ | 1,000,000 | $ | 964,005 | $ | 964,005 | ||||||||
Common Stock Warrants (6% of common stock) | 55,268 | 41,300 | ||||||||||||||
Common Stock (30 shares) | 30,000 | 10,800 | ||||||||||||||
1,000,000 | 1,049,273 | 1,016,105 | ||||||||||||||
Electronic Systems Protection, Inc. (4%)* |
Power Protection Systems Manufacturing | Subordinated Note (14%, Due 12/15) |
3,028,903 | 3,000,977 | 3,000,977 | |||||||||||
Senior Note (7%, Due 01/14) |
994,219 | 994,219 | 994,219 | |||||||||||||
Common Stock (500 shares) | 250,000 | 250,000 | ||||||||||||||
4,023,122 | 4,245,196 | 4,245,196 | ||||||||||||||
Energy Hardware Holdings, LLC (4%)* |
Machined Parts Distribution | Subordinated Note (14.5%, Due 10/12) |
3,306,628 | 3,242,864 | 3,242,864 | |||||||||||
Junior Subordinated Note (8%, Due 10/12) |
207,667 | 207,667 | 207,667 | |||||||||||||
3,514,295 | 3,450,531 | 3,450,531 | ||||||||||||||
FCL Graphics, Inc. (7%)* |
Commercial Printing Services | Senior Note (6%, Due 10/12) |
1,789,200 | 1,782,290 | 1,782,290 | |||||||||||
Senior Note |
||||||||||||||||
(10%, Due 10/13) | 2,000,000 | 1,992,608 | 1,992,608 | |||||||||||||
2nd Lien Note |
||||||||||||||||
(18%, Due 4/14) | 3,265,970 | 3,254,235 | 3,254,235 | |||||||||||||
7,055,170 | 7,029,133 | 7,029,133 | ||||||||||||||
Fire Sprinkler Systems, Inc. (2%)* |
Specialty Trade Contractors | Subordinated Notes (13%17.5%, Due 04/11) | 2,464,428 | 2,426,940 | 2,123,100 | |||||||||||
Common Stock (250 shares) | 271,186 | 18,000 | ||||||||||||||
2,464,428 | 2,698,126 | 2,141,100 | ||||||||||||||
Garden Fresh Restaurant Corp. (4%)* |
Restaurant | 2nd Lien Note |
||||||||||||||
(10%, Due 12/11) | 3,000,000 | 3,000,000 | 3,000,000 | |||||||||||||
Membership Units (5,000 units) | 500,000 | 583,600 | ||||||||||||||
3,000,000 | 3,500,000 | 3,583,600 | ||||||||||||||
Gerli & Company (3%)* |
Specialty Woven Fabrics Manufacturer | Subordinated Note (14%, Due 08/11) |
3,145,496 | 3,062,284 | 3,062,284 | |||||||||||
Common Stock Warrants (56,559 shares) | 83,414 | | ||||||||||||||
3,145,496 | 3,145,698 | 3,062,284 | ||||||||||||||
Inland Pipe Rehabilitation Holding Company LLC (8%)* |
Cleaning and Repair Services | Subordinated Note (14%, Due 01/14) |
8,012,889 | 7,292,089 | 7,292,089 | |||||||||||
Membership Interest Purchase Warrant (2.5%) | 563,300 | 563,300 | ||||||||||||||
8,012,889 | 7,855,389 | 7,855,389 | ||||||||||||||
Jenkins Service, LLC (10%)* |
Restoration Services | Subordinated Note (17.5%, Due 04/14) |
8,107,945 | 7,952,853 | 7,952,853 | |||||||||||
Convertible Note (10%, Due 04/14) |
1,400,000 | 1,359,298 | 1,359,298 | |||||||||||||
9,507,945 | 9,312,151 | 9,312,151 | ||||||||||||||
Library Systems & Services, LLC (3%)* |
Municipal Business Services | Subordinated Note (12%, Due 03/11) |
2,000,000 | 1,937,506 | 1,937,506 | |||||||||||
Common Stock Warrants (112 shares) | 58,995 | 608,000 | ||||||||||||||
2,000,000 | 1,996,501 | 2,545,506 |
8
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Syrgis Holdings, Inc. (6%)* |
Specialty Chemical Manufacturer | Senior Note (7%, Due 08/12-02/14) |
$ | 4,797,500 | $ | 4,764,552 | $ | 4,764,552 | ||||||||
Common Units (2,114 units) | 1,000,000 | 718,200 | ||||||||||||||
4,797,500 | 5,764,552 | 5,482,752 | ||||||||||||||
TrustHouse Services Group, Inc. (5%)* |
Food Management Services | Subordinated Note (14%, Due 03/15) |
4,221,233 | 4,139,190 | 4,139,190 | |||||||||||
Class A Units (1,495 units) | 475,000 | 475,000 | ||||||||||||||
Class B Units (79 units) | 25,000 | 25,000 | ||||||||||||||
4,221,233 | 4,639,190 | 4,639,190 | ||||||||||||||
Twin-Star International, Inc. (6%)* |
Consumer Home Furnishings Manufacturer | Subordinated Note (13%, Due 04/14) |
4,500,000 | 4,434,146 | 4,434,146 | |||||||||||
Senior Note (6%, Due 04/13) |
1,485,000 | 1,485,000 | 1,485,000 | |||||||||||||
5,985,000 | 5,919,146 | 5,919,146 | ||||||||||||||
Wholesale Floors, Inc. (4%)* |
Commercial Services | Subordinated Note (14%, Due 06/14) |
3,502,771 | 3,334,971 | 3,334,971 | |||||||||||
Membership Interest Purchase Warrant (4.0%) | 132,800 | 132,800 | ||||||||||||||
3,502,771 | 3,467,771 | 3,467,771 | ||||||||||||||
Yellowstone Landscape Group, Inc. (13%)* |
Landscaping Services | Subordinated Note (15%, Due 04/14) |
13,065,000 | 12,749,440 | 12,749,440 | |||||||||||
13,065,000 | 12,749,440 | 12,749,440 | ||||||||||||||
Subtotal NonControl / NonAffiliate Investments |
114,103,971 | 115,624,742 | 114,911,243 | |||||||||||||
Affiliate Investments: |
||||||||||||||||
Asset Point, LLC (6%)* |
Asset Management Software Provider | Subordinated Note (15%, Due 03/13) |
5,046,055 | 4,949,777 | 4,949,777 | |||||||||||
Membership Units (10 units) | 500,000 | 500,000 | ||||||||||||||
5,046,055 | 5,449,777 | 5,449,777 | ||||||||||||||
Axxiom Manufacturing, Inc. (2%)* |
Industrial Equipment Manufacturer | Subordinated Note (14%, Due 01/11) |
2,102,454 | 2,077,226 | 2,077,226 | |||||||||||
Common Stock (34,100 shares) | 200,000 | 286,300 | ||||||||||||||
Common Stock Warrant (1,000 shares) | | 6,400 | ||||||||||||||
2,102,454 | 2,277,226 | 2,369,926 | ||||||||||||||
Brantley Transportation, LLC (Brantley Transportation) and Pine Street Holdings, LLC (Pine Street) (4) (4%)* |
Oil and Gas Services | Subordinated Note Brantley Transportation (14%, Due 12/12) |
3,800,000 | 3,680,133 | 3,680,133 | |||||||||||
Common Unit Warrants Brantley Transportation (4,560 common units) | 33,600 | 33,600 | ||||||||||||||
Preferred Units Pine Street (200 units) | 200,000 | 200,000 | ||||||||||||||
Common Unit Warrants Pine Street (2,220 units) | | | ||||||||||||||
3,800,000 | 3,913,733 | 3,913,733 | ||||||||||||||
Dyson Corporation (12%)* |
Custom Forging and Fastener Supplies | Subordinated Note (15%, Due 12/13) |
10,161,935 | 9,953,777 | 9,953,777 | |||||||||||
Class A Units (1,000,000 units) | 1,000,000 | 1,000,000 | ||||||||||||||
10,161,935 | 10,953,777 | 10,953,777 |
9
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Equisales, LLC (8%)* |
Energy Products and Services | Subordinated Note (15%, Due 04/12) |
$ | 6,223,280 | $ | 6,118,966 | $ | 6,118,966 | ||||||||
Class A Units (500,000 units) | 500,000 | 1,856,500 | ||||||||||||||
6,223,280 | 6,618,966 | 7,975,466 | ||||||||||||||
Flint Acquisition Corporation (1%)* |
Specialty Chemical Manufacturer | Preferred Stock (9,875 shares) | 308,333 | 1,291,600 | ||||||||||||
308,333 | 1,291,600 | |||||||||||||||
Genapure Corporation (Genapure) and Genpref, LLC (Genpref) (5) (1%)* |
Lab Testing Services | Genapure Common Stock (4,286 shares) | 500,000 | 627,216 | ||||||||||||
Genpref Preferred Stock (455 shares) | 63,602 | 79,784 | ||||||||||||||
563,602 | 707,000 | |||||||||||||||
Subtotal Affiliate Investments |
27,333,724 | 30,085,414 | 32,661,279 | |||||||||||||
Control Investments: |
||||||||||||||||
Fischbein, LLC (15%)* |
Packaging and Materials Handling | Subordinated Note (16.5%, Due 05/13) |
8,859,632 | 8,717,540 | 8,717,540 | |||||||||||
Equipment Manufacturer | Membership Units (4,200,000 units) | 4,200,000 | 5,257,500 | |||||||||||||
8,859,632 | 12,917,540 | 13,975,040 | ||||||||||||||
Porters Group, LLC (5%)* |
Metal Fabrication | Membership Units (4,730 units) | 471,254 | 4,436,000 | ||||||||||||
471,254 | 4,436,000 | |||||||||||||||
Subtotal Control Investments |
8,859,632 | 13,388,794 | 18,411,040 | |||||||||||||
Total Investments, June 30, 2008 (175%)* |
$ | 150,297,327 | $ | 159,098,950 | $ | 165,983,562 | ||||||||||
* | 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) | Interest rates on subordinated debt include cash interest rate and, where applicable, paidinkind interest rate. | |
(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. | |
(5) | Genpref is the sole owner of Genapures preferred stock and its sole business purpose is its ownership of Genapures preferred stock. |
See accompanying notes.
10
Table of Contents
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2007
Consolidated Schedule of Investments
December 31, 2007
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
NonControl / NonAffiliate Investments: |
||||||||||||||||
Ambient Air Corporation (6%)* |
Specialty Trade Contractors | Subordinated Note (12%, Due 03/11) |
$ | 3,144,654 | $ | 2,997,686 | $ | 2,997,686 | ||||||||
Subordinated Note (14%, Due 03/11) |
1,872,075 | 1,833,206 | 1,833,206 | |||||||||||||
Common Stock Warrants (455 shares) | 142,361 | 929,700 | ||||||||||||||
5,016,729 | 4,973,253 | 5,760,592 | ||||||||||||||
APO Newco, LLC (5%)* |
Commercial and Consumer | Subordinated Note (14%, Due 03/13) |
4,315,262 | 4,214,957 | 4,214,957 | |||||||||||
Marketing Products | Unit purchase warrant (87,302 Class C units) | 25,200 | 199,000 | |||||||||||||
4,315,262 | 4,240,157 | 4,413,957 | ||||||||||||||
Art Headquarters, LLC (3%)* |
Retail, Wholesale and Distribution | Subordinated Note (14%, Due 01/10) |
2,441,824 | 2,397,556 | 2,397,556 | |||||||||||
Membership unit warrants (15% of units (150 units)) | 40,800 | 9,800 | ||||||||||||||
2,441,824 | 2,438,356 | 2,407,356 | ||||||||||||||
Assurance Operations Corporation (4%)* |
Auto Components / Metal Fabrication | Subordinated Note (17%, Due 03/12) |
3,828,527 | 3,776,608 | 3,776,608 | |||||||||||
Common Stock (200 shares) | 200,000 | | ||||||||||||||
3,828,527 | 3,976,608 | 3,776,608 | ||||||||||||||
Bruce Plastics, Inc. (1%)* |
Plastic Component Manufacturing | Subordinated Note (14%, Due 10/11) |
1,500,000 | 1,371,527 | 1,371,527 | |||||||||||
Common Stock Warrants (12% of common stock) | 108,534 | | ||||||||||||||
1,500,000 | 1,480,061 | 1,371,527 | ||||||||||||||
CV Holdings, LLC (5%)* |
Specialty Healthcare Products | Subordinated Note (16%, Due 03/10) |
4,976,360 | 4,932,535 | 4,932,535 | |||||||||||
Manufacturer | Royalty rights | | 197,900 | |||||||||||||
4,976,360 | 4,932,535 | 5,130,435 | ||||||||||||||
Cyrus Networks, LLC (6%)* |
Data Center Services Provider | Senior Note (9%, Due 07/13) |
4,382,257 | 4,364,705 | 4,364,705 | |||||||||||
2nd Lien Note (12%, Due 01/14) |
907,663 | 907,663 | 907,663 | |||||||||||||
Revolving Line of Credit (9%) | 70,880 | 70,880 | 70,880 | |||||||||||||
5,360,800 | 5,343,248 | 5,343,248 | ||||||||||||||
DataPath, Inc. (1%)* |
Satellite Communication Manufacturer | Common Stock (210,263 shares) | 101,500 | 576,400 | ||||||||||||
101,500 | 576,400 | |||||||||||||||
Eastern Shore Ambulance, Inc. (1%)* |
Specialty Health Care Services | Subordinated Note (13%, Due 03/11) |
1,000,000 | 958,715 | 958,715 | |||||||||||
Common Stock Warrants (6% of common stock) | 55,268 | 7,400 | ||||||||||||||
Common Stock (30 shares) | 30,000 | 1,900 | ||||||||||||||
1,000,000 | 1,043,983 | 968,015 |
11
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Energy Hardware Holdings, LLC (4%)* |
Machined Parts Distribution | Subordinated Note (14.5%, Due 10/12) |
$ | 3,265,142 | $ | 3,196,108 | $ | 3,196,108 | ||||||||
Junior Subordinated Note (8%, Due 10/12) |
207,667 | 207,667 | 207,667 | |||||||||||||
3,472,809 | 3,403,775 | 3,403,775 | ||||||||||||||
FCL Graphics, Inc. (8%)* |
Commercial Printing Services | Senior Note (9%, Due 10/12) |
1,920,000 | 1,912,331 | 1,912,331 | |||||||||||
Senior Note (13%, Due 10/13) |
2,000,000 | 1,992,061 | 1,992,061 | |||||||||||||
2nd Lien Note (18%, Due 4/14) |
3,145,481 | 3,133,096 | 3,133,096 | |||||||||||||
7,065,481 | 7,037,488 | 7,037,488 | ||||||||||||||
Fire Sprinkler Systems, Inc. (3%)* |
Specialty Trade Contractors | Subordinated Notes (13%17.5%, Due 04/11) | 2,517,986 | 2,474,943 | 2,474,943 | |||||||||||
Common Stock (250 shares) | 250,000 | 41,700 | ||||||||||||||
2,517,986 | 2,724,943 | 2,516,643 | ||||||||||||||
Flint Acquisition Corporation (5%)* |
Specialty Chemical Manufacturer | Subordinated Note (12.5%, Due 09/09) |
3,750,000 | 3,719,770 | 3,719,770 | |||||||||||
Preferred Stock (9,875 shares) | 308,333 | 1,074,100 | ||||||||||||||
3,750,000 | 4,028,103 | 4,793,870 | ||||||||||||||
Garden Fresh Restaurant Corp. (4%)* |
Restaurant | 2nd Lien Note (13%, Due 12/11) |
3,000,000 | 3,000,000 | 3,000,000 | |||||||||||
Membership Units (5,000 units) | 500,000 | 446,600 | ||||||||||||||
3,000,000 | 3,500,000 | 3,446,600 | ||||||||||||||
Gerli & Company (3%)* |
Specialty Woven Fabrics | Subordinated Note (14%, Due 08/11) |
3,114,063 | 3,017,205 | 3,017,205 | |||||||||||
Manufacturer | Common Stock Warrants (56,559 shares) | 83,414 | 84,500 | |||||||||||||
3,114,063 | 3,100,619 | 3,101,705 | ||||||||||||||
Library Systems & Services, LLC (3%)* |
Municipal Business Services | Subordinated Note (12%, Due 03/11) |
2,000,000 | 1,927,075 | 1,927,075 | |||||||||||
Common Stock Warrants (112 shares) | 58,995 | 594,300 | ||||||||||||||
2,000,000 | 1,986,070 | 2,521,375 | ||||||||||||||
Syrgis Holdings, Inc. (6%)* |
Specialty Chemical Manufacturer | Senior Note (9%, Due 08/12-02/14) |
4,932,500 | 4,896,481 | 4,896,481 | |||||||||||
Common Units (2,114 units) | 1,000,000 | 1,000,000 | ||||||||||||||
4,932,500 | 5,896,481 | 5,896,481 | ||||||||||||||
Twin-Star International, Inc. (6%)* |
Consumer Home Furnishings | Subordinated Note (13%, Due 04/14) |
4,500,000 | 4,429,439 | 4,429,439 | |||||||||||
Manufacturer | Senior Note (8%, Due 04/13) |
1,492,500 | 1,492,500 | 1,492,500 | ||||||||||||
5,992,500 | 5,921,939 | 5,921,939 | ||||||||||||||
Subtotal NonControl / NonAffiliate Investments |
64,284,841 | 66,129,119 | 68,388,014 |
12
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Affiliate Investments: |
||||||||||||||||
Axxiom Manufacturing, Inc. (3%)* |
Industrial Equipment | Subordinated Note (14%, Due 01/11) |
$ | 2,081,321 | $ | 2,051,882 | $ | 2,051,882 | ||||||||
Manufacturer | Common Stock (34,100 shares) | 200,000 | 543,600 | |||||||||||||
Common Stock Warrant (1,000 shares) | | 12,200 | ||||||||||||||
2,081,321 | 2,251,882 | 2,607,682 | ||||||||||||||
Brantley Transportation, LLC (Brantley Transportation) and Pine Street Holdings, LLC (Pine Street) (4) (4%)* |
Oil and Gas Services | Subordinated Note Brantley Transportation (14%, Due 12/12) |
3,800,000 | 3,670,336 | 3,670,336 | |||||||||||
Common Unit Warrants Brantley Transportation (4,560 common units) | 33,600 | 33,600 | ||||||||||||||
Preferred Units Pine Street (200 units) | 200,000 | 200,000 | ||||||||||||||
Common Unit Warrants Pine Street (2,220 units) | | | ||||||||||||||
3,800,000 | 3,903,936 | 3,903,936 | ||||||||||||||
Dyson Corporation (12%)* |
Custom Forging and Fastener | Subordinated Note (15%, Due 12/13) |
10,009,167 | 9,789,167 | 9,789,167 | |||||||||||
Supplies | Class A Units (1,000,000 units) | 1,000,000 | 1,000,000 | |||||||||||||
10,009,167 | 10,789,167 | 10,789,167 | ||||||||||||||
Equisales, LLC (7%)* |
Energy Products and Services | Subordinated Note (15%, Due 04/12) |
6,129,723 | 6,014,677 | 6,014,677 | |||||||||||
Class A Units (500,000 units) | 500,000 | 500,000 | ||||||||||||||
6,129,723 | 6,514,677 | 6,514,677 | ||||||||||||||
Genapure Corporation (Genapure) and Genpref, LLC (Genpref) (5) (1%)* |
Lab Testing Services | Genapure Common Stock (4,286 shares) | 500,000 | 675,122 | ||||||||||||
Genpref Preferred Stock (455 shares) | 63,602 | 85,878 | ||||||||||||||
563,602 | 761,000 | |||||||||||||||
Subtotal Affiliate Investments |
22,020,211 | 24,023,264 | 24,576,462 |
13
Table of Contents
Principal | Fair | |||||||||||||||
Portfolio Company | Industry | Type of Investment (1) (2) | Amount | Cost | Value (3) | |||||||||||
Control Investments: |
||||||||||||||||
ARC Industries, LLC (3%)* |
Remediation Services | Subordinated Note (19%, Due 11/10) |
$ | 2,403,521 | $ | 2,373,358 | $ | 2,373,358 | ||||||||
Membership Units (3,000 units) | 175,000 | 118,700 | ||||||||||||||
2,403,521 | 2,548,358 | 2,492,058 | ||||||||||||||
Fischbein, LLC (14%)* |
Packaging and Materials Handling | Subordinated Note (16.5%, Due 05/13) |
8,660,723 | 8,507,806 | 8,507,806 | |||||||||||
Equipment Manufacturer | Membership Units (4,200,000 units) | 4,200,000 | 4,200,000 | |||||||||||||
8,660,723 | 12,707,806 | 12,707,806 | ||||||||||||||
Porters Group, LLC (5%)* |
Metal Fabrication | Membership Units (4,730 units) | 471,254 | 4,871,900 | ||||||||||||
471,254 | 4,871,900 | |||||||||||||||
Subtotal Control Investments |
11,064,244 | 15,727,418 | 20,071,764 | |||||||||||||
Total Investments, December 31, 2007 (121%)* |
$ | 97,369,296 | $ | 105,879,801 | $ | 113,036,240 | ||||||||||
* | 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) | Interest rates on subordinated debt include cash interest rate and, where applicable, paidinkind interest rate. | |
(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. | |
(5) | Genpref is the sole owner of Genapures preferred stock and its sole business purpose is its ownership of Genapures preferred stock. |
See
accompanying notes.
14
Table of Contents
TRIANGLE CAPITAL CORPORATION
Notes to Unaudited Financial Statements
Notes to Unaudited Financial Statements
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization
Triangle Capital Corporation (the Company), was formed on October 10, 2006 for the purposes
of acquiring 100% of the equity interest in Triangle Mezzanine Fund LLLP (the Fund) and its
general partner, Triangle Mezzanine LLC (TML), raising capital in an initial public offering,
which was completed in February 2007 (the Offering) and thereafter operating as an internally
managed Business Development Company (BDC) under the Investment Company Act of 1940 (the 1940
Act).
The Fund is a specialty finance limited liability limited partnership formed to make
investments primarily in middle market companies located throughout the United States. The Funds
term is ten years from the date of formation (August 14, 2002) unless terminated earlier or
extended in accordance with provisions of the limited partnership agreement. 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). As an SBIC, the Fund is
subject to a variety of regulations concerning, among other things, the size and nature of the
companies in which it may invest and the structure of those investments.
On February 21, 2007, concurrent with the closing of the Offering, the following formation
transactions were consummated (the Formation Transactions):
| The Company acquired 100% of the limited partnership interests in the Fund in exchange for approximately 1.9 million shares of the Companys common stock. The Fund became a wholly owned subsidiary of the Company, retained its license under the authority of the SBA to operate as an SBIC and continues to hold its existing investments and make new investments with the proceeds of the Offering; and | ||
| The Company acquired 100% of the equity interests in TML, and the management agreement between the Fund and Triangle Capital Partners, LLC was terminated. |
The Offering consisted of the sale of 4,770,000 shares of Common Stock at a price of $15 per
share, resulting in net proceeds of approximately $64.7 million, after deducting offering costs
totaling approximately $6.8 million. Upon completion of the Offering, the Company had 6,686,760
common shares outstanding.
As a result of completion of the Offering and formation transactions, the Fund became a 100%
wholly owned subsidiary of the Company. The general partner of the Fund is the New General Partner
(which is wholly owned by the Company), and the limited partners of the Fund are the Company
(99.9%) and the New General Partner (0.1%).
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 (previously employed by the Funds external manager) under the supervision of
its board of directors. For all periods subsequent to the consummation of the Offering and the
Formation Transactions, 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. The Fund does not consolidate portfolio company
investments.
The Formation Transactions discussed above involved an exchange of shares of the Companys
common stock between companies under common control. In accordance with the guidance on exchanges
of shares between entities under common control contained in Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS 141), the Companys results of operations and cash
flows for the six months ended June 30, 2007 are presented as if the Formation Transactions had
occurred as of January 1, 2007. The effects of all intercompany transactions between the Company
and its subsidiaries have been eliminated in consolidation/combination. All financial data and
information included in these financial statements have been presented on the basis described
above.
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
15
Table of Contents
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, 2007. 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.
Allocations and Distributions of the Fund
During the six months ended June 30, 2007, the Fund distributed $751,613 in cash to the former
General and Limited Partners of the Fund. After consummation of the Formation Transactions,
distributions of the Fund are allocated 100% to the Company.
Management Fee
Prior to the consummation of the Formation Transactions, the Fund was managed by Triangle
Capital Partners, LLC, a related party that is majority-owned by the Companys Chief Executive
Officer and two of the Companys employees. Triangle Capital Partners, LLC was entitled to a
quarterly management fee, which was payable at an annual rate of 2.5% of total aggregate
subscriptions of all institutional partners and capital available from the SBA. Payments of the
management fee were made quarterly in advance. Certain direct expenses such as legal, audit, tax
and limited partner expense were the responsibility of the Fund. The management fees for the six
months ended June 30, 2007 were $232,423. In conjunction with the completion of the Offering in
February 2007, the management agreement was terminated.
New Accounting Standards
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. The changes to previous practice resulting from
the application of SFAS 157 relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurements. The definition of fair
value retains the exchange price notion used in earlier definitions of fair value. SFAS 157
clarifies that the exchange price is the price in an orderly transaction between market
participants to sell the asset or transfer the 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. SFAS 157 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, SFAS 157 provides a framework
for measuring fair value, and establishes a three-level hierarchy for fair value measurements based
upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. The Companys adoption of SFAS 157 resulted in additional unrealized depreciation of
approximately $0.2 million. See Note 2 for a further discussion of the impact of the adoption of
SFAS 157 on the Companys financial statements and for expanded disclosures about the Companys
fair value measurements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115 (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Boards long-term measurement objectives for accounting
for financial instruments. Under SFAS 159, unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. The Company did not
adopt SFAS 159.
16
Table of Contents
2. INVESTMENTS
As described above, effective January 1, 2008, the Company adopted SFAS 157 for its financial
assets. The company has changed its balance sheet presentation for all periods to reclassify
deferred loan origination revenue to the associated debt investments. Prior to the adoption of
SFAS 157, the Company reported deferred loan origination revenue as a single line item on the
Consolidated Balance Sheets. This change in presentation had no impact on the aggregate net cost
or fair value of the Companys investment portfolio and had no impact on the Companys financial
position or results of operations.
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 | Percentage of | |||||||||||||||
Cost | Total Portfolio | Fair Value | Total Portfolio | |||||||||||||
June 30, 2008: |
||||||||||||||||
Subordinated debt and 2nd lien notes |
$ | 130,998,424 | 82 | % | $ | 128,853,826 | 78 | % | ||||||||
Senior debt |
16,003,236 | 10 | 16,003,236 | 10 | ||||||||||||
Equity shares |
10,853,018 | 7 | 18,300,700 | 11 | ||||||||||||
Equity warrants |
1,244,272 | 1 | 2,551,200 | 1 | ||||||||||||
Royalty rights |
| | 274,600 | | ||||||||||||
$ | 159,098,950 | 100 | % | $ | 165,983,562 | 100 | % | |||||||||
December 31, 2007: |
||||||||||||||||
Subordinated debt and 2nd lien notes |
$ | 80,902,982 | 76 | % | $ | 80,902,982 | 72 | % | ||||||||
Senior debt |
14,728,958 | 14 | 14,728,958 | 13 | ||||||||||||
Equity shares |
9,699,689 | 9 | 15,335,900 | 13 | ||||||||||||
Equity warrants |
548,172 | 1 | 1,870,500 | 2 | ||||||||||||
Royalty rights |
| | 197,900 | | ||||||||||||
$ | 105,879,801 | 100 | % | $ | 113,036,240 | 100 | % | |||||||||
During the three months ended June 30, 2008, the Company made five new investments totaling
$41.9 million, two additional debt investments in existing portfolio companies of $1.3 million and
one additional equity investment in an existing portfolio company of approximately $21,000. During
the six months ended June 30, 2008, the Company made eight new investments totaling $56.4 million,
one additional debt investment in an existing portfolio company of $0.9 million and two additional
equity investments in existing portfolio companies of approximately $0.1 million.
During the three months ended June 30, 2007, the Company made four new investments totaling
$29.3 million. During the six months ended June 30, 2007, the Company made four new investments
totaling $29.3 million and one equity investment in an existing portfolio company of approximately
$0.1 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 SFAS 157.
Under SFAS 157, 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 SFAS 157 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 Company invests primarily in debt and equity 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.
17
Table of Contents
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.
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 (discussed below), (ii) the portfolio companys current trailing twelve months (TTM)
results of operations as compared to the portfolio companys TTM results of operations as of the
date the investment was made, (iii) the portfolio companys current leverage as compared to its
leverage as of the date the investment was made, and (iv) current pricing and credit metrics for
similar proposed and executed investment transactions. In valuing equity securities of private
companies, the Company considers valuation methodologies consistent with industry practice,
including (i) valuation using a valuation model based on original transaction multiples and the
portfolio companys recent financial performance, (ii) valuation of the securities based on recent
sales in comparable transactions, and (iii) a review of similar companies that are publicly traded
and the market multiple of their equity securities.
The following table presents the Companys financial instruments carried at fair value as of
June 30, 2008, on the consolidated balance sheet by SFAS 157 valuation hierarchy, as previously
described:
Fair Value at June 30, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Portfolio company investments |
$ | | $ | | $ | 165,983,562 | $ | 165,983,562 | ||||||||
$ | | $ | | $ | 165,983,562 | $ | 165,983,562 | |||||||||
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 six months ended June 30, 2008:
Six Months | ||||
Ended | ||||
June 30, 2008 | ||||
Fair value of portfolio, January 1, 2008 |
$ | 113,036,240 | ||
New investments |
57,312,359 | |||
Proceeds from sale of investment |
(175,000 | ) | ||
Loan origination fees received |
(1,091,996 | ) | ||
Principal repayments and payment in kind interest payments received |
(4,498,623 | ) | ||
Payment in kind interest earned |
1,442,626 | |||
Accretion of loan discounts |
49,631 | |||
Accretion of deferred loan origination revenue |
180,152 | |||
Unrealized losses on investments |
(271,827 | ) | ||
Fair value of portfolio, June 30, 2008 |
$ | 165,983,562 | ||
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
unrealized gains (losses) on investments of $924,416 and $(328,127), respectively, during the three
and six months ended June 30, 2008 are related to portfolio company investments that are still held
by the Company as of June 30, 2008.
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
18
Table of Contents
the initial investment. In certain instances, we may determine
that it is not cost-effective, and as a result is not in our shareholders 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, 2008, the Company asked Duff & Phelps to perform the
procedures on investments in six portfolio companies comprising approximately 35% of the total
investments at fair value (exclusive of the fair value of new investments made during the quarter)
as of March 31, 2008. For the quarter ended June 30, 2008, the Company asked Duff & Phelps to
perform the procedures on investments in five portfolio companies comprising approximately 18% of
the total investments at fair value (exclusive of the fair value of new investments made during the
quarter) as of June 30, 2008. 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 valuation 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.
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. The Company will stop accruing interest on investments and write off any previously
accrued and uncollected interest when it is determined that interest is no longer 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 recorded into income when received. 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 this interest generally occurs at the time of loan principal repayment. The Company
will generally cease accruing PIK interest if there is insufficient value to support the accrual or
if the investee is not expected to be able to pay all principal and interest due.
19
Table of Contents
Concentration of Credit Risk
The Companys investees are generally lower middlemarket companies in a variety of
industries. At June 30, 2008, the Company had no investments that were individually greater than or
equal to 10% of the total fair value of its investment portfolio. At December 31, 2007, the
Company had one investment that was individually greater than or equal to 10% of the total fair
value of its investment portfolio. This investment represented approximately 11% of the total fair
value of the Companys investment portfolio as of December 31, 2007. 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
For 2007 and 2008, the Company intends to elect to be treated as a Regulated Investment
Company (RIC) under Subchapter M of the Code. As a RIC, so long as the Company meets certain
minimum distribution, source-of-income and asset diversification requirements, it generally is
required to pay income taxes only on the portion of its taxable income and gains it does not
distribute (actually or constructively) and certain built-in gains.
In addition, the Company has certain wholly owned taxable subsidiaries (the Taxable
Subsidiaries), each of which holds one or more of its portfolio investments that are listed on the
Consolidated Schedule of Investments. The Taxable Subsidiaries are consolidated for GAAP 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) and still satisfy the RIC tax
requirement that at least 90% of the RICs gross revenue for income tax purposes must consist of
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 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. Where the LLCs (or other pass-through entities) are owned by the Taxable
Subsidiaries, however, 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 June 30, 2008 was
approximately $161.6 million.
4. LONGTERM DEBT
The Company has the following debentures outstanding guaranteed by the SBA:
Prioritized | June 30, | December 31, | ||||||||||||||
Issuance/Pooling Date | Maturity Date | Return Rate | 2008 | 2007 | ||||||||||||
September 22, 2004 |
September 1, 2014 | 5.539 | % | $ | 8,700,000 | $ | 8,700,000 | |||||||||
March 23, 2005 |
March 1, 2015 | 5.893 | % | 13,600,000 | 13,600,000 | |||||||||||
September 28, 2005 |
September 1, 2015 | 5.796 | % | 9,500,000 | 9,500,000 | |||||||||||
February 1, 2007 |
March 1, 2017 | 6.231 | % | 4,000,000 | 4,000,000 | |||||||||||
March 26, 2008 |
March 1, 2018 | 6.191 | % | 6,410,000 | 1,210,000 | |||||||||||
March 27, 2008 |
September 1, 2018 | 3.788 | %(1) | 4,840,000 | | |||||||||||
April 11, 2008 |
September 1, 2018 | 3.728 | %(1) | 9,400,000 | | |||||||||||
April 28, 2008 |
September 1, 2018 | 4.007 | %(1) | 15,160,000 | | |||||||||||
May 29, 2008 |
September 1, 2018 | 3.768 | %(1) | 5,000,000 | | |||||||||||
May 29, 2008 |
September 1, 2018 | 3.768 | %(1) | 5,000,000 | | |||||||||||
June 11, 2008 |
September 1, 2018 | 3.854 | %(1) | 5,000,000 | | |||||||||||
June 24, 2008 |
September 1, 2018 | 3.826 | %(1) | 2,500,000 | | |||||||||||
$ | 89,110,000 | $ | 37,010,000 | |||||||||||||
(1) | Prioritized Return Rates for debentures issued subsequent to March 26, 2008 are interim rates set by the SBA. These debentures will be pooled in September 2008 and at that time, a permanent Prioritized Return Rate for these debentures will be established by the SBA. |
20
Table of Contents
Interest payments 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 pre-payment penalties no longer apply to
debentures issued after September 1, 2006.
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 twice the amount of its regulatory capital. As of June 30, 2008, the maximum statutory limit
on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $130.6
million (which amount is subject to increase on an annual basis based on cost of living increases).
With $65.3 million of regulatory capital as of June 30, 2008, the Fund has the current capacity to
issue up to a total of $130.6 million of SBA guaranteed debentures, subject to the payment of a 1%
commitment fee to the SBA on the amount of the commitment. As of June 30, 2008, the Fund had paid
commitment fees for and had a commitment from the SBA to issue a total of $96.9 million of SBA
guaranteed debentures, of which $89.1 million are outstanding as of June 30, 2008. On July 9,
2008, the Fund received an additional commitment from the SBA of $33.75 million, bringing the total
commitment from the SBA up to the statutory limit of $130.6 million. Upon receipt of this
commitment, the Fund incurred a 1.0% non-refundable commitment fee of $337,500. In addition to the
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 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 June 30, 2008 and December
31, 2007 were 4.812% and 5.826%, respectively. The calculation of these weighted average interest
rates includes the interim rates charged on SBA guaranteed debentures which have not yet been
pooled.
5. EQUITY-BASED COMPENSATION
The Companys Board of Directors and shareholders 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. The terms of equity-based
awards granted under the Plan generally will vest ratably over one- to four-year periods.
The Company accounts for its equity-based compensation plan using the fair value method, as
prescribed by Statement of Accounting Standards No. 123R, Share-Based Payment. 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.
On May 7, 2008, the Companys Board of Directors granted 113,500 restricted shares of our
common stock to certain employees and independent directors. These restricted shares had a total
grant date fair value of approximately $1.3 million, which will be expensed on a straight-line
basis over each respective awards vesting period. In the six months ended June 30, 2008, the
Company recognized equity-based compensation expense of approximately $0.1 million. This expense
is included in general and administrative expenses in the Companys consolidated statements of
operations. As of June 30, 2008, the Company has a total of 113,500 restricted shares outstanding.
As of June 30, 2008, there was approximately $1.2 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 3.5 years.
21
Table of Contents
6. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the six months ended June 30, 2008 and
2007:
Six Months Ended June 30, | ||||||||
2008 | 2007(1) | |||||||
Per share data: |
||||||||
Net asset value at beginning of period(1) |
$ | 13.74 | $ | 13.44 | ||||
Net investment income(2) |
0.65 | 0.37 | ||||||
Net realized loss on investments(2) |
| (0.22 | ) | |||||
Net unrealized appreciation (depreciation) on investments(2) |
(0.09 | ) | 0.34 | |||||
Total increase from investment operations(2) |
0.56 | 0.49 | ||||||
Cash dividends paid |
(0.31 | ) | (0.05 | ) | ||||
Stock-based compensation |
0.01 | | ||||||
Distribution to partners(2) |
| (0.03 | ) | |||||
Income tax provision(2) |
(0.03 | ) | | |||||
Other (3) |
(0.24 | ) | (0.10 | ) | ||||
Net asset value at end of period |
$ | 13.73 | $ | 13.75 | ||||
Market value at end of period(4) |
$ | 11.39 | $ | 14.17 | ||||
Shares outstanding at end of period |
6,917,363 | 6,732,862 | ||||||
Net assets at end of period |
$ | 95,006,293 | $ | 92,602,671 | ||||
Average net assets(1) |
$ | 94,468,102 | $ | 90,820,387 | ||||
Ratio of operating expenses to average net assets (annualized) |
9 | % | 6.5 | % | ||||
Ratio of net investment income to average net assets
(annualized) |
9 | % | 5.4 | % | ||||
Portfolio turnover ratio |
4 | % | 2.7 | % | ||||
Total Return(5) |
(6 | %) | (4.5 | %) |
(1) | Net asset value as of January 1, 2007 and average net assets for the six months ended June 30, 2007 are presented as if the Offering and Formation Transactions had occurred on January 1, 2007. See Note 1 for a further description of the basis of presentation of the Companys financial statements. | |
(2) | Weighted average basic per share data. | |
(3) | 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 shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date. | |
(4) | Represents the closing price of the Companys common stock on the last day of the period. | |
(5) | The total return for the six months ended June 30, 2008 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. The total return for the six months ended June 30, 2007 equals the change in the ending market value of the Companys common stock from the Offering price of $15.00 per share plus dividends paid per share during the period, divided by the Offering price. Total return is not annualized. |
7. SUBSEQUENT EVENTS
On July 9, 2008, the Fund received an additional commitment from the SBA of $33.75 million,
bringing the total commitment from the SBA up to the statutory limit of $130.6 million. Upon
receipt of this commitment, the Fund incurred a 1.0% non-refundable commitment fee of $337,500.
On July 21, 2008, the Companys Board of Directors declared a cash dividend of $0.35 per share
payable on September 4, 2008 to all holders of record on August 14, 2008.
22
Table of Contents
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. As discussed further in Note 1 to
our unaudited financial statements, on February 21, 2007, concurrent with the closing of our
initial public offering (the Offering), we acquired Triangle Mezzanine Fund LLLP (the Fund) and
the Funds General Partner, Triangle Mezzanine LLC (TML) in exchange for shares of our common
stock. These acquisitions constituted an exchange of shares between entities under common control.
In accordance with the guidance on exchanges of shares between entities under common control
contained in Statement of Financial Accounting Standards No. 141, Business Combinations, the
financial data and information discussed herein for the six months ended June 30, 2007 are
presented as if the acquisition had occurred as of January 1, 2007.
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, 2007. Historical results and percentage relationships among any amounts in
the financial statements are not necessarily indicative of trends in operating results for any
future periods.
Overview of Our Business
We are a Maryland corporation incorporated on October 10, 2006, for the purposes of acquiring
the Fund and TML, raising capital in the Offering and thereafter operating as an internally managed
business development company, or BDC under the Investment Company Act of 1940. The Fund is licensed
as a small business investment company, or SBIC, by the United States Small Business
Administration, or SBA, and has also elected to be treated as a BDC. The Fund has invested
primarily in debt instruments, equity investments, warrants and other securities of lower middle
market privately held companies located in the United States. Upon the consummation of the
Offering, we completed the Formation Transactions described in footnote 1 to our unaudited
financial statements included in Item 1 of Part I of this Quarterly Report, at which time the Fund
became our wholly-owned subsidiary, and the former partners of the Fund became our stockholders.
Our business is to provide capital to lower middle market companies in the United States. We
define lower middle market companies as those with annual revenues between $10.0 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 $75.0 million and
annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $2.0 and
$10.0 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 have
partnered with other funds to provide larger financing commitments.
We generate revenues in the form of interest income, primarily from our investments in debt
securities, loan origination and other fees and dividend income. Fees generated in connection with
our debt investments are recognized over the life of the loan using the effective interest method
or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital
gains, if any, on warrants or other equity-related securities that we acquire from our portfolio
companies. Our debt investments generally have a term of between three and seven years and
typically bear interest at fixed rates between 11.0% and 15.0% per annum. Certain of our debt
investments have a form of interest, referred to as payment in kind, or PIK, interest, that is not
paid currently but that is accrued and added to the loan balance and paid at the end of the term.
In our negotiations with potential portfolio companies, we generally seek to minimize PIK interest.
Cash interest on our debt investments is generally payable monthly; however some of our debt
investments pay cash interest on a quarterly basis. As of June 30, 2008 and December 31, 2007, the
weighted average yield on all of our outstanding debt investments (including PIK interest) was
approximately 14.0% and 13.9%, respectively. The weighted average yield on all of our outstanding
investments (including equity and equity-linked investments) was approximately 13.0% and 12.6% as
of June 30, 2008 and December 31, 2007, respectively.
The Fund is eligible to sell debentures guaranteed by the SBA to the capital markets at
favorable interest rates and invest these funds in portfolio companies. We intend to continue to
operate the Fund as an SBIC, subject to SBA approval, and to utilize the proceeds of the sale of
SBA-guaranteed debentures, referred to herein as SBA leverage, to make additional investments and
thus enhance returns to our stockholders.
Portfolio Composition
The total value of our investment portfolio was $166.0 million as of June 30, 2008, as
compared to $113.0 million as of December 31, 2007. As of June 30, 2008,
we had investments in 34
portfolio companies with an aggregate cost of $159.1 million. As of December 31, 2007,
we had
investments in 26 portfolio companies with an aggregate cost of $105.9 million. As of June 30,
2008,
23
Table of Contents
we had no portfolio investments that represented greater than 10% of the total fair value of
our investment portfolio. As of December
31, 2007, we had one portfolio investment that represented greater than 10% of the total fair
value of our investment portfolio.
As of June 30, 2008 and December 31, 2007, our investment portfolio consisted of the following
investments:
Percentage of | Percentage of | |||||||||||||||
Cost | Total Portfolio | Fair Value | Total Portfolio | |||||||||||||
June 30, 2008: |
||||||||||||||||
Subordinated debt and 2nd lien notes(1) |
$ | 130,998,424 | 82 | % | $ | 128,853,826 | 78 | % | ||||||||
Senior debt(1) |
16,003,236 | 10 | 16,003,236 | 10 | ||||||||||||
Equity shares |
10,853,018 | 7 | 18,300,700 | 11 | ||||||||||||
Equity warrants |
1,244,272 | 1 | 2,551,200 | 1 | ||||||||||||
Royalty rights |
| | 274,600 | | ||||||||||||
$ | 159,098,950 | 100 | % | $ | 165,983,562 | 100 | % | |||||||||
December 31, 2007: |
||||||||||||||||
Subordinated debt and 2nd lien notes(1) |
$ | 80,902,982 | 76 | % | $ | 80,902,982 | 72 | % | ||||||||
Senior debt(1) |
14,728,958 | 14 | 14,728,958 | 13 | ||||||||||||
Equity shares |
9,699,689 | 9 | 15,335,900 | 13 | ||||||||||||
Equity warrants |
548,172 | 1 | 1,870,500 | 2 | ||||||||||||
Royalty rights |
| | 197,900 | | ||||||||||||
$ | 105,879,801 | 100 | % | $ | 113,036,240 | 100 | % | |||||||||
(1) | We have changed our balance sheet presentation for all periods to net deferred loan origination revenue against the associated debt investments for all periods subsequent to the adoption of SFAS 157 on January 1, 2008. |
Investment Activity
During the six months ended June 30, 2008, we made eight new investments totaling $56.4
million, one additional debt investment in an existing portfolio company of $0.9 million and two
additional equity investments in existing portfolio companies of approximately $0.1 million. We
also sold one investment in a portfolio company for approximately $0.2 million, resulting in no
realized gain or loss as the proceeds from the sale equaled the cost basis of the investment. We
had one portfolio company loan repaid at par in the amount of $3.8 million. In addition, we
received normal principal repayments and payment in kind (PIK) interest repayments totaling
approximately $0.7 million in the six months ended June 30, 2008. Total portfolio investment
activity for the six months ended June 30, 2008 was as follows:
Six Months | ||||
Ended | ||||
June 30, 2008(1) | ||||
Fair value of portfolio, January 1, 2008 |
$ | 113,036,240 | ||
New investments |
57,312,359 | |||
Proceeds from sale of investment |
(175,000 | ) | ||
Loan origination fees received |
(1,091,996 | ) | ||
Principal repayments and payment in kind interest payments received |
(4,498,623 | ) | ||
Payment in kind interest earned |
1,442,626 | |||
Accretion of loan discounts |
49,631 | |||
Accretion of deferred loan origination revenue |
180,152 | |||
Unrealized losses on investments |
(271,827 | ) | ||
Fair value of portfolio, June 30, 2008 |
$ | 165,983,562 | ||
Weighted average yield on debt investments as of June 30, 2008 |
14.0 | % | ||
Weighted average yield on total investments as of June 30, 2008 |
13.0 | % | ||
(1) | We have changed our balance sheet presentation for all periods to net deferred loan origination revenue against the associated debt investments for all periods subsequent to the adoption of SFAS 157 on January 1, 2008. |
24
Table of Contents
Results of Operations
Comparison of three months ended June 30, 2008 and June 30, 2007
Investment Income
For the three months ended June 30, 2008, total investment income was $5.0 million, a 53%
increase from $3.3 million of total investment income for the three months ended June 30, 2007.
This increase was primarily attributable to a $1.8 million increase in total loan interest, fee and
dividend income and a $0.5 million increase in total paid-in-kind interest income due to net
increase in our portfolio investments from June 30, 2007 to June 30, 2008 offset by a $0.6 million
decrease in interest income from cash and cash equivalent investments due to (i) a significant
decrease in average cash balances in the second quarter of 2008 over the comparable period in 2007
and (ii) a decrease in overall interest rates. Non-recurring fee income was $0.2 million for both
the three months ended June 30, 2008 and 2007.
Expenses
For the three months ended June 30, 2008, expenses increased by 51% to $2.5 million from $1.6
million for the three months ended June 30, 2007. The increase in expenses was primarily
attributable to a $0.4 million increase in general and administrative expenses and a $0.4 million
increase in interest expense. As a result of the Offering and the Formation Transactions described
in Note 1 to our unaudited financial statements, we are an internally managed investment company
and on February 21, 2007, we began incurring general and administrative costs associated with
employing our executive officers, key investment personnel and corporate professionals and other
general corporate overhead costs. As of June 30, 2008, we had 13 full-time employees, as compared
to nine full-time employees as of June 30, 2007. In addition, we experienced an increase in
general and administrative costs in 2008 associated with being a publicly-traded company, such as
increased insurance, accounting, corporate governance and legal costs. The increase in interest
expense is related to higher average balances of SBA-guaranteed debentures outstanding during the
three months ended June 30, 2008 than in the comparable period in 2007.
Net Investment Income
As a result of the $1.7 million increase in total investment income and the $0.9 million
increase in expenses, net investment income for the three months ended June 30, 2008 was $2.5
million compared to net investment income of $1.6 million during the three months ended June 30,
2007.
Net Increase in Net Assets Resulting From Operations
In the three months ended June 30, 2008, we recorded net unrealized appreciation of
investments in the amount of $0.4 million, comprised of unrealized gains on nine investments
totaling $1.9 million and unrealized losses on eight investments totaling $1.5 million. During the
three months ended June 30, 2007, we recorded net unrealized appreciation of investments in the
amount of $0.6 million, comprised of unrealized gains on eight investments totaling $1.2 million
and unrealized losses on eleven investments totaling $0.6 million.
As a result of these events, our net increase in net assets from operations during the three
months ended June 30, 2008 was $2.8 million as compared to $2.2 million for the three months ended
June 30, 2007.
Comparison of six months ended June 30, 2008 and June 30, 2007
Investment Income
For the six months ended June 30, 2008, total investment income was $8.9 million, a 65%
increase from $5.4 million of total investment income for the six months ended June 30, 2007. This
increase was primarily attributable to a $3.5 million increase in total loan interest, fee and
dividend income and a $0.8 million increase in total paid-in-kind interest income due to net
increase in our portfolio investments from June 30, 2007 to June 30, 2008 offset by a $0.8 million
decrease in interest income from cash and cash equivalent investments due to (i) a significant
decrease in average cash balances in the first six months of 2008 over the comparable period in
2007 and (ii) a decrease in overall interest rates. Non-recurring fee income was $0.3 million for
the six months ended June 30, 2008 as compared to $0.2 million for the six months ended June 30,
2007.
Expenses
For the six months ended June 30, 2008, expenses increased by 50% to $4.4 million from $3.0
million for the six months ended June 30, 2007. The increase in expenses was primarily attributable
to a $1.2 million increase in general and administrative expenses and a $0.4 million increase in
interest expense. As a result of the Offering and the Formation Transactions described in Note 1
to our
25
Table of Contents
unaudited financial statements, we are an internally managed investment company and on
February 21, 2007, we began incurring general and administrative costs associated with employing
our executive officers, key investment personnel and corporate professionals and other general
corporate overhead costs. As of June 30, 2008, we had 13 full-time employees, as compared to nine
full-time employees as of June 30, 2007. In addition, we experienced an increase in general and
administrative costs in 2008 associated with being a publicly-traded company, such as increased
insurance, accounting, corporate governance and legal costs. The increase in interest expense is
related to higher average balances of SBA-guaranteed debentures outstanding during the six months
ended June 30, 2008 than in the comparable period in 2007. These increases in general and
administrative costs and interest costs were partially offset by a $0.2 million decrease in
management fees. We incurred no management fees in the first six months of 2008 compared to $0.2
million in management fees in the first six months of 2007.
Net Investment Income
As a result of the $3.5 million increase in total investment income and the $1.5 million
increase in expenses, net investment income for the six months ended June 30, 2008 was $4.5 million
compared to net investment income of $2.4 million during the six months ended June 30, 2007.
Net Increase in Net Assets Resulting From Operations
We recorded no realized gains or losses on investments in the six months ended June 30, 2008.
For the six months ended June 30, 2007, net realized loss on investment was $1.5 million, all of
which related to one investment.
In the six months ended June 30, 2008, we recorded net unrealized depreciation of investments
in the amount of $0.6 million, comprised of unrealized gains on ten investments totaling $2.6
million and unrealized losses on ten investments totaling $3.2 million. During the six months
ended June 30, 2007, we recorded net unrealized appreciation of investments in the amount of $2.3
million, comprised primarily of an unrealized gain reclassification adjustment of approximately
$1.5 million related to the realized loss noted above. In addition, in the six months ended June
30, 2007, we recorded unrealized gains on eleven other investments totaling $2.0 million and
unrealized losses on eight investments totaling $1.1 million.
As a result of these events, our net increase in net assets from operations during the six
months ended June 30, 2008 was $3.6 million as compared to $3.3 million for the six months ended
June 30, 2007.
Liquidity and Capital Resources
We believe that our current cash and cash equivalents on hand, our available SBA leverage and
our anticipated cash flows from operations will be adequate to meet our cash needs for our daily
operations for at least the next twelve months.
Cash Flows
For the six months ended June 30, 2008, we experienced a net decrease in cash and cash
equivalents in the amount of $3.1 million. During that period, our operating activities used $49.2
million in cash, consisting primarily of new portfolio investments of $57.3 million, and we
generated $46.1 million of cash from financing activities, consisting of proceeds from borrowings
under SBA guaranteed debentures payable of $52.1 million, partially offset by financing fees paid
to the SBA of $1.8 million and cash dividends paid of $4.2 million. At June 30, 2008, we had $18.7
million of cash and cash equivalents on hand.
For the six months ended June 30, 2007, we experienced a net increase in cash and cash
equivalents in the amount of $42.6 million. During that period, our operating activities used $25.9
million in cash, and we generated $68.5 million of cash from financing activities, consisting
primarily of (i) proceeds from our Offering of $64.7 million, (ii) proceeds from borrowings under
SBA guaranteed debentures payable of $4.0 million and (iii) a decrease in deferred offering costs
of $1.0 million, partially offset by cash dividends paid of $0.4 million, tax distributions to
partners of $0.8 million and financing fees paid to the SBA of $0.1 million. At June 30, 2007, we
had $45.1 million of cash and cash equivalents on hand.
Financing Transactions
Due to the Funds status as a licensed SBIC, the Fund has the ability to issue debentures
guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the
SBA rules applicable to SBICs, an SBIC (or group of SBICs under common control) can have
outstanding at any time debentures guaranteed by the SBA in an amount up to twice 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 as of June 30, 2008 is currently $130.6 million (which amount is subject to increase on
an annual basis based on cost of living increases). 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
26
Table of Contents
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.
With $65.3 million of regulatory capital as of June 30, 2008, the Fund has the current
capacity to issue up to a total of $130.6 million of SBA guaranteed debentures, subject to the
payment of a 1% commitment fee to the SBA on the amount of the commitment. As of June 30, 2008,
the Fund had paid commitment fees for and had a commitment from the SBA to issue a total of $96.9
million of SBA guaranteed debentures, of which $89.1 million are outstanding as of June 30, 2008.
On July 9, 2008, the Fund received an additional commitment from the SBA of $33.75 million,
bringing the total commitment from the SBA up to the statutory limit of $130.6 million. Upon
receipt of this commitment, the Fund incurred a 1.0% non-refundable commitment fee of $337,500. In
addition to the 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 debenture issued. These fees are capitalized as deferred
financing costs and are amortized over the term of the debt agreements using the effective interest
method. The weighted average interest rate for all SBA guaranteed debentures as of June 30, 2008
was 4.812%. The calculation of these weighted average interest rates includes the interim rates
charged on SBA guaranteed debentures which have not yet been pooled.
Current Market Conditions
The debt and equity capital markets in the United States have been severely impacted by
significant write-offs in the financial services sector relating to subprime mortgages and the
re-pricing of credit risk in the broadly syndicated bank loan market, among other things. These
events, along with the deterioration of the housing market, have led to worsening general economic
conditions which have impacted the broader financial and credit markets and have reduced the
availability of debt and equity capital for the market as a whole and financial firms in
particular. 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 2009 and beyond.
In the event that the United States economy enters into a protracted recession, it is possible
that the results of some of the middle market companies similar to those in which we invest could
experience deterioration, which could ultimately lead to difficulty in meeting debt service
requirements and an increase in defaults. While we are not seeing signs of an overall, broad
deterioration in our portfolio company results at this time, there can be no assurance that the
performance of certain of our portfolio companies will not be negatively impacted by economic
conditions which could have a negative impact on our future results.
Critical Accounting Policies and Use of Estimates
The preparation of our financial statements in accordance with accounting principles generally
accepted in the United States requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the periods covered by such financial statements.
We have identified investment valuation and revenue recognition as our most critical accounting
estimates. On an on-going basis, we evaluate our estimates, including those related to the matters
described below. These estimates are based on the information that is currently available to us and
on various other assumptions that we believe to be reasonable under the circumstances. Actual
results could differ materially from those estimates under different assumptions or conditions. A
discussion of our critical accounting policies follows.
Investment Valuation
The most significant estimate inherent in the preparation of our financial statements is the
valuation of investments and the related amounts of unrealized appreciation and depreciation of
investments recorded. We have established and documented processes and methodologies for
determining the fair values of portfolio company investments on a recurring (quarterly) basis. As
discussed below, we have engaged an independent valuation firm to assist us in our valuation
process.
On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures about fair value
measurements.
SFAS 157 clarifies that the exchange price is the price in an orderly transaction between
market participants to sell an asset or transfer a liability in the market in which the reporting
entity would transact for the asset or liability, that is, the principal or most advantageous
market for the asset or liability. The transaction to sell the asset or transfer the liability is a
hypothetical transaction at the measurement date, considered from the perspective of a market
participant that holds the asset or owes the liability. SFAS 157 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, SFAS 157 provides a framework
for measuring fair value, and establishes a three-level hierarchy for fair value measurements based
upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. The three levels of valuation hierarchy established by SFAS 157 are defined as follows:
27
Table of Contents
Level 1 | inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
Level 2 | inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
Level 3 | inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. We invest primarily in
debt and equity 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 recent portfolio company
financial statements and forecasts. We also consult with the portfolio companys senior management
to obtain further updates on the portfolio companys performance, including information such as
industry trends, new product development and other operational issues. Additionally, we consider
some or all of the following factors:
| 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 paymentinkind
(PIK) interest, if any. We also use a risk rating system to estimate the probability of default on
the debt securities and the probability of loss if there is a default. The risk rating system
covers both qualitative and quantitative aspects of the business and the securities held. In
valuing debt securities, we utilize an income approach model that considers factors including,
but not limited to, (i) the portfolio investments current risk rating (discussed below), (ii) the
portfolio companys current trailing twelve months (TTM) results of operations as compared to
the portfolio companys TTM results of operations as of the date the investment was made, (iii) the
portfolio companys current leverage as compared to its leverage as of the date the investment was
made, and (iv) current pricing and credit metrics for similar proposed and executed investment
transactions. In valuing equity securities of private companies, we consider valuation
methodologies consistent with industry practice, including (i) valuation using a valuation model
based on original transaction multiples and the portfolio companys recent financial performance,
(ii) valuation of the securities based on recent sales in comparable transactions, and (iii) a
review of similar companies that are publicly traded and the market multiple of their equity
securities.
Unrealized appreciation or depreciation on portfolio investments are recorded as increases or
decreases in investments on the
28
Table of Contents
balance sheets and are separately reflected on the statements of operations in determining net
increase or decrease in net assets resulting from operations.
Duff & Phelps, LLC (Duff & Phelps), an independent valuation firm, provides third party
valuation consulting services to us, which consist of certain limited procedures that we identified
and requested Duff & Phelps to perform (hereinafter referred to as the procedures). We generally
request Duff & Phelps to perform the procedures on each portfolio company at least once in every
calendar year and for new portfolio companies, at least once in the twelve-month period subsequent
to the initial investment. In certain instances, we may determine that it is not cost-effective,
and as a result is not in our shareholders 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, 2008, we asked Duff & Phelps to perform the procedures on
investments in six portfolio companies comprising approximately 35% of the total investments at
fair value (exclusive of the fair value of new investments made during the quarter) as of March 31,
2008. For the quarter ended June 30, 2008, we asked Duff & Phelps to perform the procedures on
investments in five portfolio companies comprising approximately 18% of the total investments at
fair value (exclusive of the fair value of new investments made during the quarter) as of June 30,
2008. Upon completion of the procedures, Duff & Phelps concluded that the fair value, as
determined by the Board of Directors, of those investments subjected to the procedures did not
appear to be unreasonable. Our Board of Directors is ultimately and solely responsible for
determining the fair value of our investments in good faith.
Revenue Recognition
Interest and Dividend Income
Interest income, adjusted for amortization of premium and accretion of original issue
discount, is recorded on the accrual basis to the extent that such amounts are expected to be
collected. We stop accruing interest on investments and 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 by us on loan
agreements or other investments are recorded as deferred income and recognized as income over the
term of the 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 recorded as interest income. 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. We will stop accruing PIK interest and write off any accrued and uncollected
interest when it is determined that PIK interest is no longer collectible.
New Accounting Standards
On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles (GAAP) and expands disclosures
about fair value measurements. The changes to previous practice resulting from the application of
SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. The definition of fair value retains the
exchange price notion used in earlier definitions of fair value. SFAS 157 clarifies that the
exchange price is the price in an orderly transaction between market participants to sell the asset
or transfer the 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. SFAS 157 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, SFAS 157 provides a framework for measuring fair value, and
establishes a three-level hierarchy for fair value measurements based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date. Our adoption of SFAS
157 resulted in additional unrealized depreciation of approximately $0.2 million. See Note 2 to
our unaudited financial statements for a further discussion of the impact of the adoption of SFAS
157 on our financial statements and for expanded disclosures about our fair value measurements.
29
Table of Contents
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115 (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Boards long-term measurement objectives for accounting
for financial instruments. Under SFAS 159, unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. We did not adopt SFAS
159.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Related Party Transactions
Effective concurrently with the closing of the Offering, TML, the general partner of the Fund,
merged into a wholly-owned subsidiary of Triangle Capital Corporation. A substantial majority of
the ownership interests of TML at that time were owned by our Chief Executive Officer, Chief
Financial Officer, Chief Investment Officer and two of our Managing Directors. As a result of such
merger, these five individuals collectively received shares of our common stock valued at
approximately $6.7 million.
Three members of our management, including our Chief Executive Officer, collectively own
approximately 67% of Triangle Capital Partners, LLC. As of June 30, 2008, Triangle Capital
Partners, LLC does not own any shares of Triangle Capital Corporations common stock. Prior to the
closing of the Offering, Triangle Capital Partners, LLC provided management and advisory services
to the Fund pursuant to a management services agreement dated as of February 3, 2003. Under the
terms of this management services agreement, Triangle Capital Partners, LLC received approximately
$0.2 million in management fees from the Fund during the six months ended June 30, 2007. This
agreement terminated upon the closing of the Offering.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report contains forward-looking statements which are subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of the statements in this
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 in Item 1A entitled Risk Factors in Part I of our 2007 Annual Report on Form 10-K.
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.
30
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market 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. As of June 30, 2008, approximately 86.2% of our investment portfolio bore interest
at fixed rates. All of our pooled SBA leverage is currently at fixed rates.
Because we currently borrow, and plan to borrow in the future, money to make investments, our
net investment income is dependent upon the difference between the rate at which we borrow funds
and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a
significant change in market interest rates will not have a material adverse effect on our net
investment income. In periods of rising interest rates, our cost of funds would increase, which
could reduce our net investment income if there is not a corresponding increase in interest income
generated by floating rate assets in 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 second
quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
31
Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Neither Triangle Capital Corporation nor any of its subsidiaries is a party to any pending
legal proceedings.
Item 1A. Risk Factors.
Except for the risk factors set forth below, there have been no material changes from the risk
factors as previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year
ended December 31, 2007.
Regulations governing our operation as a business development company may affect our ability to
raise additional capital through the issuance of our common stock.
Due to restrictions under the Investment Company Act of 1940 (the 1940 Act), we are not
generally able to issue and sell our common stock at a price below net asset value per share. We
may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a
price below the current net asset value of the common stock if our board of directors determines
that such sale is in the best interests of our stockholders, and our stockholders approve such
sale. At our annual stockholders meeting on May 7, 2008, our stockholders voted to allow us to
issue common stock at a price below net asset value per share for a period of one year. In any such
case, however, the price at which our common stock is to be issued and sold may not be less than a
price which, in the determination of our board of directors, closely approximates the market value
of such securities (less any distributing commission or discount).
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to
qualify as a business development company or be precluded from investing according to our
current business strategy.
As a business development company (BDC), we may not acquire any assets other than
qualifying assets unless, at the time of and after giving effect to such acquisition, at least
70.0% of our total assets are qualifying assets.
We believe that substantially all of our investments are currently or will in the future
constitute qualifying assets. However, we may be precluded from investing in what we believe are
attractive investments if such investments are not qualifying assets for purposes of the 1940 Act.
If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our
status as a BDC, which would have a material adverse effect on our business, financial condition
and results of operations. Similarly, these rules could prevent us from making follow-on
investments in existing portfolio companies (which could result in the dilution of our position).
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we
are not limited with respect to the proportion of our assets that may be invested in securities
of a single issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act,
which means that we are not limited by the 1940 Act with respect to the proportion of our assets
that we may invest in securities of a single issuer. To the extent that we assume large positions
in the securities of a small number of issuers, our net asset value may fluctuate to a greater
extent than that of a diversified investment company as a result of changes in the financial
condition or the markets assessment of the issuer. We may also be more susceptible to any single
economic or regulatory occurrence than a diversified investment company. Beyond our regulated
investment company asset diversification requirements, we do not have fixed guidelines for
diversification, and our investments could be concentrated in relatively few portfolio companies.
32
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Companys 2008 Annual Meeting of Stockholders held on May 7, 2008, our stockholders
voted on the following four matters:
1. | The re-election of eight directors to hold office until the Companys 2009 Annual Meeting of Stockholders. The votes cast with respect to each director were as follows: |
Director | Shares Voted For | Authority Withheld | ||||||
Garland S. Tucker, III |
6,284,532.89 | 207,383.21 | ||||||
Brent P.W. Burgess |
6,286,144.89 | 205,771.21 | ||||||
Steven C. Lilly |
6,285,489.89 | 206,426.21 | ||||||
W. McComb Dunwoody |
6,222,024.89 | 269,891.21 | ||||||
Thomas M. Garrott, III |
6,282,449.89 | 209,466.21 | ||||||
Benjamin S. Goldstein |
6,280,584.89 | 211,331.21 | ||||||
Simon B. Rich, Jr. |
6,286,334.89 | 205,581.21 | ||||||
Sherwood H. Smith, Jr. |
6,279,359.89 | 212,556.21 |
2. | A proposal to approve the Companys Amended and Restated 2007 Equity Incentive Plan was approved by a vote of 4,427,314.59 shares for, 536,611.92 shares against, 126,438.59 shares abstained and 1,401,551.00 broker non-votes. |
3. | A proposal to authorize the Company, pursuant to approval of its Board of Directors, to sell shares of its common stock for a period of one year at a price below the Companys then current net asset value per share, was approved by a vote of 3,990,179.91 shares for, 1,032,651.18 shares against, 67,534.00 shares abstained and 1,401,551.00 broker non-votes. This proposal was also approved by our non-affiliated stockholders by a vote of 3,185,846.86 shares for, 1,032,651.18 shares against, 67,534.00 shares abstained and 1,401,551.00 broker non-votes. |
4. | A proposal for the ratification of the selection of Ernst & Young LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2008 was approved by a vote of 6,368,765.89 shares for, 85,336.21 shares against and 37,814.00 shares abstained. |
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Number | Exhibit | |
2.1
|
Agreement and Plan of Merger, dated as of November 2, 2006, by and among Triangle Capital Corporation, New Triangle GP, LLC, and Triangle Mezzanine LLC (Filed as Exhibit (k)(7) to the Registrants Registration Statement on Form N-2/N-5 (File No. 333-138418) filed with the Securities and Exchange Commission on November 3, 2006 and incorporated herein by reference). | |
2.2
|
Agreement and Plan of Merger, dated as of November 2, 2006, by and among Triangle Capital Corporation, TCC Merger Sub, LLC and Triangle Mezzanine Fund LLLP (Filed as Exhibit (k)(8) to the Registrants Registration Statement on Form N-2/N-5 (File No. 333-138418) filed with the Securities and Exchange Commission on November 3, 2006 and incorporated herein by reference). | |
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
|
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 |
33
Table of Contents
Number | Exhibit | |
and Exchange Commission on February 13, 2007 and incorporated herein by reference). | ||
3.3
|
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). | |
3.4
|
Amended and Restated Bylaws of the Registrant (Filed as Exhibit (b) 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). | |
4.1
|
Form of Common Stock Certificate (Filed as Exhibit (d) to the Registrants post -effective amendment to the 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 filed with the Securities and Exchange Commission on March 12, 2008 and incorporated herein by reference). | |
14.1
|
Code of Conduct | |
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. |
34
Table of Contents
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: August 5, 2008 | /s/ Garland S. Tucker, III | |||
Garland S. Tucker, III | ||||
President, Chief Executive Officer
and Chairman of the Board of Directors |
||||
Date: August 5, 2008 | /s/ Steven C. Lilly | |||
Steven C. Lilly | ||||
Chief Financial Officer and Director | ||||
Date: August 5, 2008 | /s/ C. Robert Knox, Jr. | |||
C. Robert Knox, Jr. | ||||
Principal Accounting Officer |
35
Table of Contents
EXHIBIT INDEX
Number | Exhibit | |
2.1
|
Agreement and Plan of Merger, dated as of November 2, 2006, by and among Triangle Capital Corporation, New Triangle GP, LLC, and Triangle Mezzanine LLC (Filed as Exhibit (k)(7) to the Registrants Registration Statement on Form N-2/N-5 (File No. 333-138418) filed with the Securities and Exchange Commission on November 3, 2006 and incorporated herein by reference). | |
2.2
|
Agreement and Plan of Merger, dated as of November 2, 2006, by and among Triangle Capital Corporation, TCC Merger Sub, LLC and Triangle Mezzanine Fund LLLP (Filed as Exhibit (k)(8) to the Registrants Registration Statement on Form N-2/N-5 (File No. 333-138418) filed with the Securities and Exchange Commission on November 3, 2006 and incorporated herein by reference). | |
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
|
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). | |
3.3
|
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). | |
3.4
|
Amended and Restated Bylaws of the Registrant (Filed as Exhibit (b) 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). | |
4.1
|
Form of Common Stock Certificate (Filed as Exhibit (d) to the Registrants post -effective amendment to the 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 filed with the Securities and Exchange Commission on March 12, 2008 and incorporated herein by reference). | |
14.1
|
Code of Conduct | |
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. |