10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 8, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-Q
__________________________________________________________
(Mark One)
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
OR
¨ |
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 814-00733
__________________________________________________________
Triangle Capital Corporation
(Exact name of registrant as specified in its charter)
__________________________________________________________
Maryland |
06-1798488 |
|
(State or other jurisdiction of |
(I.R.S. Employer |
|
incorporation or organization) |
Identification No.) |
|
3700 Glenwood Avenue, Suite 530
Raleigh, North Carolina
|
27612 |
|
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (919) 719-4770
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
__________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
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 |
¨ |
Accelerated filer |
ý |
Non-accelerated filer |
¨ (Do not check if a smaller reporting company)
|
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s Common Stock on May 6, 2013 was 27,563,375.
TRIANGLE CAPITAL CORPORATION
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
Page |
||
PART I – FINANCIAL INFORMATION | ||
Item 1. |
||
Item 2. |
||
Item 3. |
||
Item 4. |
||
PART II – OTHER INFORMATION | ||
Item 1. |
||
Item 1A. |
||
Item 2. |
||
Item 3. |
||
Item 4. |
||
Item 5. |
||
Item 6. |
||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
TRIANGLE CAPITAL CORPORATION
Consolidated Balance Sheets
March 31, 2013 |
December 31, 2012 |
||||||
(Unaudited) |
|||||||
Assets: |
|||||||
Investments at fair value: |
|||||||
Non-Control / Non-Affiliate investments (cost of $571,951,156 and $565,737,092 at March 31, 2013 and December 31, 2012, respectively) |
$ |
587,495,700 |
$ |
579,078,939 |
|||
Affiliate investments (cost of $124,090,454 and $123,019,204 at March 31, 2013 and December 31, 2012, respectively) |
123,444,532 |
123,408,445 |
|||||
Control investments (cost of $11,586,932 and $11,474,208 at March 31, 2013 and December 31, 2012, respectively) |
4,585,685 |
4,315,339 |
|||||
Total investments at fair value |
715,525,917 |
706,802,723 |
|||||
Cash and cash equivalents |
37,041,674 |
72,300,423 |
|||||
Interest and fees receivable |
4,131,647 |
2,650,178 |
|||||
Prepaid expenses and other current assets |
593,736 |
403,123 |
|||||
Deferred financing fees |
11,521,363 |
12,323,430 |
|||||
Property and equipment, net |
56,583 |
55,535 |
|||||
Total assets |
$ |
768,870,920 |
$ |
794,535,412 |
|||
Liabilities: |
|||||||
Accounts payable and accrued liabilities |
$ |
1,707,249 |
$ |
6,405,570 |
|||
Interest payable |
1,065,668 |
3,136,574 |
|||||
Taxes payable |
234,796 |
3,210,989 |
|||||
Deferred income taxes |
901,067 |
1,342,456 |
|||||
Notes |
149,500,000 |
149,500,000 |
|||||
SBA-guaranteed debentures payable |
193,148,838 |
213,604,579 |
|||||
Total liabilities |
346,557,618 |
377,200,168 |
|||||
Net Assets: |
|||||||
Common stock, $0.001 par value per share (150,000,000 shares authorized, 27,563,375 and 27,284,798 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively) |
27,563 |
27,285 |
|||||
Additional paid-in-capital |
404,748,852 |
403,322,097 |
|||||
Investment income in excess of distributions |
6,714,859 |
6,783,161 |
|||||
Accumulated realized gains on investments |
3,825,722 |
1,972,940 |
|||||
Net unrealized appreciation of investments |
6,996,306 |
5,229,761 |
|||||
Total net assets |
422,313,302 |
417,335,244 |
|||||
Total liabilities and net assets |
$ |
768,870,920 |
$ |
794,535,412 |
|||
Net asset value per share |
$ |
15.32 |
$ |
15.30 |
See accompanying notes.
3
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Operations
Three Months
Ended
|
Three Months
Ended
|
|||||||
March 31, 2013 |
March 31, 2012 |
|||||||
Investment income: |
||||||||
Loan interest, fee and dividend income: |
||||||||
Non-Control / Non-Affiliate investments |
$ |
17,187,501 |
$ |
12,963,602 |
||||
Affiliate investments |
2,963,029 |
2,717,149 |
||||||
Control investments |
49,371 |
59,773 |
||||||
Total loan interest, fee and dividend income |
20,199,901 |
15,740,524 |
||||||
Payment-in-kind interest income: |
||||||||
Non-Control / Non-Affiliate investments |
3,250,548 |
2,587,267 |
||||||
Affiliate investments |
958,379 |
654,233 |
||||||
Control investments |
5,867 |
19,971 |
||||||
Total payment-in-kind interest income |
4,214,794 |
3,261,471 |
||||||
Interest income from cash and cash equivalent investments |
51,240 |
109,858 |
||||||
Total investment income |
24,465,935 |
19,111,853 |
||||||
Expenses: |
||||||||
Interest and other debt financing fees |
5,111,512 |
3,310,737 |
||||||
General and administrative expenses |
4,120,958 |
3,607,267 |
||||||
Total expenses |
9,232,470 |
6,918,004 |
||||||
Net investment income |
15,233,465 |
12,193,849 |
||||||
Net realized gains: |
||||||||
Net realized gain on investments – Non-Control / Non-Affiliate |
578,782 |
— |
||||||
Net realized gain on investments – Affiliate |
1,274,000 |
— |
||||||
Net unrealized appreciation of investments |
1,766,545 |
621,471 |
||||||
Total net gain on investments |
3,619,327 |
621,471 |
||||||
Loss on extinguishment of debt |
(412,673 |
) |
(205,043 |
) |
||||
Income tax benefit (provision) |
(20,303 |
) |
7,231 |
|||||
Net increase in net assets resulting from operations |
$ |
18,419,816 |
$ |
12,617,508 |
||||
Net investment income per share—basic and diluted |
$ |
0.56 |
$ |
0.49 |
||||
Net increase in net assets resulting from operations per share—basic and diluted |
$ |
0.67 |
$ |
0.50 |
||||
Dividends declared per common share |
$ |
0.54 |
$ |
0.47 |
||||
Weighted average number of shares outstanding—basic and diluted |
27,433,290 |
25,075,300 |
See accompanying notes.
4
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Changes in Net Assets
Common Stock |
Additional
Paid In
Capital
|
Investment
Income
in Excess of Distributions
|
Accumulated
Realized
Gains on Investments
|
Net
Unrealized
Appreciation of Investments
|
Total
Net
Assets
|
|||||||||||||||||||||
Number
of Shares
|
Par
Value
|
|||||||||||||||||||||||||
Balance, December 31, 2011 |
22,774,726 |
$ |
22,775 |
$ |
318,297,269 |
$ |
6,847,486 |
$ |
1,011,649 |
$ |
8,107,776 |
$ |
334,286,955 |
|||||||||||||
Net investment income |
— |
— |
— |
12,193,849 |
— |
— |
12,193,849 |
|||||||||||||||||||
Stock-based compensation |
— |
— |
648,750 |
— |
— |
— |
648,750 |
|||||||||||||||||||
Net unrealized appreciation of investments |
— |
— |
— |
— |
— |
621,471 |
621,471 |
|||||||||||||||||||
Loss on extinguishment of debt |
— |
— |
— |
(205,043 |
) |
— |
— |
(205,043 |
) |
|||||||||||||||||
Income tax benefit |
— |
— |
— |
7,231 |
— |
— |
7,231 |
|||||||||||||||||||
Dividends/distributions declared |
52,717 |
52 |
1,028,467 |
(12,788,904 |
) |
— |
— |
(11,760,385 |
) |
|||||||||||||||||
Public offering of common stock |
4,255,000 |
4,255 |
77,243,819 |
— |
— |
— |
77,248,074 |
|||||||||||||||||||
Issuance of restricted stock |
227,631 |
228 |
(228 |
) |
— |
— |
— |
— |
||||||||||||||||||
Common stock withheld for payroll taxes upon vesting of restricted stock |
(46,923 |
) |
(47 |
) |
(897,590 |
) |
— |
— |
— |
(897,637 |
) |
|||||||||||||||
Balance, March 31, 2012 |
27,263,151 |
$ |
27,263 |
$ |
396,320,487 |
$ |
6,054,619 |
$ |
1,011,649 |
$ |
8,729,247 |
$ |
412,143,265 |
Common Stock |
Additional
Paid In
Capital
|
Investment
Income
in Excess of Distributions
|
Accumulated
Realized
Gains on Investments
|
Net
Unrealized
Appreciation of Investments
|
Total
Net
Assets
|
|||||||||||||||||||||
Number
of Shares
|
Par
Value
|
|||||||||||||||||||||||||
Balance, December 31, 2012 |
27,284,798 |
$ |
27,285 |
$ |
403,322,097 |
$ |
6,783,161 |
$ |
1,972,940 |
$ |
5,229,761 |
$ |
417,335,244 |
|||||||||||||
Net investment income |
— |
— |
— |
15,233,465 |
— |
— |
15,233,465 |
|||||||||||||||||||
Stock-based compensation |
— |
— |
630,006 |
— |
— |
— |
630,006 |
|||||||||||||||||||
Net realized gain on investments |
— |
— |
— |
— |
1,852,782 |
(1,274,000 |
) |
578,782 |
||||||||||||||||||
Net unrealized appreciation of investments |
— |
— |
— |
— |
— |
3,040,545 |
3,040,545 |
|||||||||||||||||||
Loss on extinguishment of debt |
— |
— |
— |
(412,673 |
) |
— |
— |
(412,673 |
) |
|||||||||||||||||
Income tax provision |
— |
— |
— |
(20,303 |
) |
— |
— |
(20,303 |
) |
|||||||||||||||||
Dividends/distributions declared |
28,577 |
28 |
796,999 |
(14,868,791 |
) |
— |
— |
(14,071,764 |
) |
|||||||||||||||||
Issuance of restricted stock |
250,000 |
250 |
(250 |
) |
— |
— |
— |
— |
||||||||||||||||||
Balance, March 31, 2013 |
27,563,375 |
$ |
27,563 |
$ |
404,748,852 |
$ |
6,714,859 |
$ |
3,825,722 |
$ |
6,996,306 |
$ |
422,313,302 |
See accompanying notes.
5
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Statements of Cash Flows
Three Months Ended |
Three Months Ended |
||||||
March 31, 2013 |
March 31, 2012 |
||||||
Cash flows from operating activities: |
|||||||
Net increase in net assets resulting from operations |
$ |
18,419,816 |
$ |
12,617,508 |
|||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
|||||||
Purchases of portfolio investments |
(10,259,545 |
) |
(41,952,989 |
) |
|||
Repayments received/sales of portfolio investments |
9,274,946 |
8,253,844 |
|||||
Loan origination and other fees received |
255,159 |
666,420 |
|||||
Net realized gain on investments |
(1,852,782 |
) |
— |
||||
Net unrealized appreciation of investments |
(1,325,156 |
) |
(768,682 |
) |
|||
Deferred income taxes |
(441,389 |
) |
147,211 |
||||
Payment-in-kind interest accrued, net of payments received |
(3,685,061 |
) |
(2,704,362 |
) |
|||
Amortization of deferred financing fees |
389,394 |
222,917 |
|||||
Loss on extinguishment of debt |
412,673 |
205,043 |
|||||
Accretion of loan origination and other fees |
(734,094 |
) |
(476,512 |
) |
|||
Accretion of loan discounts |
(396,661 |
) |
(374,341 |
) |
|||
Accretion of discount on SBA-guaranteed debentures payable |
44,259 |
43,629 |
|||||
Depreciation expense |
9,172 |
7,349 |
|||||
Stock-based compensation |
630,006 |
648,750 |
|||||
Changes in operating assets and liabilities: |
|||||||
Interest and fees receivable |
(1,481,469 |
) |
(861,679 |
) |
|||
Prepaid expenses |
(190,613 |
) |
153,192 |
||||
Accounts payable and accrued liabilities |
(4,698,321 |
) |
(2,606,598 |
) |
|||
Interest payable |
(2,070,906 |
) |
(2,316,068 |
) |
|||
Taxes payable |
(2,976,193 |
) |
(1,198,973 |
) |
|||
Net cash used in operating activities |
(676,765 |
) |
(30,294,341 |
) |
|||
Cash flows from investing activities: |
|||||||
Purchases of property and equipment |
(10,220 |
) |
(9,656 |
) |
|||
Net cash used in investing activities |
(10,220 |
) |
(9,656 |
) |
|||
Cash flows from financing activities: |
|||||||
Repayments of SBA-guaranteed debentures payable |
(20,500,000 |
) |
(10,410,000 |
) |
|||
Repayments of credit facility |
— |
(15,000,000 |
) |
||||
Proceeds from notes |
— |
69,000,000 |
|||||
Financing fees paid |
— |
(2,230,237 |
) |
||||
Proceeds from public stock offerings, net of expenses |
— |
77,248,074 |
|||||
Common stock withheld for payroll taxes upon vesting of restricted stock |
— |
(897,637 |
) |
||||
Cash dividends paid |
(14,071,764 |
) |
(11,760,385 |
) |
|||
Net cash provided by (used in) financing activities |
(34,571,764 |
) |
105,949,815 |
||||
Net increase (decrease) in cash and cash equivalents |
(35,258,749 |
) |
75,645,818 |
||||
Cash and cash equivalents, beginning of period |
72,300,423 |
66,868,340 |
|||||
Cash and cash equivalents, end of period |
$ |
37,041,674 |
$ |
142,514,158 |
|||
Supplemental disclosure of cash flow information: |
|||||||
Cash paid for interest |
$ |
6,594,078 |
$ |
5,289,789 |
|||
Summary of non-cash financing transactions: |
|||||||
Dividends paid through DRIP share issuances |
$ |
797,027 |
$ |
1,028,519 |
See accompanying notes.
6
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Non–Control / Non–Affiliate Investments: |
||||||||||||||||
Agilex Flavors & Fragrances, Inc. (3%)* |
Custom Fragrance Producers |
Subordinated Note (12% Cash, 1.5% PIK, Due 06/19) |
$ |
12,553,671 |
$ |
12,310,156 |
$ |
12,310,156 |
||||||||
Common Units (1,250 units) |
1,250,000 |
1,250,000 |
||||||||||||||
12,553,671 |
13,560,156 |
13,560,156 |
||||||||||||||
Ambient Air Corporation (“AA”) and Peaden-Hobbs Mechanical, LLC (“PHM”) (1%)* |
Specialty Trade Contractors |
Subordinated Note-AA (15% Cash, 3% PIK, Due 06/13) |
4,077,549 |
4,073,083 |
4,073,083 |
|||||||||||
Subordinated Note-PHM (12% Cash, Due 09/12) |
12,857 |
12,857 |
12,857 |
|||||||||||||
Common Stock-PHM (128,571 shares) |
128,571 |
128,571 |
||||||||||||||
Common Stock Warrants-AA (455 shares) |
142,361 |
220,000 |
||||||||||||||
4,090,406 |
4,356,872 |
4,434,511 |
||||||||||||||
Aramsco, Inc. (0%)* |
Environmental Emergency Preparedness Products Distributor |
Subordinated Note (12% Cash, 2% PIK, Due 03/14) |
1,180,506 |
1,119,533 |
1,119,533 |
|||||||||||
1,180,506 |
1,119,533 |
1,119,533 |
||||||||||||||
Assurance Operations Corporation (0%)* |
Metal Fabrication |
Common Stock (517 shares) |
516,867 |
961,000 |
||||||||||||
516,867 |
961,000 |
|||||||||||||||
Audio and Video Labs Holdings, Inc. (3%)* |
Manufacturer and Distributor for Independent Artists and Authors |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
13,068,012 |
12,816,526 |
12,816,526 |
|||||||||||
Common Units (134 units) |
1,300,000 |
1,300,000 |
||||||||||||||
13,068,012 |
14,116,526 |
14,116,526 |
||||||||||||||
Botanical Laboratories, Inc. (0%)* |
Nutritional Supplement Manufacturing and Distribution |
Common Unit Warrants (998,680 units) |
474,600 |
1,031,000 |
||||||||||||
474,600 |
1,031,000 |
|||||||||||||||
Capital Contractors, Inc. (2%)* |
Janitorial and Facilities Maintenance Services |
Subordinated Notes (12% Cash, 2% PIK, Due 12/15) |
9,420,689 |
9,002,754 |
9,002,754 |
|||||||||||
Common Stock Warrants (20 shares) |
492,000 |
448,000 |
||||||||||||||
9,420,689 |
9,494,754 |
9,450,754 |
||||||||||||||
Carolina Beverage Group, LLC (1%)* |
Beverage Manufacturing and Packaging |
Class A Units (11,974 units) |
1,077,615 |
1,400,000 |
||||||||||||
Class B Units (11,974 units) |
119,735 |
1,360,000 |
||||||||||||||
1,197,350 |
2,760,000 |
|||||||||||||||
Charter Facilities Services, Inc. (1%)* |
Retail, Restaurant, and Commercial Facilities Maintenance |
Subordinated Note (9% Cash, 4% PIK, Due 07/18) |
5,152,072 |
5,073,130 |
5,073,130 |
|||||||||||
Convertible Preferred Units (2,500 units) |
250,000 |
279,000 |
||||||||||||||
5,152,072 |
5,323,130 |
5,352,130 |
||||||||||||||
Chromaflo Technologies, LLC (5%)* |
Colorant Manufacturer and Distributor |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
16,549,234 |
16,268,865 |
16,268,865 |
|||||||||||
Preferred A Units (22,561 units) |
2,256,098 |
2,937,000 |
||||||||||||||
16,549,234 |
18,524,963 |
19,205,865 |
||||||||||||||
Comverge, Inc. (4%)* |
Provider of Intelligent Energy Management Solutions |
Subordinated Note (12% Cash, 3% PIK, Due 05/18) |
15,155,319 |
14,874,084 |
14,874,084 |
|||||||||||
Preferred Units (900 units) |
900,000 |
900,000 |
||||||||||||||
Common Units (1,000,000 units) |
100,000 |
100,000 |
||||||||||||||
15,155,319 |
15,874,084 |
15,874,084 |
||||||||||||||
Continental Anesthesia Management, LLC (2%)* |
Physicians Management Services |
Senior Note (14.0% Cash, Due 11/14) |
9,950,000 |
9,765,167 |
8,831,000 |
|||||||||||
Warrant (263 shares) |
276,100 |
— |
||||||||||||||
9,950,000 |
10,041,267 |
8,831,000 |
||||||||||||||
CRS Reprocessing, LLC (6%)* |
Fluid Reprocessing Services |
Subordinated Note (12% Cash, 2% PIK, Due 11/15) |
11,827,272 |
11,617,433 |
11,617,433 |
|||||||||||
Subordinated Note (12% Cash, 2% PIK, Due 11/15) |
13,043,263 |
11,899,345 |
11,899,345 |
|||||||||||||
Series C Preferred Units (30 units) |
288,342 |
430,000 |
||||||||||||||
Common Unit Warrant (664 units) |
1,759,556 |
2,849,000 |
||||||||||||||
Series D Preferred Units (16 units) |
107,074 |
171,000 |
||||||||||||||
24,870,535 |
25,671,750 |
26,966,778 |
||||||||||||||
DataSource Incorporated (2%)* |
Print Supply Chain Management Services |
Subordinated Note (12% Cash, 2% PIK, Due 01/18) |
8,627,184 |
8,474,391 |
8,474,391 |
|||||||||||
Common Units (47 units) |
1,000,000 |
1,089,000 |
||||||||||||||
8,627,184 |
9,474,391 |
9,563,391 |
||||||||||||||
DCWV Acquisition Corporation (1%)* |
Arts & Crafts and Home Decor Products Designer and Supplier |
Subordinated Note (12% Cash, 3% PIK, Due 09/17) |
6,100,207 |
5,989,273 |
5,346,000 |
|||||||||||
6,100,207 |
5,989,273 |
5,346,000 |
||||||||||||||
7
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
DLR Restaurants, LLC (3%)* |
Restaurant |
Subordinated Note (12% Cash, 2% PIK, Due 03/16) |
$ |
12,495,114 |
$ |
12,337,031 |
$ |
12,337,031 |
||||||||
Subordinated Note (12% Cash, 4% PIK, Due 03/16) |
791,102 |
776,102 |
776,102 |
|||||||||||||
Royalty Rights |
— |
44,000 |
||||||||||||||
13,286,216 |
13,113,133 |
13,157,133 |
||||||||||||||
Eckler's Holdings, Inc. (2%)* |
Restoration Parts and Accessories for Classic Cars and Trucks |
Subordinated Note (11% Cash, 4% PIK, Due 07/18) |
6,870,925 |
6,717,698 |
6,717,698 |
|||||||||||
Common Stock (18,029 shares) |
183,562 |
— |
||||||||||||||
Preferred Stock A (1,596 shares) |
1,596,126 |
1,638,003 |
||||||||||||||
6,870,925 |
8,497,386 |
8,355,701 |
||||||||||||||
Electronic Systems Protection, Inc. (1%)* |
Power Protection Systems Manufacturing |
Subordinated Note (12% Cash, 2% PIK, Due 12/15) |
4,267,913 |
4,242,543 |
4,242,543 |
|||||||||||
Common Stock (570 shares) |
285,000 |
308,000 |
||||||||||||||
4,267,913 |
4,527,543 |
4,550,543 |
||||||||||||||
Foodstate, Inc. (1%)* |
Nutritional Supplement Manufacturing and Distribution |
Subordinated Note (12% Cash, 3.8% PIK, Due 10/16) |
5,531,727 |
5,454,198 |
5,454,198 |
|||||||||||
5,531,727 |
5,454,198 |
5,454,198 |
||||||||||||||
Frozen Specialties, Inc. (1%)* |
Frozen Foods Manufacturer |
Subordinated Note (13% Cash, 5% PIK, Due 05/16) |
6,324,276 |
6,277,364 |
6,277,364 |
|||||||||||
6,324,276 |
6,277,364 |
6,277,364 |
||||||||||||||
Garden Fresh Restaurant Corp. (0%)* |
Restaurant |
Membership Units (5,000 units) |
500,000 |
62,000 |
||||||||||||
500,000 |
62,000 |
|||||||||||||||
Glencoe Business Services Holdings (5%)* |
Business Process Outsourcing Provider |
Subordinated Note (12% Cash, 2.5% PIK, Due 06/18) |
20,126,654 |
19,739,752 |
19,739,752 |
|||||||||||
20,126,654 |
19,739,752 |
19,739,752 |
||||||||||||||
Grindmaster-Cecilware Corp. (1%)* |
Food Services Equipment Manufacturer |
Subordinated Note (12% Cash, 6% PIK, Due 04/16) |
6,768,491 |
6,718,573 |
5,997,000 |
|||||||||||
6,768,491 |
6,718,573 |
5,997,000 |
||||||||||||||
Hatch Chile Co., LLC (1%)* |
Food Products Distributor |
Senior Note (19% Cash, Due 07/15) |
3,395,454 |
3,331,938 |
3,331,938 |
|||||||||||
Subordinated Note (14% Cash, Due 07/15) |
754,546 |
660,978 |
660,978 |
|||||||||||||
Unit Purchase Warrant (5,265 units) |
149,800 |
285,000 |
||||||||||||||
4,150,000 |
4,142,716 |
4,277,916 |
||||||||||||||
Home Physicians, LLC (“HP”) and Home Physicians Holdings, LP (“HPH”) (3%)* |
In-home Primary Care Physician Services |
Subordinated Note-HP (12% Cash, 5% PIK, Due 03/16) |
11,349,166 |
10,638,781 |
10,425,000 |
|||||||||||
Subordinated Note-HPH (4% Cash, 6% PIK, Due 03/16) |
1,384,898 |
1,303,361 |
— |
|||||||||||||
Senior Subordinated Note-HP (14% Cash, 2% PIK, Due 03/16) |
1,367,897 |
1,344,580 |
1,344,580 |
|||||||||||||
Preferred Units (0%) |
1,100,000 |
— |
||||||||||||||
Preferred Unit Purchase Warrants (25%) |
— |
— |
||||||||||||||
Royalty Rights |
— |
— |
||||||||||||||
14,101,961 |
14,386,722 |
11,769,580 |
||||||||||||||
Infrastructure Corporation of America, Inc. (3%)* |
Roadway Maintenance, Repair and Engineering Services |
Subordinated Note (12% Cash, 2% PIK, Due 09/18) |
11,022,936 |
9,371,776 |
9,371,776 |
|||||||||||
Common Stock Purchase Warrant (417,593 shares) |
2,411,000 |
2,862,000 |
||||||||||||||
11,022,936 |
11,782,776 |
12,233,776 |
||||||||||||||
Inland Pipe Rehabilitation Holding Company LLC (5%)* |
Cleaning and Repair Services |
Subordinated Note (13% Cash, 2.5% PIK, Due 12/16) |
20,927,777 |
20,701,499 |
20,701,499 |
|||||||||||
Membership Interest Purchase Warrant (3.0%) |
853,500 |
2,328,000 |
||||||||||||||
20,927,777 |
21,554,999 |
23,029,499 |
||||||||||||||
IOS Acquisitions, Inc. (4%)* |
Provider of Oil Country Tubular Goods Inspections and Repair Services |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
17,089,881 |
16,761,015 |
16,761,015 |
|||||||||||
Common Units (7,314 Class A Units) |
1,699,847 |
1,699,847 |
||||||||||||||
17,089,881 |
18,460,862 |
18,460,862 |
||||||||||||||
Library Systems & Services, LLC (1%)* |
Municipal Business Services |
Subordinated Note (12.5% Cash, 4.5% PIK, Due 06/15) |
4,256,702 |
4,173,803 |
4,173,803 |
|||||||||||
Common Stock Warrants (112 shares) |
58,995 |
1,267,000 |
||||||||||||||
4,256,702 |
4,232,798 |
5,440,803 |
||||||||||||||
Magpul Industries Corp. (5%)* |
Firearm Accessories Manufacturer and Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 03/17) |
13,300,000 |
13,090,346 |
13,090,346 |
|||||||||||
Preferred Units (1,470 units) |
1,470,000 |
1,812,000 |
||||||||||||||
Common Units (30,000 units) |
30,000 |
4,433,000 |
||||||||||||||
13,300,000 |
14,590,346 |
19,335,346 |
||||||||||||||
8
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Marine Acquisition Corp. (3%)* |
Boat Steering System and Driver Control Provider |
Subordinated Note (11.50% Cash, 2% PIK, Due 05/17) |
$ |
12,000,000 |
$ |
11,752,071 |
$ |
11,752,071 |
||||||||
12,000,000 |
11,752,071 |
11,752,071 |
||||||||||||||
Media Storm, LLC (2%)* |
Marketing Services |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
8,096,946 |
8,027,916 |
8,027,916 |
|||||||||||
Membership Units (1,216,204 units) |
1,176,957 |
1,390,000 |
||||||||||||||
8,096,946 |
9,204,873 |
9,417,916 |
||||||||||||||
Media Temple, Inc. (5%)* |
Web Hosting Services |
Subordinated Note (12% Cash, 3% PIK, Due 04/15) |
11,000,000 |
10,906,578 |
10,906,578 |
|||||||||||
Convertible Note (8% Cash, 6% PIK, Due 04/15) |
4,000,000 |
4,562,615 |
8,001,000 |
|||||||||||||
Common Stock Purchase Warrant (28,000 shares) |
1,251,000 |
3,500,000 |
||||||||||||||
15,000,000 |
16,720,193 |
22,407,578 |
||||||||||||||
Micross Solutions LLC (3%)* |
Provider Semiconductor Products and Services |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
10,668,476 |
10,514,683 |
10,514,683 |
|||||||||||
Class A-2 Common Units (1,500,000 units) |
1,500,000 |
1,500,000 |
||||||||||||||
10,668,476 |
12,014,683 |
12,014,683 |
||||||||||||||
Minco Technology Labs, LLC (1%)* |
Semiconductor Distribution |
Subordinated Note (6.5% Cash, 3.5% PIK, Due 05/16) |
5,585,737 |
5,457,936 |
3,253,000 |
|||||||||||
Class A Units (5,000 HoldCo. units) |
500,000 |
— |
||||||||||||||
Class A Units (3,907 OpCo. units) |
3,907 |
— |
||||||||||||||
5,585,737 |
5,961,843 |
3,253,000 |
||||||||||||||
My Alarm Center, LLC (3%)* |
Security Company |
Subordinated Note (12% Cash, 2.5% PIK, Due 09/17) |
10,135,685 |
10,044,308 |
10,044,308 |
|||||||||||
Preferred Units (2,000,000 units) |
2,000,000 |
1,993,000 |
||||||||||||||
10,135,685 |
12,044,308 |
12,037,308 |
||||||||||||||
Novolyte Technologies, Inc. (0%)* |
Specialty Manufacturing |
Common Units (24,522 units) |
43,905 |
178,801 |
||||||||||||
43,905 |
178,801 |
|||||||||||||||
Performance Health & Wellness Holdings, Inc. (3%)* |
Designer and Manufacturer of Rehabilitation and Wellness Products |
Subordinated Note (12% Cash, 1% PIK, Due 04/19) |
13,061,834 |
12,877,102 |
12,877,102 |
|||||||||||
Class A Limited Partnership Units (15,000 units) |
1,500,000 |
1,500,000 |
||||||||||||||
13,061,834 |
14,377,102 |
14,377,102 |
||||||||||||||
PowerDirect Marketing, LLC (2%)* |
Marketing Services |
Subordinated Note (12% Cash, 2% PIK, Due 05/16) |
7,598,981 |
7,041,753 |
7,041,753 |
|||||||||||
Common Unit Purchase Warrants |
590,200 |
1,992,000 |
||||||||||||||
7,598,981 |
7,631,953 |
9,033,753 |
||||||||||||||
ROM Acquisition Corporation (3%)* |
Military and Industrial Vehicles Equipment Manufacturing |
Subordinated Note (12% Cash, 3% PIK, Due 03/17) |
13,256,685 |
13,142,383 |
13,142,383 |
|||||||||||
13,256,685 |
13,142,383 |
13,142,383 |
||||||||||||||
Sheplers, Inc. (3%)* |
Western Apparel Retailer |
Subordinated Note (13.15% Cash, Due 12/16) |
8,750,000 |
8,573,508 |
8,573,508 |
|||||||||||
Subordinated Note (10% Cash, 7% PIK, Due 12/17) |
4,095,960 |
4,036,393 |
4,036,393 |
|||||||||||||
12,845,960 |
12,609,901 |
12,609,901 |
||||||||||||||
Snacks Holding Corporation (3%)* |
Trail Mixes and Nut Manufacturer and Marketer |
Subordinated Note (12% Cash, 1% PIK, Due 11/17) |
7,170,790 |
6,866,187 |
6,866,187 |
|||||||||||
Preferred A Units (22,368 units) |
2,124,957 |
3,185,000 |
||||||||||||||
Preferred B Units (10,380 units) |
986,059 |
1,546,000 |
||||||||||||||
Common Units (190,935 units) |
150,000 |
938,000 |
||||||||||||||
Common Stock Warrants (14,558 shares) |
14,558 |
91,000 |
||||||||||||||
7,170,790 |
10,141,761 |
12,626,187 |
||||||||||||||
SRC, Inc. (1%)* |
Specialty Chemical Manufacturer |
Subordinated Notes (12% Cash, 2% PIK, Due 12/14) |
6,053,888 |
5,906,509 |
5,567,000 |
|||||||||||
Common Stock Purchase Warrants |
123,800 |
— |
||||||||||||||
6,053,888 |
6,030,309 |
5,567,000 |
||||||||||||||
Stella Environmental Services, LLC (0%)* |
Waste Transfer Stations |
Common Stock Purchase Warrants |
20,000 |
316,000 |
||||||||||||
20,000 |
316,000 |
|||||||||||||||
Syrgis Holdings, Inc. (0%)* |
Specialty Chemical Manufacturer |
Class C Units (2,114 units) |
111,037 |
201,281 |
||||||||||||
111,037 |
201,281 |
|||||||||||||||
The Krystal Company (4%)* |
Quick Service Restaurant |
Subordinated Note (12% Cash, 3% PIK, Due 06/17) |
12,608,531 |
12,399,769 |
12,399,769 |
|||||||||||
Class A Units of Limited Partnership (2,000 units) |
2,000,000 |
3,044,000 |
||||||||||||||
12,608,531 |
14,399,769 |
15,443,769 |
||||||||||||||
9
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
TMR Automotive Service Supply, LLC (1%)* |
Automotive Supplies |
Subordinated Note (12% Cash, 1% PIK, Due 03/16) |
$ |
4,500,000 |
$ |
4,302,625 |
$ |
4,302,625 |
||||||||
Unit Purchase Warrant (316,858 units) |
195,000 |
388,000 |
||||||||||||||
4,500,000 |
4,497,625 |
4,690,625 |
||||||||||||||
Tomich Brothers, LLC (2%)* |
Squid and Wetfish Processor and Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 04/16) |
7,200,309 |
7,089,368 |
7,089,368 |
|||||||||||
Royalty Rights |
— |
— |
||||||||||||||
7,200,309 |
7,089,368 |
7,089,368 |
||||||||||||||
Top Knobs USA, Inc. (3%)* |
Hardware Designer and Distributor |
Common Stock (26,593 shares) |
750,000 |
1,115,000 |
||||||||||||
750,000 |
1,115,000 |
|||||||||||||||
Trinity Consultants Holdings, Inc. (2%)* |
Air Quality Consulting Services |
Subordinated Note (12% Cash, 2.5% PIK, Due 11/17) |
7,448,430 |
7,326,637 |
7,326,637 |
|||||||||||
Series A Preferred Stock (10,000 units) |
950,000 |
1,149,000 |
||||||||||||||
Common Stock (50,000 units) |
50,000 |
647,000 |
||||||||||||||
7,448,430 |
8,326,637 |
9,122,637 |
||||||||||||||
TrustHouse Services Group, Inc. (7%)* |
Food Management Services |
Subordinated Note (12% Cash, 2.25% PIK, Due 06/19) |
25,476,664 |
25,200,236 |
25,200,236 |
|||||||||||
Class A Units (1,557 units) |
512,124 |
1,796,000 |
||||||||||||||
Class B Units (82 units) |
26,954 |
65,000 |
||||||||||||||
Class E Units (838 units) |
750,406 |
1,032,000 |
||||||||||||||
25,476,664 |
26,489,720 |
28,093,236 |
||||||||||||||
Tulsa Inspection Resources, Inc. (2%)* |
Pipeline Inspection Services |
Subordinated Note (14%-17.5% Cash, Due 03/14) |
5,810,588 |
5,696,398 |
5,696,398 |
|||||||||||
Common Units (2 units) |
337,925 |
707,000 |
||||||||||||||
Common Stock Warrants (8 shares) |
321,000 |
2,717,000 |
||||||||||||||
5,810,588 |
6,355,323 |
9,120,398 |
||||||||||||||
United Biologics, LLC (2%)* |
Allergy Immunotherapy |
Subordinated Note (12% Cash, 2% PIK, Due 03/17) |
9,969,981 |
9,093,494 |
9,093,494 |
|||||||||||
Class A Common Stock (177,935 shares) |
1,999,989 |
1,143,000 |
||||||||||||||
Class A & Class B Unit Purchase Warrants |
838,117 |
201,000 |
||||||||||||||
9,969,981 |
11,931,600 |
10,437,494 |
||||||||||||||
United Retirement Plan Consultants, Inc. (3%)* |
Retirement Plan Administrator |
Subordinated Note (12% Cash, 5% PIK, Due 09/16) |
12,463,243 |
12,265,497 |
12,265,497 |
|||||||||||
Preferred A Units (90,000 units) |
900,000 |
931,000 |
||||||||||||||
Common Units (10,000 units) |
100,000 |
— |
||||||||||||||
12,463,243 |
13,265,497 |
13,196,497 |
||||||||||||||
Wholesale Floors, Inc. (1%)* |
Commercial Services |
Subordinated Note (12.5% Cash, 3.5% PIK, Due 06/14) |
3,853,796 |
3,807,968 |
3,807,968 |
|||||||||||
Membership Interest Purchase Warrant (4.0%) |
132,800 |
— |
||||||||||||||
3,853,796 |
3,940,768 |
3,807,968 |
||||||||||||||
Workforce Software, LLC (3%)* |
Software Provider |
Subordinated Note (11% Cash, 5% PIK, Due 11/16) |
8,000,000 |
7,084,042 |
7,084,042 |
|||||||||||
Class B Preferred Units (1,020,000 units) |
1,020,000 |
1,160,000 |
||||||||||||||
Common Unit Purchase Warrants (2,434,749 units) |
952,300 |
2,336,000 |
||||||||||||||
8,000,000 |
9,056,342 |
10,580,042 |
||||||||||||||
WSO Holdings, LP (5%)* |
Organic/Fair Trade Sugar, Syrup, Nectar and Honey Producer |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
20,299,258 |
20,040,359 |
20,040,359 |
|||||||||||
Common Points (3,000 points) |
3,000,000 |
2,976,000 |
||||||||||||||
20,299,258 |
23,040,359 |
23,016,359 |
||||||||||||||
Xchange Technology Group, LLC (0%)* |
Used and Refurbished IT Asset Supplier |
Subordinated (8% Cash, Due 06/15) |
6,144,480 |
5,904,000 |
750,000 |
|||||||||||
Royalty Rights |
— |
— |
||||||||||||||
6,144,480 |
5,904,000 |
750,000 |
||||||||||||||
Yellowstone Landscape Group, Inc. (4%)* |
Landscaping Services |
Subordinated Note (10% Cash, 6% PIK, Due 04/14) |
15,476,540 |
15,383,142 |
15,383,142 |
|||||||||||
15,476,540 |
15,383,142 |
15,383,142 |
||||||||||||||
Subtotal Non–Control / Non–Affiliate Investments |
535,470,096 |
571,951,156 |
587,495,700 |
|||||||||||||
10
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Affiliate Investments: |
||||||||||||||||
All Aboard America! Holdings Inc. (2%)* |
Motor Coach Operator |
Subordinated Note (12% Cash, 3% PIK, Due 10/17) |
$ |
8,696,065 |
$ |
8,544,388 |
$ |
8,544,388 |
||||||||
Convertible Preferred Interest in LLC |
1,500,000 |
1,979,000 |
||||||||||||||
8,696,065 |
10,044,388 |
10,523,388 |
||||||||||||||
American De-Rosa Lamparts, LLC and Hallmark Lighting (1%)* |
Wholesale and Distribution |
Subordinated Note (12% Cash, 6% PIK, Due 10/13) |
6,533,798 |
5,778,219 |
5,778,219 |
|||||||||||
Membership Units (6,516 units) |
620,653 |
— |
||||||||||||||
6,533,798 |
6,398,872 |
5,778,219 |
||||||||||||||
AP Services, Inc. (0%)* |
Fluid Sealing Supplies and Services |
Class A Units (933 units) |
302,886 |
556,618 |
||||||||||||
Class B Units (496 units) |
— |
295,642 |
||||||||||||||
302,886 |
852,260 |
|||||||||||||||
Asset Point, LLC (2%)* |
Asset Management Software Provider |
Senior Note (12% Cash, 5% PIK, Due 03/13) |
6,384,976 |
6,384,974 |
6,384,974 |
|||||||||||
Senior Note (12% Cash, 2% PIK, Due 07/15) |
633,404 |
633,404 |
585,000 |
|||||||||||||
Subordinated Note (7% Cash, Due 03/13) |
941,798 |
941,798 |
706,000 |
|||||||||||||
Membership Units (1,000,000 units) |
8,203 |
817,000 |
||||||||||||||
Options to Purchase Membership Units (342,407 units) |
500,000 |
189,000 |
||||||||||||||
Membership Unit Warrants (356,506 units) |
— |
— |
||||||||||||||
7,960,178 |
8,468,379 |
8,681,974 |
||||||||||||||
Captek Softgel International, Inc. (2%)* |
Nutraceutical Manufacturer |
Subordinated Note (12% Cash, 4% PIK, Due 08/16) |
8,706,552 |
8,593,144 |
8,593,144 |
|||||||||||
Class A Units (80,000 units) |
800,000 |
431,000 |
||||||||||||||
8,706,552 |
9,393,144 |
9,024,144 |
||||||||||||||
CIS Secure Computing Inc. (2%)* |
Secure Communications and Computing Solutions Provider |
Subordinated Note (12% Cash, 3% PIK, Due 06/17) |
10,221,041 |
10,054,278 |
10,054,278 |
|||||||||||
Common Stock (84 shares) |
502,320 |
1,045,000 |
||||||||||||||
10,221,041 |
10,556,598 |
11,099,278 |
||||||||||||||
Dyson Corporation (1%)* |
Custom Forging and Fastener Supplies |
Class A Units (1,000,000 units) |
1,000,000 |
2,614,000 |
||||||||||||
1,000,000 |
2,614,000 |
|||||||||||||||
Equisales, LLC (0%)* |
Energy Products and Services |
Subordinated Note (6.5% Cash, 10% PIK, Due 06/12) |
3,729,471 |
3,157,043 |
125,000 |
|||||||||||
Class A Units (500,000 units) |
480,900 |
— |
||||||||||||||
3,729,471 |
3,637,943 |
125,000 |
||||||||||||||
Fischbein Partners, LLC (2%)* |
Packaging and Materials Handling Equipment Manufacturer |
Class A Units (1,750,000 units) |
417,088 |
6,881,000 |
||||||||||||
417,088 |
6,881,000 |
|||||||||||||||
Main Street Gourmet, LLC (1%)* |
Baked Goods Provider |
Subordinated Notes (12% Cash, 4.5% PIK, Due 10/16) |
4,376,660 |
4,319,956 |
4,319,956 |
|||||||||||
Jr. Subordinated Notes (8% Cash, 2% PIK, Due 04/17) |
1,040,937 |
1,026,580 |
1,026,580 |
|||||||||||||
Preferred Units (233 units) |
211,867 |
154,000 |
||||||||||||||
Common B Units (3,000 units) |
23,140 |
— |
||||||||||||||
Common A Units (1,652 units) |
14,993 |
— |
||||||||||||||
5,417,597 |
5,596,536 |
5,500,536 |
||||||||||||||
PartsNow!, LLC (3%)* |
Printer Parts Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 08/17) |
11,196,741 |
11,000,454 |
11,000,454 |
|||||||||||
Member Units (1,000,000 units) |
1,000,000 |
1,306,000 |
||||||||||||||
Royalty Rights |
— |
64,000 |
||||||||||||||
11,196,741 |
12,000,454 |
12,370,454 |
||||||||||||||
Pine Street Holdings, LLC (0%)* |
Oil and Gas Services |
Preferred Units (200 units) |
200,000 |
183,000 |
||||||||||||
Common Unit Warrants (2,220 units) |
— |
— |
||||||||||||||
200,000 |
183,000 |
|||||||||||||||
Plantation Products, LLC (6%)* |
Seed Manufacturing |
Subordinated Notes (10.5% Cash, 7% PIK, Due 11/17) |
19,648,000 |
19,455,888 |
19,455,888 |
|||||||||||
Preferred Units (4,312 units) |
4,312,000 |
4,749,000 |
||||||||||||||
Common Units (352,000 units) |
88,000 |
831,000 |
||||||||||||||
19,648,000 |
23,855,888 |
25,035,888 |
||||||||||||||
11
TRIANGLE CAPITAL CORPORATION
Unaudited Consolidated Schedule of Investments
March 31, 2013
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
QC Holdings, Inc. (0%)* |
Lab Testing Services |
Common Stock (5,594 shares) |
$ |
563,602 |
$ |
226,000 |
||||||||||
563,602 |
226,000 |
|||||||||||||||
Technology Crops International (2%)* |
Supply Chain Management Services |
Subordinated Note (12% Cash, 5% PIK, Due 03/15) |
$ |
5,976,368 |
5,932,320 |
5,932,320 |
||||||||||
Common Units (50 units) |
500,000 |
487,000 |
||||||||||||||
5,976,368 |
6,432,320 |
6,419,320 |
||||||||||||||
Venture Technology Groups, Inc. (0%)* |
Fluid and Gas Handling Products Distributor |
Subordinated Note (12.5% Cash, 4% PIK, Due 09/16) |
6,210,094 |
5,703,715 |
711,545 |
|||||||||||
Class A Units (1,000,000 units) |
1,000,000 |
— |
||||||||||||||
6,210,094 |
6,703,715 |
711,545 |
||||||||||||||
Waste Recyclers Holdings, LLC (1%)* |
Environmental and Facilities Services |
Class A Preferred Units (280 units) |
2,251,100 |
— |
||||||||||||
Class B Preferred Units (985,372 units) |
3,304,218 |
2,456,000 |
||||||||||||||
Class C Preferred Units (1,444,475 units) |
246,598 |
687,000 |
||||||||||||||
Common Unit Purchase Warrant (1,170,083 units) |
748,900 |
— |
||||||||||||||
Common Units (153,219 units) |
180,783 |
— |
||||||||||||||
6,731,599 |
3,143,000 |
|||||||||||||||
Wythe Will Tzetzo, LLC (3%)* |
Confectionary Goods Distributor |
Subordinated Notes (13% Cash, Due 10/16) |
10,357,475 |
9,985,532 |
9,985,532 |
|||||||||||
Series A Preferred Units (74,764 units) |
1,500,000 |
3,397,000 |
||||||||||||||
Common Unit Purchase Warrants (25,065 units) |
301,510 |
892,994 |
||||||||||||||
10,357,475 |
11,787,042 |
14,275,526 |
||||||||||||||
Subtotal Affiliate Investments |
104,653,380 |
124,090,454 |
123,444,532 |
|||||||||||||
Control Investments: |
||||||||||||||||
FCL Graphics, Inc. (“FCL”) and FCL Holding SPV, LLC (“SPV”) (1%)* |
Commercial Printing Services |
Senior Note—FCL (5.0% Cash, Due 09/16) |
1,368,052 |
1,368,052 |
1,368,052 |
|||||||||||
Senior Note—FCL (8.0% Cash, 2% PIK, Due 09/16) |
1,177,261 |
1,177,259 |
1,018,000 |
|||||||||||||
Senior Note—SPV (2.5% Cash, 6% PIK, Due 09/16) |
1,021,275 |
1,007,272 |
127,000 |
|||||||||||||
Members Interests—SPV (299,875 units) |
— |
— |
||||||||||||||
3,566,588 |
3,552,583 |
2,513,052 |
||||||||||||||
Fire Sprinkler Systems, Inc. (0%)* |
Specialty Trade Contractors |
Subordinated Notes (2% PIK, Due 03/13) |
3,582,906 |
2,992,528 |
263,000 |
|||||||||||
Common Stock (2,978 shares) |
294,624 |
— |
||||||||||||||
3,582,906 |
3,287,152 |
263,000 |
||||||||||||||
Fischbein, LLC (0%)* |
Packaging and Materials Handling Equipment Manufacturer |
Class A-1 Common Units (501,984 units) |
29,575 |
141,512 |
||||||||||||
Class A Common Units (3,839,068 units) |
226,182 |
927,121 |
||||||||||||||
255,757 |
1,068,633 |
|||||||||||||||
Gerli & Company (0%)* |
Specialty Woven Fabrics Manufacturer |
Subordinated Note (10% Cash, Due 03/15) |
398,464 |
375,000 |
375,000 |
|||||||||||
Subordinated Note (8.5% Cash, Due 03/15) |
3,557,800 |
3,000,000 |
366,000 |
|||||||||||||
Class A Preferred Shares (1,211 shares) |
855,000 |
— |
||||||||||||||
Class C Preferred Shares (744 shares) |
— |
— |
||||||||||||||
Class E Preferred Shares (400 shares) |
161,440 |
— |
||||||||||||||
Common Stock (300 shares) |
100,000 |
— |
||||||||||||||
3,956,264 |
4,491,440 |
741,000 |
||||||||||||||
Subtotal Control Investments |
11,105,758 |
11,586,932 |
4,585,685 |
|||||||||||||
Total Investments, March 31, 2013 (169%)* |
$ |
651,229,234 |
$ |
707,628,542 |
$ |
715,525,917 |
* Value as a percent of net assets
(1) |
All debt investments are income producing. Common stock, preferred stock and all warrants are non–income producing. |
(2) |
Disclosures of interest rates on notes include cash interest rates and payment–in–kind (“PIK”) interest rates. |
(3) |
All investments are restricted as to resale and were valued at fair value as determined in good faith by the Board of Directors. |
See accompanying notes.
12
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Non–Control / Non–Affiliate Investments: |
||||||||||||||||
Agilex Flavors & Fragrances, Inc. (3%)* |
Custom Fragrance Producers |
Subordinated Note (12% Cash, 1.5% PIK, Due 06/19) |
$ |
12,506,771 |
$ |
12,256,771 |
$ |
12,256,771 |
||||||||
Common Units (1,250 units) |
1,250,000 |
1,250,000 |
||||||||||||||
12,506,771 |
13,506,771 |
13,506,771 |
||||||||||||||
Ambient Air Corporation (“AA”) and Peaden-Hobbs Mechanical, LLC (“PHM”) (1%)* |
Specialty Trade Contractors |
Subordinated Note-AA (15% Cash, 3% PIK, Due 06/13) |
4,047,120 |
4,038,351 |
4,038,351 |
|||||||||||
Subordinated Note-PHM (12% Cash, Due 09/12) |
12,857 |
12,857 |
12,857 |
|||||||||||||
Common Stock-PHM (128,571 shares) |
128,571 |
128,571 |
||||||||||||||
Common Stock Warrants-AA (455 shares) |
142,361 |
242,000 |
||||||||||||||
4,059,977 |
4,322,140 |
4,421,779 |
||||||||||||||
Aramsco, Inc. (0%)* |
Environmental Emergency Products Distributor |
Subordinated Note (12% Cash, 2% PIK, Due 03/14) |
1,231,819 |
1,156,696 |
1,156,696 |
|||||||||||
1,231,819 |
1,156,696 |
1,156,696 |
||||||||||||||
Assurance Operations Corporation (0%)* |
Metal Fabrication |
Common Stock (517 shares) |
516,867 |
905,000 |
||||||||||||
516,867 |
905,000 |
|||||||||||||||
Audio and Video Labs Holdings, Inc. (3%)* |
Manufacturer and Distributor for Independent Artists and Authors |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
13,002,889 |
12,742,889 |
12,742,889 |
|||||||||||
Common Units (134 units) |
1,300,000 |
1,300,000 |
||||||||||||||
13,002,889 |
14,042,889 |
14,042,889 |
||||||||||||||
Botanical Laboratories, Inc. (0%)* |
Nutritional Supplement Manufacturing and Distribution |
Common Unit Warrants (998,680 units) |
474,600 |
1,031,000 |
||||||||||||
474,600 |
1,031,000 |
|||||||||||||||
Capital Contractors, Inc. (2%)* |
Janitorial and Facilities Maintenance Services |
Subordinated Notes (12% Cash, 2% PIK, Due 12/15) |
9,373,742 |
8,924,127 |
8,924,127 |
|||||||||||
Common Stock Warrants (20 shares) |
492,000 |
339,000 |
||||||||||||||
9,373,742 |
9,416,127 |
9,263,127 |
||||||||||||||
Carolina Beverage Group, LLC (1%)* |
Beverage Manufacturing and Packaging |
Class A Units (11,974 units) |
1,077,615 |
1,367,000 |
||||||||||||
Class B Units (11,974 units) |
119,735 |
963,000 |
||||||||||||||
1,197,350 |
2,330,000 |
|||||||||||||||
Chromaflo Technologies, LLC (5%)* |
Colorant Manufacturer and Distributor |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
16,466,899 |
16,174,905 |
16,174,905 |
|||||||||||
Preferred A Units (22,561 units) |
2,256,098 |
2,878,098 |
||||||||||||||
16,466,899 |
18,431,003 |
19,053,003 |
||||||||||||||
Comverge, Inc. (4%)* |
Provider of Intelligent Energy Management Solutions |
Subordinated Note (12% Cash, 3% PIK, Due 05/18) |
15,042,500 |
14,751,744 |
14,751,744 |
|||||||||||
Preferred Units (900 units) |
900,000 |
900,000 |
||||||||||||||
Common Units (1,000,000 units) |
100,000 |
100,000 |
||||||||||||||
15,042,500 |
15,751,744 |
15,751,744 |
||||||||||||||
Continental Anesthesia Management, LLC (2%)* |
Physicians Management Services |
Senior Note (14% Cash, Due 11/14) |
9,950,000 |
9,739,469 |
9,739,469 |
|||||||||||
Warrant (263 shares) |
276,100 |
— |
||||||||||||||
9,950,000 |
10,015,569 |
9,739,469 |
||||||||||||||
CRS Reprocessing, LLC (7%)* |
Fluid Reprocessing Services |
Subordinated Note (10% Cash, 4% PIK, Due 11/15) |
11,768,332 |
11,531,905 |
11,531,905 |
|||||||||||
Subordinated Note (10% Cash, 4% PIK, Due 11/15) |
12,978,264 |
11,746,721 |
11,746,721 |
|||||||||||||
Series C Preferred Units (30 units) |
288,342 |
454,000 |
||||||||||||||
Common Unit Warrant (664 units) |
1,759,556 |
3,653,000 |
||||||||||||||
Series D Preferred Units (16 units) |
107,074 |
184,000 |
||||||||||||||
24,746,596 |
25,433,598 |
27,569,626 |
||||||||||||||
DataSource Incorporated (2%)* |
Print Supply Chain Management Services |
Subordinated Note (12% Cash, 2% PIK, Due 01/18) |
8,584,263 |
8,425,564 |
8,425,564 |
|||||||||||
Common Units (47 units) |
1,000,000 |
1,000,000 |
||||||||||||||
8,584,263 |
9,425,564 |
9,425,564 |
||||||||||||||
DCWV Acquisition Corporation (1%)* |
Arts & Crafts and Home Decor Products Designer and Supplier |
Subordinated Note (12% Cash, 3% PIK, Due 09/17) |
6,054,683 |
5,939,149 |
5,939,149 |
|||||||||||
6,054,683 |
5,939,149 |
5,939,149 |
||||||||||||||
DLR Restaurants, LLC (3%)* |
Restaurant |
Subordinated Note (12% Cash, 2% PIK, Due 03/16) |
10,934,260 |
10,764,337 |
10,764,337 |
|||||||||||
Subordinated Note (12% Cash, 4% PIK, Due 03/16) |
783,243 |
768,243 |
768,243 |
|||||||||||||
Royalty Rights |
— |
132,000 |
||||||||||||||
11,717,503 |
11,532,580 |
11,664,580 |
13
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Eckler's Holdings, Inc. (2%)* |
Restoration Parts and Accessories for Classic Cars and Trucks |
Subordinated Note (11% Cash, 4% PIK, Due 07/18) |
$ |
6,804,178 |
$ |
6,645,927 |
$ |
6,645,927 |
||||||||
Common Stock (18,029 shares) |
183,562 |
183,562 |
||||||||||||||
Preferred Stock A (1,596.13 shares) |
1,596,126 |
1,596,126 |
||||||||||||||
6,804,178 |
8,425,615 |
8,425,615 |
||||||||||||||
Electronic Systems Protection, Inc. (1%)* |
Power Protection Systems Manufacturing |
Subordinated Note (12% Cash, 2% PIK, Due 12/15) |
4,246,680 |
4,219,387 |
4,219,387 |
|||||||||||
Common Stock (570 shares) |
285,000 |
301,000 |
||||||||||||||
4,246,680 |
4,504,387 |
4,520,387 |
||||||||||||||
Empire Facilities Management Group, Inc. (1%)* |
Retail, Restaurant, and Commercial Facilities Maintenance |
Subordinated Note (9% Cash, 4% PIK, Due 07/18) |
5,101,061 |
5,019,203 |
5,019,203 |
|||||||||||
Convertible Preferred Units (2,500 units) |
250,000 |
250,000 |
||||||||||||||
5,101,061 |
5,269,203 |
5,269,203 |
||||||||||||||
Foodstate, Inc. (1%)* |
Nutritional Supplement Manufacturing and Distribution |
Subordinated Note (12% Cash, 3.8% PIK, Due 10/16) |
5,480,349 |
5,398,773 |
5,398,773 |
|||||||||||
5,480,349 |
5,398,773 |
5,398,773 |
||||||||||||||
Frozen Specialties, Inc. (1%)* |
Frozen Foods Manufacturer |
Subordinated Note (13% Cash, 5% PIK, Due 05/16) |
6,245,877 |
6,190,449 |
6,190,449 |
|||||||||||
6,245,877 |
6,190,449 |
6,190,449 |
||||||||||||||
Garden Fresh Restaurant Corp. (0%)* |
Restaurant |
Membership Units (5,000 units) |
500,000 |
295,000 |
||||||||||||
500,000 |
295,000 |
|||||||||||||||
Glencoe Business Services Holdings (5%)* |
Business Process Outsourcing Provider |
Subordinated Note (12% Cash, 2.5% PIK, Due 06/18) |
20,001,388 |
19,601,388 |
19,601,388 |
|||||||||||
20,001,388 |
19,601,388 |
19,601,388 |
||||||||||||||
Grindmaster-Cecilware Corp. (1%)* |
Food Services Equipment Manufacturer |
Subordinated Note (12% Cash, 6% PIK, Due 04/16) |
6,667,971 |
6,612,541 |
5,894,000 |
|||||||||||
6,667,971 |
6,612,541 |
5,894,000 |
||||||||||||||
Hatch Chile Co., LLC (1%)* |
Food Products Distributor |
Senior Note (19% Cash, Due 07/15) |
3,600,000 |
3,530,928 |
3,530,928 |
|||||||||||
Subordinated Note (14% Cash, Due 07/15) |
800,000 |
697,713 |
697,713 |
|||||||||||||
Unit Purchase Warrant (5,265 units) |
149,800 |
229,000 |
||||||||||||||
4,400,000 |
4,378,441 |
4,457,641 |
||||||||||||||
Home Physicians, LLC (“HP”) and Home Physicians Holdings, LP (“HPH”) (2%)* |
In-home Primary Care Physician Services |
Subordinated Note-HP (12% Cash, 5% PIK, Due 03/16) |
11,208,476 |
10,628,482 |
6,219,000 |
|||||||||||
Subordinated Note-HPH (4% Cash, 6% PIK, Due 03/16) |
1,364,331 |
1,303,361 |
— |
|||||||||||||
Senior Subordinated Note-HP (14% Cash, 2% PIK, Due 03/16) |
612,245 |
602,472 |
602,472 |
|||||||||||||
Royalty Rights |
— |
— |
||||||||||||||
13,185,052 |
12,534,315 |
6,821,472 |
||||||||||||||
Infrastructure Corporation of America, Inc. (3%)* |
Roadway Maintenance, Repair and Engineering Services |
Subordinated Note (12% Cash, 1% PIK, Due 10/15) |
10,989,934 |
10,213,309 |
10,213,309 |
|||||||||||
Common Stock Purchase Warrant (199,526 shares) |
980,000 |
1,164,000 |
||||||||||||||
10,989,934 |
11,193,309 |
11,377,309 |
||||||||||||||
Inland Pipe Rehabilitation Holding Company LLC (6%)* |
Cleaning and Repair Services |
Subordinated Note (13% Cash, 2.5% PIK, Due 12/16) |
20,797,791 |
20,559,945 |
20,559,945 |
|||||||||||
Membership Interest Purchase Warrant (3.0%) |
853,500 |
2,726,000 |
||||||||||||||
20,797,791 |
21,413,445 |
23,285,945 |
||||||||||||||
IOS Acquisitions, Inc. (4%)* |
Provider of Oil Country Tubular Goods Inspections and Repair Services |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
17,004,723 |
16,664,723 |
16,664,723 |
|||||||||||
Common Units (7,314 Class A Units) |
1,699,847 |
1,699,847 |
||||||||||||||
17,004,723 |
18,364,570 |
18,364,570 |
||||||||||||||
Library Systems & Services, LLC (2%)* |
Municipal Business Services |
Subordinated Note (12.5% Cash, 4.5% PIK, Due 06/15) |
5,250,002 |
5,159,230 |
5,159,230 |
|||||||||||
Common Stock Warrants (112 shares) |
58,995 |
1,486,000 |
||||||||||||||
5,250,002 |
5,218,225 |
6,645,230 |
||||||||||||||
Magpul Industries Corp. (4%)* |
Firearm Accessories Manufacturer and Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 03/17) |
13,300,000 |
13,080,247 |
13,080,247 |
|||||||||||
Preferred Units (1,470 units) |
1,470,000 |
1,694,000 |
||||||||||||||
Common Units (30,000 units) |
30,000 |
3,100,000 |
||||||||||||||
13,300,000 |
14,580,247 |
17,874,247 |
||||||||||||||
Marine Acquisition Corp. (3%)* |
Boat Steering System and Driver Control Provider |
Subordinated Note (11.50% Cash, 2% PIK, Due 05/17) |
12,000,000 |
11,740,879 |
11,740,879 |
|||||||||||
12,000,000 |
11,740,879 |
11,740,879 |
14
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Media Storm, LLC (2%)* |
Marketing Services |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
$ |
8,056,663 |
$ |
7,984,771 |
$ |
7,984,771 |
||||||||
Membership Units (1,216,204 units) |
1,176,957 |
1,307,000 |
||||||||||||||
8,056,663 |
9,161,728 |
9,291,771 |
||||||||||||||
Media Temple, Inc. (4%)* |
Web Hosting Services |
Subordinated Note (12% Cash, 3% PIK, Due 04/15) |
8,800,000 |
8,696,378 |
8,696,378 |
|||||||||||
Convertible Note (8% Cash, 6% PIK, Due 04/15) |
3,200,000 |
2,896,501 |
6,377,000 |
|||||||||||||
Common Stock Purchase Warrant (28,000 shares) |
536,000 |
2,790,000 |
||||||||||||||
12,000,000 |
12,128,879 |
17,863,378 |
||||||||||||||
Micross Solutions LLC (3%)* |
Provider Semiconductor Products and Services |
Subordinated Note (12% Cash, 2% PIK, Due 06/18) |
10,615,311 |
10,456,311 |
10,456,311 |
|||||||||||
Class A-2 Common Units (1,500,000 units) |
1,500,000 |
1,500,000 |
||||||||||||||
10,615,311 |
11,956,311 |
11,956,311 |
||||||||||||||
Minco Technology Labs, LLC (1%)* |
Semiconductor Distribution |
Subordinated Note (6.5% Cash, 3.5% PIK, Due 05/16) |
5,537,286 |
5,453,091 |
3,619,000 |
|||||||||||
Class A Units (5,000 HoldCo. units) |
500,000 |
— |
||||||||||||||
Class A Units (3,907 OpCo. units) |
3,907 |
— |
||||||||||||||
5,537,286 |
5,956,998 |
3,619,000 |
||||||||||||||
My Alarm Center, LLC (2%)* |
Security Company |
Subordinated Note (12% Cash, 2.5% PIK, Due 09/17) |
8,084,991 |
8,010,654 |
8,010,654 |
|||||||||||
Preferred Units (2,000,000 units) |
2,000,000 |
2,000,000 |
||||||||||||||
8,084,991 |
10,010,654 |
10,010,654 |
||||||||||||||
National Investment Managers Inc. (3%)* |
Retirement Plan Administrator |
Subordinated Note (12% Cash, 5% PIK, Due 09/16) |
12,309,375 |
12,100,174 |
12,100,174 |
|||||||||||
Preferred A Units (90,000 units) |
900,000 |
658,000 |
||||||||||||||
Common Units (10,000 units) |
100,000 |
— |
||||||||||||||
12,309,375 |
13,100,174 |
12,758,174 |
||||||||||||||
Novolyte Technologies, Inc. (0%)* |
Specialty Manufacturing |
Common Units (24,522 units) |
43,905 |
178,801 |
||||||||||||
43,905 |
178,801 |
|||||||||||||||
Performance Health & Wellness Holdings, Inc. (3%)* |
Designer and Manufacturer of Rehabilitation and Wellness Products |
Subordinated Note (12% Cash, 1% PIK, Due 04/19) |
13,029,262 |
12,839,320 |
12,839,320 |
|||||||||||
Class A Limited Partnership Units (15,000 units) |
1,500,000 |
1,500,000 |
||||||||||||||
13,029,262 |
14,339,320 |
14,339,320 |
||||||||||||||
PowerDirect Marketing, LLC (2%)* |
Marketing Services |
Subordinated Note (12% Cash, 2% PIK, Due 05/16) |
7,660,631 |
7,069,381 |
7,069,381 |
|||||||||||
Common Unit Purchase Warrants |
590,200 |
1,820,000 |
||||||||||||||
7,660,631 |
7,659,581 |
8,889,381 |
||||||||||||||
ROM Acquisition Corporation (3%)* |
Military and Industrial Vehicles Equipment Manufacturing |
Subordinated Note (12% Cash, 3% PIK, Due 03/17) |
13,157,755 |
13,037,948 |
13,037,948 |
|||||||||||
13,157,755 |
13,037,948 |
13,037,948 |
||||||||||||||
Sheplers, Inc. (3%)* |
Western Apparel Retailer |
Subordinated Note (13.15% Cash, Due 12/16) |
8,750,000 |
8,564,503 |
8,564,503 |
|||||||||||
Subordinated Note (10% Cash, 7% PIK, Due 12/17) |
4,027,230 |
3,964,422 |
3,964,422 |
|||||||||||||
12,777,230 |
12,528,925 |
12,528,925 |
||||||||||||||
Snacks Holding Corporation (3%)* |
Trail Mixes and Nut Manufacturer and Marketer |
Subordinated Note (12% Cash, 1% PIK, Due 11/17) |
7,152,710 |
6,835,477 |
6,835,477 |
|||||||||||
Preferred A Units (22,368 units) |
2,124,957 |
3,016,000 |
||||||||||||||
Preferred B Units (10,380 units) |
986,059 |
1,430,000 |
||||||||||||||
Common Units (190,935 units) |
150,000 |
415,000 |
||||||||||||||
Common Stock Warrants (14,558 shares) |
14,558 |
40,000 |
||||||||||||||
7,152,710 |
10,111,051 |
11,736,477 |
||||||||||||||
SRC, Inc. (1%)* |
Specialty Chemical Manufacturer |
Subordinated Notes (12% Cash, 2% PIK, Due 12/14) |
6,023,719 |
5,856,719 |
5,643,000 |
|||||||||||
Common Stock Purchase Warrants |
123,800 |
— |
||||||||||||||
6,023,719 |
5,980,519 |
5,643,000 |
||||||||||||||
Stella Environmental Services, LLC (1%)* |
Waste Transfer Stations |
Subordinated Notes (12% Cash, 3% PIK, Due 02/17) |
5,916,326 |
5,788,004 |
5,788,004 |
|||||||||||
Common Stock Purchase Warrants |
20,000 |
259,000 |
||||||||||||||
5,916,326 |
5,808,004 |
6,047,004 |
||||||||||||||
Syrgis Holdings, Inc. (0%)* |
Specialty Chemical Manufacturer |
Class C Units (2,114 units) |
111,037 |
201,281 |
||||||||||||
111,037 |
201,281 |
15
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| |||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
||||||||||||
The Krystal Company (4%)* |
Quick Service Restaurant |
Subordinated Note (12% Cash, 3% PIK, Due 06/17) |
$ |
12,514,671 |
$ |
12,296,595 |
$ |
12,296,595 |
|||||||||
Class A Units of Limited Partnership (2,000 units) |
2,000,000 |
3,051,000 |
|||||||||||||||
12,514,671 |
14,296,595 |
15,347,595 |
|||||||||||||||
TMR Automotive Service Supply, LLC (1%)* |
Automotive Supplies |
Subordinated Note (12% Cash, 1% PIK, Due 03/16) |
4,750,000 |
4,539,123 |
4,539,123 |
||||||||||||
Unit Purchase Warrant (316,858 units) |
195,000 |
384,000 |
|||||||||||||||
4,750,000 |
4,734,123 |
4,923,123 |
|||||||||||||||
Tomich Brothers, LLC (2%)* |
Squid and Wetfish Processor and Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 04/16) |
7,146,576 |
7,028,045 |
7,028,045 |
||||||||||||
Royalty Rights |
— |
— |
|||||||||||||||
7,146,576 |
7,028,045 |
7,028,045 |
|||||||||||||||
Top Knobs USA, Inc. (3%)* |
Hardware Designer and Distributor |
Common Stock (26,593 shares) |
750,000 |
1,071,000 |
|||||||||||||
750,000 |
1,071,000 |
||||||||||||||||
Trinity Consultants Holdings, Inc. (2%)* |
Air Quality Consulting Services |
Subordinated Note (12% Cash, 2.5% PIK, Due 11/17) |
7,402,071 |
7,275,570 |
7,275,570 |
||||||||||||
Series A Preferred Stock (10,000 units) |
950,000 |
1,143,000 |
|||||||||||||||
Common Stock (50,000 units) |
50,000 |
478,000 |
|||||||||||||||
7,402,071 |
8,275,570 |
8,896,570 |
|||||||||||||||
TrustHouse Services Group, Inc. (7%)* |
Food Management Services |
Subordinated Note (12% Cash, 2.25% PIK, Due 06/19) |
25,334,160 |
25,050,372 |
25,050,372 |
||||||||||||
Class A Units (1,557 units) |
512,124 |
1,699,000 |
|||||||||||||||
Class B Units (82 units) |
26,954 |
70,000 |
|||||||||||||||
Class E Units (838 units) |
750,406 |
976,000 |
|||||||||||||||
25,334,160 |
26,339,856 |
27,795,372 |
|||||||||||||||
Tulsa Inspection Resources, Inc. (2%)* |
Pipeline Inspection Services |
Subordinated Note (14%-17.5% Cash, Due 03/14) |
5,810,588 |
5,670,249 |
5,670,249 |
||||||||||||
Common Units (2 units) |
337,925 |
569,000 |
|||||||||||||||
Common Stock Warrants (8 shares) |
321,000 |
2,188,000 |
|||||||||||||||
5,810,588 |
6,329,174 |
8,427,249 |
|||||||||||||||
United Biologics, LLC (3%)* |
Allergy Immunotherapy |
Subordinated Note (12% Cash, 2% PIK, Due 03/17) |
10,169,051 |
9,250,348 |
9,250,348 |
||||||||||||
Class A Common Stock (177,935 shares) |
1,999,989 |
2,029,000 |
|||||||||||||||
Class A & Class B Unit Purchase Warrants |
838,117 |
349,000 |
|||||||||||||||
10,169,051 |
12,088,454 |
11,628,348 |
|||||||||||||||
Wholesale Floors, Inc. (1%)* |
Commercial Services |
Subordinated Note (12.5% Cash, 3.5% PIK, Due 06/14) |
3,820,271 |
3,766,095 |
3,766,095 |
||||||||||||
Membership Interest Purchase Warrant (4.0%) |
132,800 |
— |
|||||||||||||||
3,820,271 |
3,898,895 |
3,766,095 |
|||||||||||||||
Workforce Software, LLC (2%)* |
Software Provider |
Subordinated Note (11% Cash, 5% PIK, Due 11/16) |
8,000,000 |
7,035,228 |
7,035,228 |
||||||||||||
Class B Preferred Units (1,020,000 units) |
1,020,000 |
1,133,000 |
|||||||||||||||
Common Unit Purchase Warrants (2,434,749 units) |
952,300 |
2,218,000 |
|||||||||||||||
8,000,000 |
9,007,528 |
10,386,228 |
|||||||||||||||
WSO Holdings, LP (6%)* |
Organic/Fair Trade Sugar, Syrup, Nectar and Honey Producer |
Subordinated Note (12% Cash, 2% PIK, Due 10/17) |
20,198,267 |
19,928,633 |
19,928,633 |
||||||||||||
Common Points (3,000 points) |
3,000,000 |
3,172,000 |
|||||||||||||||
20,198,267 |
22,928,633 |
23,100,633 |
|||||||||||||||
Xchange Technology Group, LLC (0%)* |
Used and Refurbished IT Asset Supplier |
Subordinated Note (8% Cash, Due 06/15) |
6,024,000 |
5,904,000 |
1,512,000 |
||||||||||||
Royalty Rights |
— |
— |
|||||||||||||||
6,024,000 |
5,904,000 |
1,512,000 |
|||||||||||||||
Yellowstone Landscape Group, Inc. (4%)* |
Landscaping Services |
Subordinated Note (10% Cash, 6% PIK, Due 04/14) |
15,247,823 |
15,132,751 |
15,132,751 |
||||||||||||
15,247,823 |
15,132,751 |
15,132,751 |
|||||||||||||||
Subtotal Non–Control / Non–Affiliate Investments |
532,951,385 |
565,737,092 |
579,078,939 |
||||||||||||||
16
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Affiliate Investments: |
||||||||||||||||
All Aboard America! Holdings Inc. (2%)* |
Motor Coach Operator |
Subordinated Note (12% Cash, 3% PIK, Due 10/17) |
$ |
8,631,169 |
$ |
8,473,203 |
$ |
8,473,203 |
||||||||
Convertible Preferred Interest in LLC |
1,500,000 |
1,500,000 |
||||||||||||||
8,631,169 |
9,973,203 |
9,973,203 |
||||||||||||||
American De-Rosa Lamparts, LLC and Hallmark Lighting (1%)* |
Wholesale and Distribution |
Subordinated Note (12% Cash, 6% PIK, Due 10/13) |
6,436,764 |
5,679,311 |
5,679,311 |
|||||||||||
Membership Units (6,516 units) |
620,653 |
— |
||||||||||||||
6,436,764 |
6,299,964 |
5,679,311 |
||||||||||||||
AP Services, Inc. (0%)* |
Fluid Sealing Supplies and Services |
Class A Units (933 units) |
302,886 |
556,618 |
||||||||||||
Class B Units (496 units) |
— |
295,642 |
||||||||||||||
302,886 |
852,260 |
|||||||||||||||
Asset Point, LLC (2%)* |
Asset Management Software Provider |
Senior Note (12% Cash, 4% PIK, Due 03/13) |
6,305,825 |
6,299,297 |
6,299,297 |
|||||||||||
Senior Note (12% Cash, 2% PIK, Due 07/15) |
630,247 |
630,247 |
576,000 |
|||||||||||||
Subordinated Note (7% Cash, Due 03/13) |
941,798 |
941,798 |
647,000 |
|||||||||||||
Membership Units (1,000,000 units) |
8,203 |
398,000 |
||||||||||||||
Options to Purchase Membership Units (342,407 units) |
500,000 |
180,000 |
||||||||||||||
Membership Unit Warrants (356,506 units) |
— |
— |
||||||||||||||
7,877,870 |
8,379,545 |
8,100,297 |
||||||||||||||
Axxiom Manufacturing, Inc. (0%)* |
Industrial Equipment Manufacturer |
Common Stock (136,400 shares) |
200,000 |
1,437,000 |
||||||||||||
Common Stock Warrant (4,000 shares) |
— |
37,000 |
||||||||||||||
200,000 |
1,474,000 |
|||||||||||||||
Captek Softgel International, Inc. (2%)* |
Nutraceutical Manufacturer |
Subordinated Note (12% Cash, 4% PIK, Due 08/16) |
8,620,064 |
8,500,212 |
8,500,212 |
|||||||||||
Class A Units (80,000 units) |
800,000 |
409,000 |
||||||||||||||
8,620,064 |
9,300,212 |
8,909,212 |
||||||||||||||
CIS Secure Computing Inc. (3%)* |
Secure Communications and Computing Solutions Provider |
Subordinated Note (12% Cash, 3% PIK, Due 06/17) |
10,144,765 |
9,966,594 |
9,966,594 |
|||||||||||
Common Stock (84 shares) |
502,320 |
1,081,000 |
||||||||||||||
10,144,765 |
10,468,914 |
11,047,594 |
||||||||||||||
Dyson Corporation (1%)* |
Custom Forging and Fastener Supplies |
Class A Units (1,000,000 units) |
1,000,000 |
3,122,000 |
||||||||||||
1,000,000 |
3,122,000 |
|||||||||||||||
Equisales, LLC (0%)* |
Energy Products and Services |
Subordinated Note (6.5% Cash, 10.5% PIK, Due 06/12) |
3,574,630 |
3,157,043 |
250,000 |
|||||||||||
Class A Units (500,000 units) |
480,900 |
— |
||||||||||||||
3,574,630 |
3,637,943 |
250,000 |
||||||||||||||
Fischbein Partners, LLC (2%)* |
Packaging and Materials Handling Equipment Manufacturer |
Class A Units (1,750,000 units) |
417,088 |
6,616,000 |
||||||||||||
417,088 |
6,616,000 |
|||||||||||||||
Main Street Gourmet, LLC (1%)* |
Baked Goods Provider |
Subordinated Notes (12% Cash, 4.5% PIK, Due 10/16) |
4,327,970 |
4,268,044 |
4,268,044 |
|||||||||||
Jr. Subordinated Notes (8% Cash, 2% PIK, Due 04/17) |
1,035,758 |
1,020,646 |
1,020,646 |
|||||||||||||
Preferred Units (233 units) |
211,867 |
153,000 |
||||||||||||||
Common B Units (3,000 units) |
23,140 |
— |
||||||||||||||
Common A Units (1,652 units) |
14,993 |
— |
||||||||||||||
5,363,728 |
5,538,690 |
5,441,690 |
||||||||||||||
PartsNow!, LLC (3%)* |
Printer Parts Distributor |
Subordinated Note (12% Cash, 3% PIK, Due 08/17) |
11,113,184 |
10,908,758 |
10,908,758 |
|||||||||||
Member Units (1,000,000 units) |
1,000,000 |
1,000,000 |
||||||||||||||
Royalty Rights |
— |
— |
||||||||||||||
11,113,184 |
11,908,758 |
11,908,758 |
||||||||||||||
Pine Street Holdings, LLC (0%)* |
Oil and Gas Services |
Preferred Units (200 units) |
200,000 |
417,000 |
||||||||||||
Common Unit Warrants (2,220 units) |
— |
36,000 |
||||||||||||||
200,000 |
453,000 |
|||||||||||||||
17
TRIANGLE CAPITAL CORPORATION
Consolidated Schedule of Investments
December 31, 2012
| ||||||||||||||||
Portfolio Company |
Industry |
Type of Investment(1)(2)
|
Principal
Amount
|
Cost |
Fair
Value(3)
|
|||||||||||
Plantation Products, LLC (6%)* |
Seed Manufacturing |
Subordinated Notes (10.5% Cash, 7% PIK, Due 11/17) |
$ |
19,308,135 |
$ |
19,108,298 |
$ |
19,108,298 |
||||||||
Preferred Units (4,312 units) |
4,312,000 |
4,660,000 |
||||||||||||||
Common Units (352,000 units) |
88,000 |
382,000 |
||||||||||||||
19,308,135 |
23,508,298 |
24,150,298 |
||||||||||||||
QC Holdings, Inc. (0%)* |
Lab Testing Services |
Common Stock (5,594 shares) |
563,602 |
233,000 |
||||||||||||
563,602 |
233,000 |
|||||||||||||||
Technology Crops International (2%)* |
Supply Chain Management Services |
Subordinated Note (12% Cash, 5% PIK, Due 03/15) |
5,902,282 |
5,853,425 |
5,853,425 |
|||||||||||
Common Units (50 units) |
500,000 |
680,000 |
||||||||||||||
5,902,282 |
6,353,425 |
6,533,425 |
||||||||||||||
Venture Technology Groups, Inc. (0%)* |
Fluid and Gas Handling Products Distributor |
Subordinated Note (12.5% Cash, 4% PIK, Due 09/16) |
5,731,024 |
5,469,170 |
1,288,000 |
|||||||||||
Class A Units (1,000,000 units) |
1,000,000 |
— |
||||||||||||||
5,731,024 |
6,469,170 |
1,288,000 |
||||||||||||||
Waste Recyclers Holdings, LLC (1%)* |
Environmental and Facilities Services |
Class A Preferred Units (280 units) |
2,251,100 |
— |
||||||||||||
Class B Preferred Units (985,372 units) |
3,304,218 |
2,974,000 |
||||||||||||||
Class C Preferred Units (1,444,475 units) |
246,598 |
663,000 |
||||||||||||||
Common Unit Purchase Warrant (1,170,083 units) |
748,900 |
— |
||||||||||||||
Common Units (153,219 units) |
180,783 |
— |
||||||||||||||
6,731,599 |
3,637,000 |
|||||||||||||||
Wythe Will Tzetzo, LLC (3%)* |
Confectionary Goods Distributor |
Subordinated Notes (13% Cash, Due 10/16) |
10,357,475 |
9,964,397 |
9,964,397 |
|||||||||||
Series A Preferred Units (74,764 units) |
1,500,000 |
3,007,000 |
||||||||||||||
Common Unit Purchase Warrants (25,065 units) |
301,510 |
768,000 |
||||||||||||||
10,357,475 |
11,765,907 |
13,739,397 |
||||||||||||||
Subtotal Affiliate Investments |
103,061,090 |
123,019,204 |
123,408,445 |
|||||||||||||
Control Investments: |
||||||||||||||||
FCL Graphics, Inc. (“FCL”) and FCL Holding SPV, LLC (“SPV”) (1%)* |
Commercial Printing Services |
Senior Note—FCL (5.0% Cash, Due 09/16) |
1,386,706 |
1,386,706 |
1,386,706 |
|||||||||||
Senior Note—FCL (8.0% Cash, 2% PIK, Due 09/16) |
1,171,394 |
1,170,881 |
1,006,000 |
|||||||||||||
Senior Note—SPV (2.5% Cash, 6% PIK, Due 09/16) |
1,007,272 |
1,007,272 |
— |
|||||||||||||
Members Interests—SPV (299,875 units) |
— |
— |
||||||||||||||
3,565,372 |
3,564,859 |
2,392,706 |
||||||||||||||
Fire Sprinkler Systems, Inc. (0%)* |
Specialty Trade Contractors |
Subordinated Notes (2% PIK, Due 03/13) |
3,565,051 |
2,992,528 |
140,000 |
|||||||||||
Common Stock (2,978 shares) |
294,624 |
— |
||||||||||||||
3,565,051 |
3,287,152 |
140,000 |
||||||||||||||
Fischbein, LLC (0%)* |
Packaging and Materials Handling Equipment Manufacturer |
Class A-1 Common Units (501,984 units) |
29,575 |
141,512 |
||||||||||||
Class A Common Units (3,839,068 units) |
226,182 |
927,121 |
||||||||||||||
255,757 |
1,068,633 |
|||||||||||||||
Gerli & Company (0%)* |
Specialty Woven Fabrics Manufacturer |
Subordinated Note (10% Cash, Due 03/15) |
264,694 |
250,000 |
250,000 |
|||||||||||
Subordinated Note (8.5% Cash, Due 03/15) |
3,483,770 |
3,000,000 |
464,000 |
|||||||||||||
Class A Preferred Shares (1,211 shares) |
855,000 |
— |
||||||||||||||
Class C Preferred Shares (744 shares) |
— |
— |
||||||||||||||
Class E Preferred Shares (400 shares) |
161,440 |
— |
||||||||||||||
Common Stock (300 shares) |
100,000 |
— |
||||||||||||||
3,748,464 |
4,366,440 |
714,000 |
||||||||||||||
Subtotal Control Investments |
10,878,887 |
11,474,208 |
4,315,339 |
|||||||||||||
Total Investments, December 31, 2012 (169%)* |
$ |
646,891,362 |
$ |
700,230,504 |
$ |
706,802,723 |
* Value as a percent of net assets
(1) |
All debt investments are income producing. Common stock, preferred stock and all warrants are non–income producing. |
(2) |
Disclosures of interest rates on notes include cash interest rates and payment–in–kind (“PIK”) interest rates. |
(3) |
All investments are restricted as to resale and were valued at fair value as determined in good faith by the Board of Directors. |
See accompanying notes.
18
TRIANGLE CAPITAL CORPORATION
Notes to Unaudited Consolidated Financial Statements
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Organization
Triangle Capital Corporation and its wholly owned subsidiaries, including Triangle Mezzanine Fund LLLP ( “Triangle SBIC”) and Triangle Mezzanine Fund II LP (“Triangle SBIC II”) (collectively, the “Company”), operate as a Business Development Company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Triangle SBIC and Triangle SBIC II are specialty finance limited partnerships formed to make investments primarily in middle market companies located throughout the United States. On September 11, 2003, Triangle SBIC was licensed to operate as a Small Business Investment Company (“SBIC”) under the authority of the United States Small Business Administration (“SBA”). On May 26, 2010, Triangle SBIC II obtained its license to operate as an SBIC. As SBICs, both Triangle SBIC and Triangle SBIC II are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments.
The Company currently operates as a closed-end, non-diversified investment company and has elected to be treated as a BDC under the 1940 Act. The Company is internally managed by its executive officers under the supervision of its Board of Directors. The Company does not pay management or advisory fees, but instead incurs the operating costs associated with employing executive management and investment and portfolio management professionals.
Basis of Presentation
The financial statements of the Company include the accounts of Triangle Capital Corporation and its wholly-owned subsidiaries, including Triangle SBIC and Triangle SBIC II. Neither Triangle SBIC nor Triangle SBIC II consolidates portfolio company investments. The effects of all intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.
The accompanying unaudited financial statements are presented in conformity with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of financial statements for the interim period, have been reflected in the unaudited consolidated financial statements. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Additionally, 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, 2012. 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.
2. INVESTMENTS
The Company primarily invests in subordinated debt (or 2nd lien notes) of privately held companies. These subordinated debt investments generally are secured by a second priority security interest in the assets of the borrower. In addition, the Company generally invests in an equity instrument of the borrower, such as warrants to purchase common stock in the portfolio company or direct preferred or common equity interests. The Company also invests in senior debt (or 1st lien notes) on a more limited basis.
The cost basis of our debt investments include any unamortized original issue discount, unamortized loan origination fees and payment-in-kind (“PIK”) interest, if any. Summaries of the composition of the Company’s investment portfolio at cost and fair value, and as a percentage of total investments, are shown in the following tables:
19
Cost |
Percentage of
Total
Portfolio
|
Fair Value |
Percentage of
Total Portfolio
|
||||||||||
March 31, 2013: |
|||||||||||||
Subordinated debt and 2nd lien notes
|
$ |
604,000,832 |
85 |
% |
$ |
581,372,402 |
81 |
% |
|||||
Senior debt and 1st lien notes
|
29,672,384 |
4 |
29,513,125 |
4 |
|||||||||
Equity shares |
61,848,229 |
9 |
80,808,396 |
11 |
|||||||||
Equity warrants |
12,107,097 |
2 |
23,723,994 |
4 |
|||||||||
Royalty rights |
— |
— |
108,000 |
— |
|||||||||
$ |
707,628,542 |
100 |
% |
$ |
715,525,917 |
100 |
% |
||||||
December 31, 2012: |
|||||||||||||
Subordinated debt and 2nd lien notes
|
$ |
582,365,584 |
83 |
% |
$ |
559,355,550 |
79 |
% |
|||||
Senior debt and 1st lien notes
|
46,955,594 |
7 |
46,576,994 |
7 |
|||||||||
Equity shares |
60,948,229 |
9 |
78,979,179 |
11 |
|||||||||
Equity warrants |
9,961,097 |
1 |
21,759,000 |
3 |
|||||||||
Royalty rights |
— |
— |
132,000 |
— |
|||||||||
$ |
700,230,504 |
100 |
% |
$ |
706,802,723 |
100 |
% |
During the three months ended March 31, 2013, the Company made six investments in existing portfolio companies totaling approximately $10.3 million. During the three months ended March 31, 2012, the Company made four new investments totaling approximately $41.0 million and three investments in existing portfolio companies totaling approximately $1.0 million.
Investment Valuation Process
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 the 1940 Act and FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). Under ASC Topic 820, a financial instrument is categorized within the ASC Topic 820 valuation hierarchy based upon the lowest level of input to the valuation process that is significant to the fair value measurement. The three levels of valuation inputs established by ASC Topic 820 are as follows:
Level 1 Inputs – include quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs – 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 – include inputs that are unobservable and significant to the fair value measurement.
The Company’s investment portfolio is comprised of debt and equity instruments of privately held companies for which quoted prices or other inputs falling within the categories of Level 1 and Level 2 are not available. Therefore, the Company determines the fair value of its investments in good faith using Level 3 inputs, pursuant to a valuation policy and process that is established by the management of the Company with the assistance of certain third-party advisors and subsequently approved by the Company’s Board of Directors. There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment. The recorded fair values of the Company’s investments may differ significantly from fair values that would have been used had an active market for the securities existed. 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.
The Company’s valuation process is led by the Company’s executive officers and managing directors. The Company’s valuation process begins with a quarterly review of each investment in the Company’s investment portfolio by the Company’s executive officers and investment committee. Valuations of each portfolio security are then prepared by the Company’s investment professionals, who have direct responsibility for the origination, management and monitoring of each investment. Under the Company’s valuation policy, each investment valuation is subject to (i) a review by the lead investment officer responsible for the portfolio company investment and (ii) a peer review by a second investment officer or executive officer of the Company. Generally, any investment that is valued below cost is subjected to review by one of the Company’s executive officers. After the peer review is complete, the Company engages two independent valuation firms, Duff & Phelps, LLC and Lincoln Partners Advisors LLC (collectively, the “Valuation Firms”), to provide third-party reviews of certain investments, as
20
described further below. Finally, the Board of Directors has the responsibility for reviewing and approving, in good faith, the fair value of the Company’s investments in accordance with the 1940 Act.
The Valuation Firms provide third party valuation consulting services to the Company which consist of certain procedures that the Company identified and requested the Valuation Firms to perform (hereinafter referred to as the “Procedures”). The Procedures are performed with respect to 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 addition, the Procedures are generally performed with respect to a portfolio company when there has been a significant change in the fair value of the investment. In certain instances, the Company may determine that it is not cost-effective, and as a result is not in the Company’s stockholders’ best interest, to request the Valuation Firms to perform the Procedures on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined to be insignificant relative to the total investment portfolio.
The total number of investments and the percentage of the investment portfolio on which the Procedures were performed are summarized below by period:
For the quarter ended: |
Total
companies
|
Percent of total
investments at
fair value(1)
|
|
March 31, 2012 |
10 |
19% |
|
June 30, 2012 |
14 |
21% |
|
September 30, 2012 |
16 |
33% |
|
December 31, 2012 |
17 |
30% |
|
March 31, 2013 |
17 |
23% |
(1) |
Exclusive of the fair value of new investments made during the quarter. |
Upon completion of the Procedures, the Valuation Firms concluded that, with respect to each investment reviewed by each Valuation Firm, the fair value of those investments subjected to the Procedures appeared reasonable. The Company’s Board of Directors is ultimately responsible for determining the fair value of the Company’s investments in good faith.
Investment Valuation Inputs
Under ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between a willing buyer and a willing seller at the measurement date. For the Company’s portfolio securities, fair value is generally the amount that the Company might reasonably expect to receive upon the current sale of the security. Under ASC Topic 820, the fair value measurement assumes that the sale occurs in the principal market for the security, or in the absence of a principal market, in the most advantageous market for the security. Under ASC Topic 820, if no market for the security exists or if the Company does not have access to the principal market, the security should be valued based on the sale occurring in a hypothetical market. The securities in which the Company invests are generally only purchased and sold in merger and acquisition transactions, in which case the entire portfolio company is sold to a third-party purchaser. As a result, unless the Company has the ability to control such a transaction, the assumed principal market for the Company’s securities is a hypothetical secondary market. The Level 3 inputs to the Company’s valuation process reflect the Company’s best estimate of the assumptions that would be used by market participants in pricing the investment in a transaction in a hypothetical secondary market.
Enterprise Value Waterfall Approach
In valuing equity securities (including warrants), the Company estimates fair value using an “Enterprise Value Waterfall” valuation model. The Company estimates the enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidation preference. In addition, the Company assumes that any outstanding debt or other securities that are senior to the Company’s equity securities are required to be repaid at par. Additionally, the Company estimates the fair value of a limited number of its debt securities using the Enterprise Value Waterfall approach in cases where the Company does not expect to receive full repayment.
To estimate the enterprise value of the portfolio company, the Company primarily uses a valuation model based on a transaction multiple, which generally is the original transaction multiple, and measures of the portfolio company’s financial performance. In addition, the Company considers other factors, including but not limited to (i) offers from third-parties to purchase the portfolio company, (ii) the implied value of recent investments in the equity securities of the portfolio company, (iii) publicly available information regarding recent sales of private companies in comparable transactions and, (iv) when the
21
Company believes there are comparable companies that are publicly traded, the Company performs a review of these publicly traded companies and the market multiple of their equity securities.
The significant Level 3 inputs to the Enterprise Value Waterfall model are (i) an appropriate transaction multiple and (ii) a measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. Such inputs can be based on historical operating results, projections of future operating results, or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for certain non-recurring items. In determining the operating results input, the Company utilizes the most recent portfolio company financial statements and forecasts available as of the valuation date. The Company also consults with the portfolio company’s senior management to obtain updates on the portfolio company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either the transaction multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for that security.
Income Approach
In valuing debt securities, the Company utilizes an “Income Approach” model that considers factors including, but not limited to, (i) the stated yield on the debt security, (ii) the portfolio company’s current Adjusted EBITDA as compared to the portfolio company’s historical or projected Adjusted EBITDA as of the date the investment was made and the portfolio company’s anticipated Adjusted EBITDA for the next twelve months of operations, (iii) the portfolio company’s current Leverage Ratio (defined as the portfolio company’s total indebtedness divided by Adjusted EBITDA) as compared to its Leverage Ratio as of the date the investment was made, (iv) publicly available information regarding current pricing and credit metrics for similar proposed and executed investment transactions of private companies and (v) when the Company believes a relevant comparison exists, current pricing and credit metrics for similar proposed and executed investment transactions of publicly traded debt. In addition, the Company 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. This risk rating system covers both qualitative and quantitative aspects of the business and the securities held.
The Company considers the factors above, particularly any significant changes in the portfolio company’s results of operations and leverage, and develops an expectation of the yield that a hypothetical market participant would require when purchasing the debt investment (the “Required Rate of Return”). The Required Rate of Return, along with the Leverage Ratio and Adjusted EBITDA are the significant Level 3 inputs to the Income Approach model. For investments where the Leverage Ratio and Adjusted EBITDA have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from the Company’s expectations as of the date the investment was made, and where there have been no significant fluctuations in the market pricing for such investments, the Company may conclude that the Required Rate of Return is equal to the stated rate on the investment and therefore, the debt security is appropriately priced. In instances where the Company determines that the Required Rate of Return is different from the stated rate on the investment, the Company discounts the contractual cash flows on the debt instrument using the Required Rate of Return in order to estimate the fair value of the debt security.
Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in the Required Rate of Return or Leverage Ratio inputs for a particular debt security may result in a lower (higher) fair value for that security. A significant increase (decrease) in the Adjusted EBITDA input for a particular debt security may result in a higher (lower) fair value for that security.
The fair value of the Company’s royalty rights are calculated based on specific provisions contained in the pertinent operating or royalty agreements. The determination of the fair value of such royalty rights is not a significant component of the Company’s valuation process.
22
The ranges and weighted-average values of the significant Level 3 inputs used in the valuation of the Company’s debt and equity securities as of March 31, 2013 are summarized as follows:
Fair Value |
Valuation
Model
|
Level 3
Input
|
Range of
Inputs
|
Weighted
Average
|
|||||||
Subordinated debt and 2nd lien notes
|
$ |
575,401,857 |
Income
Approach
|
Required Rate of Return |
10.0% – 25.0% |
15.4% |
|||||
Leverage Ratio |
0.7x – 14.7x |
3.6x |
|||||||||
Adjusted EBITDA |
$0.4 million – $48.6 million |
$16.3 million |
|||||||||
Subordinated debt and 2nd lien notes
|
5,970,545 |
Enterprise
Value Waterfall
Approach |
Adjusted EBITDA Multiple |
5.3x – 10.0x |
6.1x |
||||||
Adjusted EBITDA |
$0.7 million – $5.0 million |
$1.4 million |
|||||||||
Senior debt and 1st lien notes
|
29,513,125 |
Income
Approach
|
Required Rate of Return |
4.8% – 19.0% |
14.8% |
||||||
Leverage Ratio |
1.3x – 14.7x |
5.4x |
|||||||||
Adjusted EBITDA |
$0.4 million – $5.0 million |
$2.9 million |
|||||||||
Equity shares and warrants |
104,532,390 |
Enterprise
Value Waterfall
Approach |
Adjusted EBITDA Multiple |
4.0x – 11.0x |
6.9x |
||||||
Adjusted EBITDA |
$0.7 million – $48.6 million |
$18.7 million |
|||||||||
Revenue Multiple |
1.5x – 4.8x |
2.9x |
|||||||||
Revenues |
$8.0 million – $52.8 million |
$40.8 million |
The following table presents the Company’s investment portfolio at fair value as of March 31, 2013 and December 31, 2012, categorized by the ASC Topic 820 valuation hierarchy, as previously described:
Fair Value as of March 31, 2013 |
|||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Subordinated debt and 2nd lien notes
|
$ |
— |
$ |
— |
$ |
581,372,402 |
$ |
581,372,402 |
|||||||
Senior debt and 1st lien notes
|
— |
— |
29,513,125 |
29,513,125 |
|||||||||||
Equity shares |
— |
— |
80,808,396 |
80,808,396 |
|||||||||||
Equity warrants |
— |
— |
23,723,994 |
23,723,994 |
|||||||||||
Royalty rights |
— |
— |
108,000 |
108,000 |
|||||||||||
$ |
— |
$ |
— |
$ |
715,525,917 |
$ |
715,525,917 |
||||||||
Fair Value as of December 31, 2012 |
|||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Subordinated debt and 2nd lien notes
|
$ |
— |
$ |
— |
$ |
559,355,550 |
$ |
559,355,550 |
|||||||
Senior debt and 1st lien notes
|
— |
— |
46,576,994 |
46,576,994 |
|||||||||||
Equity shares |
— |
— |
78,979,179 |
78,979,179 |
|||||||||||
Equity warrants |
— |
— |
21,759,000 |
21,759,000 |
|||||||||||
Royalty rights |
— |
— |
132,000 |
132,000 |
|||||||||||
$ |
— |
$ |
— |
$ |
706,802,723 |
$ |
706,802,723 |
23
The following tables reconcile the beginning and ending balances of the Company’s investment portfolio measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012:
Three Months Ended
March 31, 2013:
|
Subordinated
Debt and 2nd
Lien Notes
|
Senior Debt
and 1st Lien
Notes
|
Equity
Shares
|
Equity
Warrants
|
Royalty
Rights
|
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
559,355,550 |
$ |
46,576,994 |
$ |
78,979,179 |
$ |
21,759,000 |
$ |
132,000 |
$ |
706,802,723 |
|||||||||||
New investments |
5,513,545 |
1,500,000 |
1,100,000 |
2,146,000 |
— |
10,259,545 |
|||||||||||||||||
Reclassifications |
18,570,523 |
(18,570,523 |
) |
— |
— |
— |
— |
||||||||||||||||
Proceeds from sales of investments |
— |
— |
(1,437,000 |
) |
(37,000 |
) |
— |
(1,474,000 |
) |
||||||||||||||
Loan origination fees received |
(255,159 |
) |
— |
— |
— |
— |
(255,159 |
) |
|||||||||||||||
Principal repayments received |
(7,577,746 |
) |
(223,200 |
) |
(7,800,946 |
) |
|||||||||||||||||
PIK interest earned |
4,017,911 |
196,883 |
— |
— |
— |
4,214,794 |
|||||||||||||||||
PIK interest payments received |
(529,733 |
) |
— |
— |
— |
— |
(529,733 |
) |
|||||||||||||||
Accretion of loan discounts |
396,661 |
— |
— |
— |
— |
396,661 |
|||||||||||||||||
Accretion of deferred loan origination revenue |
706,745 |
27,349 |
— |
— |
— |
734,094 |
|||||||||||||||||
Realized gain |
578,782 |
— |
1,237,000 |
37,000 |
— |
1,852,782 |
|||||||||||||||||
Unrealized gain (loss) |
595,323 |
5,622 |
929,217 |
(181,006 |
) |
(24,000 |
) |
1,325,156 |
|||||||||||||||
Fair value, end of period |
$ |
581,372,402 |
$ |
29,513,125 |
$ |
80,808,396 |
$ |
23,723,994 |
$ |
108,000 |
$ |
715,525,917 |
Three Months Ended
March 31, 2012:
|
Subordinated
Debt and 2nd
Lien Notes
|
Senior Debt
and 1st Lien
Notes
|
Equity
Shares
|
Equity
Warrants
|
Royalty
Rights
|
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
387,169,056 |
$ |
59,974,195 |
$ |
43,972,024 |
$ |
15,043,300 |
$ |
920,000 |
$ |
507,078,575 |
|||||||||||
New investments |
27,726,000 |
9,161,883 |
4,206,989 |
858,117 |
— |
41,952,989 |
|||||||||||||||||
Loan origination fees received |
(466,420 |
) |
(200,000 |
) |
— |
— |
— |
(666,420 |
) |
||||||||||||||
Principal repayments received |
(7,048,039 |
) |
(1,205,805 |
) |
— |
— |
— |
(8,253,844 |
) |
||||||||||||||
PIK interest earned |
2,837,384 |
424,087 |
— |
— |
— |
3,261,471 |
|||||||||||||||||
PIK interest payments received |
(260,426 |
) |
(296,683 |
) |
— |
— |
— |
(557,109 |
) |
||||||||||||||
Accretion of loan discounts |
316,068 |
58,273 |
— |
— |
— |
374,341 |
|||||||||||||||||
Accretion of deferred loan origination revenue |
416,175 |
60,337 |
— |
— |
— |
476,512 |
|||||||||||||||||
Unrealized gain (loss) |
(2,209,952 |
) |
464,934 |
1,325,000 |
1,276,700 |
(88,000 |
) |
768,682 |
|||||||||||||||
Fair value, end of period |
$ |
408,479,846 |
$ |
68,441,221 |
$ |
49,504,013 |
$ |
17,178,117 |
$ |
832,000 |
$ |
544,435,197 |
All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported on separate line items within the Company’s Statements of Operations. Pre-tax net unrealized gains on investments of $2.6 million during the three months ended March 31, 2013 are related to portfolio company investments that were still held by the Company as of March 31, 2013. Pre-tax net unrealized gains on investments of $0.8 million during the three months ended March 31, 2012 are related to portfolio company investments that were still held by the Company as of March 31, 2012.
Warrants
When originating a debt security, the Company will sometimes receive warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related 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 equity-related 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.
24
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 are calculated as the difference between the net proceeds from the sale or liquidation, if any, and the cost basis of the investment using the specific identification method. Unrealized appreciation or depreciation reflects the difference between the fair value of the investments and the cost basis of the investments.
Investment Classification
In accordance with the provisions of the 1940 Act, the Company classifies investments by level of control. As defined in the 1940 Act, “Control Investments” are investments in those companies that the Company is deemed to “Control.” “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, other than Control Investments. “Non-Control / Non-Affiliate 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, has greater than 50.0% representation on its board or has the power to exercise control over management or policies of such portfolio company. 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. Generally, when interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes, until all principal and interest has been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The Company writes off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. Dividend income is recorded on the ex-dividend date.
Fee Income
Origination, facility, commitment, consent and other advance fees received in connection with the loan agreements ("Loan Origination Fees") are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized loan origination fees are recorded as investment income. In the general course of its business, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, certain investment banking and structuring fees and loan waiver and amendment fees, and are recorded as investment income when received.
Payment-in-Kind Interest
The Company currently holds, and expects to hold in the future, some loans in its portfolio that contain a payment-in-kind (“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 the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment.
PIK interest, which is a non-cash source of income, is included in the Company’s taxable income and therefore affects the amount the Company is required to distribute to its stockholders to maintain its qualification as a regulated investment company ("RIC") for federal income tax purposes, even though the Company has not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing PIK interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The Company writes off any accrued and uncollected PIK interest when it is determined that the PIK interest is no longer collectible.
25
Concentration of Credit Risk
The Company’s investments are generally in lower middle-market companies in a variety of industries. At both March 31, 2013 and December 31, 2012, there were no individual investments greater than 10% of the fair value of the Company’s portfolio. As of both March 31, 2013 and December 31, 2012, the Company’s largest single portfolio company investment represented approximately 3.9% of the fair value of the Company’s portfolio. Income, consisting of interest, dividends, fees, other investment income, and realization of gains or losses on equity interests, can fluctuate dramatically upon repayment of an investment or sale of an equity interest and in any given year can be highly concentrated among several investees.
The Company’s investments carry a number of risks including, but not limited to: (i) investing in lower middle market companies which may have limited financial resources and may have limited operating histories, (ii) investing in senior subordinated debt which ranks equal to or lower than debt held by other investors and (iii) 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
The Company elected for federal income tax purposes to be treated as a RIC under the Internal Revenue Code of 1986, as amended (the "Code") commencing with its taxable year ended December 31, 2007. In order to maintain its qualification as a RIC, the Company must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then the Company is generally 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. The Company has historically met its minimum distribution requirements and continually monitors its distribution requirements with the goal of ensuring compliance with the Code.
The minimum distribution requirements applicable to RICs require the Company to distribute to its stockholders at least 90% of its investment company taxable income (“ICTI”), as defined by the Code, each year. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year distributions into the next tax year and pay a 4% excise tax on such excess. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.
ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments issued with warrants), the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as i) PIK interest income and ii) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
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 financial reporting purposes, such that the Company’s consolidated financial statements reflect the Company’s 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 pass-through entities) and still satisfy the RIC tax requirement that at least 90% of the RIC’s 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 pass-through entity) portfolio investment would flow through directly to the RIC. To the extent that such income did not consist of investment income, it could jeopardize the Company’s ability to qualify as a RIC and therefore cause the Company to incur significant amounts of federal income taxes. When LLCs (or other pass-through entities) are owned by the Taxable Subsidiaries, their income is taxed to the Taxable Subsidiaries and does not flow through to the RIC, thereby helping the Company preserve its RIC status and resultant tax advantages. The Taxable Subsidiaries are not consolidated for income tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. This income tax expense is reflected in the Company’s Statements of Operations.
26
For federal income tax purposes, the cost of investments owned at March 31, 2013 and December 31, 2012 was approximately $712.1 million and $704.0 million, respectively.
4. BORROWINGS
The Company had the following borrowings outstanding as of March 31, 2013 and December 31, 2012:
Issuance/Pooling Date |
Maturity Date |
Interest Rate as of March 31, 2013 |
March 31, 2013 |
December 31, 2012 |
|||||||
SBA-Guaranteed Debentures: |
|||||||||||
September 24, 2008 |
September 1, 2018 |
N/A |
$ |
— |
$ |
20,500,000 |
|||||
March 25, 2009 |
March 1, 2019 |
5.337% |
22,000,000 |
22,000,000 |
|||||||
March 24, 2010 |
March 1, 2020 |
4.825% |
6,800,000 |
6,800,000 |
|||||||
September 22, 2010 |
September 1, 2020 |
3.687% |
32,590,000 |
32,590,000 |
|||||||
March 29, 2011 |
March 1, 2021 |
4.474% |
75,400,000 |
75,400,000 |
|||||||
September 21, 2011 |
September 1, 2021 |
3.392% |
19,100,000 |
19,100,000 |
|||||||
March 27, 2013 |
March 1, 2023 |
3.155% |
30,000,000 |
30,000,000 |
|||||||
SBA-Guaranteed LMI Debentures: |
|||||||||||
September 14, 2010 |
March 1, 2016 |
2.508% |
7,258,838 |
7,214,579 |
|||||||
Credit Facility: |
|||||||||||
September 18, 2012 |
September 17, 2016 |
N/A |
— |
— |
|||||||
Notes |
|||||||||||
March 2, 2012 |
March 15, 2019 |
7.000% |
69,000,000 |
69,000,000 |
|||||||
October 19, 2012 |
December 15, 2022 |
6.375% |
80,500,000 |
80,500,000 |
|||||||
$ |
342,648,838 |
$ |
363,104,579 |
SBA and SBA LMI Debentures
Interest payments on SBA-guaranteed debentures are payable semi-annually and there are no principal payments required on these debentures prior to maturity, nor do the debentures carry any prepayment penalties. The Company’s SBA-guaranteed Low or Moderate Income (“LMI”) debentures are five-year deferred interest debentures that are issued at a discount to par. The accretion of discount on SBA-guaranteed LMI debentures is classified as interest expense in the Company’s consolidated financial statements.
Under the Small Business Investment Act and current SBA policy applicable to SBICs, an SBIC (or group of SBICs under common control) can have outstanding at any time, SBA-guaranteed debentures up to two times (and in certain cases, up to three times) the amount of its regulatory capital. As of March 31, 2013, the maximum statutory limit on the dollar amount of outstanding SBA-guaranteed debentures that can be issued by a single SBIC was $150.0 million and by a group of SBICs under common control was $225.0 million. As of March 31, 2013, Triangle SBIC had issued $118.7 million of SBA-guaranteed debentures and had the current capacity to issue up to the statutory maximum of $150.0 million, subject to SBA approval. As of March 31, 2013, Triangle SBIC II had issued $75.0 million in face amount of SBA-guaranteed debentures. The weighted average interest rate for all SBA-guaranteed debentures as of March 31, 2013 and December 31, 2012 was 4.07% and 4.05%, respectively. As of March 31, 2013, all SBA debentures were pooled. The weighted average interest rate as of December 31, 2012 included $183.6 million of pooled SBA-guaranteed debentures with a weighted average fixed rate of 4.48% and $30.0 million of unpooled SBA guaranteed debentures with a weighted average interim interest rate of 1.42%.
In addition to a one-time 1.0% fee on the total commitment from the SBA, the Company also pays a one-time 2.425% fee on the amount of each SBA-guaranteed debenture issued and a one-time 2.0% fee on the amount of each SBA-guaranteed LMI debenture issued. These fees are capitalized as deferred financing costs and are amortized over the term of the debt agreements using the effective interest method. Upon prepayment of an SBA-guaranteed debenture, any unamortized deferred financing costs related to the SBA-guaranteed debenture are written off and recognized as a loss on extinguishment of debt in the Consolidated Statements of Operations. In the three months ended March 31, 2013 and 2012, the Company prepaid approximately $20.5 million and $10.4 million, respectively, of SBA-guaranteed debentures and recognized losses on extinguishment of debt of approximately $0.4 million and $0.2 million, respectively.
27
The fair values of the SBA-guaranteed debentures are based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model. As of March 31, 2013 and December 31, 2012, the carrying amounts of the SBA-guaranteed debentures were approximately $193.1 million and $213.6 million, respectively. As of March 31, 2013 and December 31,2012, the fair values of the SBA-guaranteed debentures were $205.6 million and $228.4 million, respectively.
Credit Facility
In September 2012, the Company entered into a four-year senior secured credit facility (the “Credit Facility”) to provide additional liquidity in support of its investment and operational activities. The Credit Facility, which has an initial commitment of $165.0 million supported by nine financial institutions, replaced the Company's $75.0 million senior secured credit facility (the “Prior Facility”). The Company entered into the Prior Facility in May 2011 with an initial commitment of $50.0 million, which was increased to $75.0 million in November 2011.
The Credit Facility has an accordion feature that allows for an increase in the total commitment size up to $215.0 million, subject to certain conditions, and also contains two one-year extension options, bringing the total potential borrowing term to six years from closing. The Credit Facility, which is structured to operate like a revolving credit facility, is secured primarily by the Company's assets, excluding the assets of Triangle SBIC and Triangle SBIC II.
Borrowings under the Credit Facility bear interest, subject to the Company's election, on a per annum basis equal to (i) the applicable base rate plus 1.95% or (ii) the applicable LIBOR rate plus 2.95%. The applicable base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the adjusted one-month LIBOR plus 2.0%. The Company pays a commitment fee of 0.375% per annum on undrawn amounts, which is included with interest and other financing fees on the Company's Consolidated Statement of Operations. Borrowings under the Credit Facility are also limited to a borrowing base, which includes certain cash and a portion of eligible debt investments. As of March 31, 2013 and December 31, 2012, the Company had no borrowings outstanding under the Credit Facility.
As with the Prior Facility, the Credit Facility contains certain affirmative and negative covenants, including but not limited to (i) maintaining a minimum interest coverage ratio, (ii) maintaining minimum consolidated tangible net worth and (iii) maintaining its status as a regulated investment company and as a business development company. As of March 31, 2013 the Company was in compliance with all covenants of the Credit Facility.
Notes
In March 2012, the Company issued $69.0 million of unsecured notes due 2019 (the “2019 Notes”). The 2019 Notes mature on March 15, 2019, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after March 15, 2015. The 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning June 15, 2012. The net proceeds to the Company from the sale of the 2019 Notes, after underwriting discounts and offering expenses, were approximately $66.7 million. As of both March 31, 2013 and December 31, 2012, the carrying amount of the 2019 Notes was approximately $69.0 million. As of March 31, 2013 and December 31,2012, the fair values of the 2019 Notes were $72.1 million and $72.6 million, respectively.
In October 2012, the Company issued $70.0 million of unsecured notes due 2022 (the "2022 Notes") and in November 2012, issued $10.5 million of 2022 Notes pursuant to the exercise of an over-allotment option. The 2022 Notes mature on December 15, 2022, and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after December 15, 2015. The 2022 Notes bear interest at a rate of 6.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning December 15, 2012. The net proceeds to the Company from the sale of the 2022 Notes, after underwriting discounts and offering expenses, were approximately $77.8 million. As of both March 31, 2013 and December 31, 2012, the carrying amount of the 2022 Notes was approximately $80.5 million. As of March 31, 2013 and December 31,2012, the fair values of the 2022 Notes were $82.4 million and $78.1 million, respectively. The fair values of the 2019 Notes and the 2022 Notes are based on the closing prices of each respective security on the New York Stock Exchange, which are Level 1 inputs under ASC 820.
The indentures relating to the 2019 Notes and the 2022 Notes contain certain covenants, including but not limited to (i) a requirement that the Company comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) to provide financial information to the holders of the notes and the trustee under the indentures if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934.
28
5. EQUITY-BASED AND OTHER COMPENSATION PLANS
The Company’s Board of Directors and stockholders have approved the Triangle Capital Corporation Amended and Restated 2007 Equity Incentive Plan (the “Plan”), under which there are 2,400,000 shares of the Company’s Common Stock authorized for issuance. Under the Plan, the Board (or compensation committee, if delegated administrative authority by the Board) may award stock options, restricted stock or other stock based incentive awards to executive officers, employees and directors. Equity-based awards granted under the Plan to independent directors generally will vest over a one-year period and equity-based awards granted under the Plan to executive officers and employees generally will vest ratably over a four-year period.
The Company accounts for its equity-based compensation plan using the fair value method, as prescribed by ASC Topic 718, Stock Compensation. Accordingly, for restricted stock awards, the Company measures the grant date fair value based upon the market price of the Company’s common stock on the date of the grant and amortizes this fair value to compensation expense ratably over the requisite service period or vesting term.
The following table presents information with respect to the Plan for the three months ended March 31, 2013 and 2012:
Three Months Ended
March 31, 2013
|
Three Months Ended
March 31, 2012
|
||||||||
Number of
Shares
|
Weighted-Average
Grant-Date Fair
Value per Share
|
Number of
Shares
|
Weighted-Average
Grant-Date Fair
Value per Share
|
||||||
Unvested shares, beginning of period |
290,198 |
$18.52 |
359,555 |
$15.39 |
|||||
Shares granted during the period |
250,000 |
$28.47 |
227,631 |
$18.96 |
|||||
Shares vested during the period |
— |
— |
(107,067 |
) |
$13.61 |
||||
Unvested shares, end of period |
540,198 |
$23.13 |
480,119 |
$17.48 |
In both the three months ended March 31, 2013 and 2012, the Company recognized equity-based compensation expense of approximately $0.6 million. This expense is included in general and administrative expenses in the Company’s Consolidated Statements of Operations. As of March 31, 2013, there was approximately $11.8 million of total unrecognized compensation cost, related to the Company’s non-vested restricted shares. This cost is expected to be recognized over a weighted-average period of approximately 2.6 years.
The Company’s Board of Directors has adopted a nonqualified deferred compensation plan covering the Company’s executive officers and key employees. Any compensation deferred and the Company’s contributions will earn a return based on the returns on certain investments designated by the Compensation Committee of the Company’s Board of Directors. Participants are 100% vested in amounts deferred under the deferred compensation plan and the earnings thereon. Contributions to the plan and earnings thereon vest ratably over a four-year period.
The Company maintains a 401(k) plan in which all full-time employees who are at least 21 years of age and have 90 days of service are eligible to participate and receive employer contributions. Eligible employees may contribute a portion of their compensation on a pretax basis into the 401(k) plan up to the maximum amount allowed under the Code, and direct the investment of their contributions.
29
6. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the three months ended March 31, 2013 and 2012:
Three Months Ended March 31, |
|||||||
2013 |
2012 |
||||||
Per share data: |
|||||||
Net asset value at beginning of period |
$ |
15.30 |
$ |
14.68 |
|||
Net investment income(1) |
0.56 |
0.49 |
|||||
Net realized gain on investments(1) |
0.07 |
— |
|||||
Net unrealized appreciation (depreciation) on investments(1) |
0.06 |
0.02 |
|||||
Total increase from investment operations(1) |
0.69 |
0.51 |
|||||
Cash dividends/distributions declared |
(0.54 |
) |
(0.47 |
) |
|||
Shares issued pursuant to Dividend Reinvestment Plan |
0.01 |
0.01 |
|||||
Common stock offerings |
— |
0.55 |
|||||
Stock-based compensation |
(0.12 |
) |
(0.13 |
) |
|||
Loss on extinguishment of debt(1) |
(0.02 |
) |
(0.01 |
) |
|||
Other(2) |
— |
(0.02 |
) |
||||
Net asset value at end of period |
$ |
15.32 |
$ |
15.12 |
|||
Market value at end of period(3) |
$ |
27.99 |
$ |
19.75 |
|||
Shares outstanding at end of period |
27,563,375 |
27,263,151 |
|||||
Net assets at end of period |
$ |
422,313,302 |
$ |
412,143,265 |
|||
Average net assets |
$ |
423,635,444 |
$ |
364,159,187 |
|||
Ratio of total expenses to average net assets (annualized) |
8.7 |
% |
7.6 |
% |
|||
Ratio of net investment income to average net assets (annualized) |
14.4 |
% |
13.4 |
% |
|||
Portfolio turnover ratio |
1.4 |
% |
1.8 |
% |
|||
Total return(4) |
11.9 |
% |
5.8 |
% |
|||
Efficiency ratio(5) |
16.8 |
% |
18.9 |
% |
(1) |
Weighted average basic per share data. |
(2) |
Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date. |
(3) |
Represents the closing price of the Company’s common stock on the last day of the period. |
(4) |
Total return equals the change in the ending market value of the Company’s common stock during the period, plus dividends declared per share during the period, divided by the market value of the Company’s common stock on the first day of the period. Total return is not annualized. |
(5) |
Efficiency ratio equals general and administrative expenses divided by total investment income. |
7. SUBSEQUENT EVENTS
In May 2013, the Company invested $7.6 million in subordinated debt and equity of Dyno Parent LLC ("Dyno”), a supplier of sewing products and seasonal decorative products. Under the terms of the investment, Dyno will pay interest on the subordinated debt at a rate of 14% per annum.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is designed to provide a better understanding of our financial statements, including a brief discussion of our business, key factors that impacted our performance and a summary of our operating results. 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 Management’s 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, 2012. 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.
30
Forward-Looking Statements
Some of the statements in this Quarterly Report constitute forward-looking statements because they relate to future events or our future performance or financial condition. Forward-looking statements may include, among other things, statements as to our future operating results, our business prospects and the prospects of our portfolio companies, the impact of the investments that we expect to make, the ability of our portfolio companies to achieve their objectives, our expected financings and investments, the adequacy of our cash resources and working capital, and the timing of cash flows, if any, from the operations of our portfolio companies. Words such as “expect,” “anticipate,” “target,” “goals,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “forecast,” “may,” “should,” “potential,” variations of such words, and similar expressions indicate a forward-looking statement, although not all forward-looking statements include these words. Readers are cautioned that the forward-looking statements contained in this Quarterly Report are only predictions, are not guarantees of future performance, and are subject to risks, events, uncertainties and assumptions that are difficult to predict. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors discussed herein and in Item 1A entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2012. Other factors that could cause actual results to differ materially include changes in the economy, risks associated with possible disruption due to terrorism in our operations or the economy generally, and future changes in laws or regulations and conditions in our operating areas. These statements are based on our current expectations, estimates, forecasts, information and projections about the industry in which we operate and the beliefs and assumptions of our management as of the date of this Quarterly Report. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview of Our Business
We are a Maryland corporation which has elected to be treated and operates as an internally managed business development company, or BDC, under the Investment Company Act of 1940, or 1940 Act. Our wholly-owned subsidiaries, Triangle Mezzanine Fund LLLP, or Triangle SBIC, and Triangle Mezzanine Fund II LP, or Triangle SBIC II, are licensed as small business investment companies, or SBICs, by the United States Small Business Administration, or SBA. In addition, Triangle SBIC has also elected to be treated as a BDC under the 1940 Act. We, Triangle SBIC and Triangle SBIC II invest primarily in debt instruments, equity investments, warrants and other securities of lower middle market privately-held companies located in the United States.
Our business is to provide capital to lower middle market companies in the United States. We focus on investments in companies with a history of generating revenues and positive cash flows, an established market position and a proven management team with a strong operating discipline. Our target portfolio company has annual revenues between $20.0 million and $200.0 million and annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $3.0 million and $25.0 million.
We invest primarily in subordinated debt securities secured by second lien security interests in portfolio company assets, coupled with equity interests. On a more limited basis, we also invest in senior debt securities secured by first lien security interests in portfolio companies. Our investments generally range from $5.0 million to $30.0 million per portfolio company. In certain situations, we have partnered with other funds to provide larger financing commitments.
We generate revenues in the form of interest income, primarily from our investments in debt securities, loan origination and other fees and dividend income. Fees generated in connection with our debt investments are recognized over the life of the loan using the effective interest method or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity-related securities that we acquire from our portfolio companies. Our debt investments generally have a term of between three and seven years and typically bear interest at fixed rates between 12.0% and 17.0% per annum. Certain of our debt investments have a form of interest, referred to as payment-in-kind, or PIK, interest, that is not paid currently but is instead accrued and added to the loan balance and paid at the end of the term. In our negotiations with potential portfolio companies, we generally seek to minimize PIK interest. Cash interest on our debt investments is generally payable monthly; however, some of our debt investments pay cash interest on a quarterly basis. As of March 31, 2013 and December 31, 2012, the weighted average yield on our outstanding debt investments other than non-accrual debt investments was approximately 14.8% and 14.6%, respectively. The weighted average yield on all of our outstanding investments (including equity and equity-linked investments but excluding non-accrual debt investments) was approximately 13.4% as of both March 31, 2013 and December 31, 2012. The weighted average yield on all of our outstanding
31
investments (including equity and equity-linked investments and non-accrual debt investments) was approximately 12.8% and 12.9% as of March 31, 2013 and December 31, 2012, respectively.
Triangle SBIC and Triangle SBIC II are eligible to issue debentures to the SBA, which pools these with debentures of other SBICs and sells them in the capital markets at favorable interest rates, in part as a result of the guarantee of payment from the SBA. Triangle SBIC and Triangle SBIC II invest these funds in portfolio companies. We intend to continue to operate Triangle SBIC and Triangle SBIC II as SBICs, subject to SBA approval, and to utilize the proceeds from the issuance of SBA-guaranteed debentures, referred to herein as SBA leverage, to enhance returns to our stockholders.
Portfolio Investment Composition
The total value of our investment portfolio was $715.5 million as of March 31, 2013, as compared to $706.8 million as of December 31, 2012. As of March 31, 2013, we had investments in 81 portfolio companies with an aggregate cost of $707.6 million. As of December 31, 2012, we had investments in 82 portfolio companies with an aggregate cost of $700.2 million. As of both March 31, 2013 and December 31, 2012, none of our portfolio investments represented greater than 10% of the total fair value of our investment portfolio.
As of March 31, 2013 and December 31, 2012, our investment portfolio consisted of the following investments:
Cost |
Percentage of
Total
Portfolio
|
Fair Value |
Percentage of
Total
Portfolio
|
||||||||||
March 31, 2013: |
|||||||||||||
Subordinated debt and 2nd lien notes |
$ |
604,000,832 |
85 |
% |
$ |
581,372,402 |
81 |
% |
|||||
Senior debt and 1st lien notes |
29,672,384 |
4 |
29,513,125 |
4 |
|||||||||
Equity shares |
61,848,229 |
9 |
80,808,396 |
11 |
|||||||||
Equity warrants |
12,107,097 |
2 |
23,723,994 |
4 |
|||||||||
Royalty rights |
— |
— |
108,000 |
— |
|||||||||
$ |
707,628,542 |
100 |
% |
$ |
715,525,917 |
100 |
% |
||||||
December 31, 2012: |
|||||||||||||
Subordinated debt and 2nd lien notes |
$ |
582,365,584 |
83 |
% |
$ |
559,355,550 |
79 |
% |
|||||
Senior debt and 1st lien notes |
46,955,594 |
7 |
46,576,994 |
7 |
|||||||||
Equity shares |
60,948,229 |
9 |
78,979,179 |
11 |
|||||||||
Equity warrants |
9,961,097 |
1 |
21,759,000 |
3 |
|||||||||
Royalty rights |
— |
— |
132,000 |
— |
|||||||||
$ |
700,230,504 |
100 |
% |
$ |
706,802,723 |
100 |
% |
Investment Activity
During the three months ended March 31, 2013, the Company made debt investments in six existing portfolio companies totaling approximately $8.5 million and equity investments in two existing portfolio companies totaling approximately $1.8 million. We had one portfolio company loan repaid at par of approximately $5.8 million and received normal principal repayments and partial loan prepayments totaling approximately $2.0 million in the three months ended March 31, 2013. In addition, we received proceeds related to the sales of certain equity securities totaling $1.5 million and realized gains totaling approximately $1.3 million in the three months ended March 31, 2013.
During the three months ended March 31, 2012, we made four new investments totaling approximately $41.0 million, debt investments in two existing portfolio companies totaling approximately $0.8 million and one equity investment in an existing portfolio company of approximately $0.2 million. We had two portfolio company loans repaid at par totaling approximately $6.7 million and received normal principal repayments and partial loan prepayments totaling approximately $1.6 million in the three months ended March 31, 2012.
32
Total portfolio investment activity for the three months ended March 31, 2013 and 2012 was as follows:
Three Months Ended
March 31, 2013:
|
Subordinated
Debt and 2nd
Lien Notes
|
Senior Debt
and 1st Lien
Notes
|
Equity
Shares
|
Equity
Warrants
|
Royalty
Rights
|
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
559,355,550 |
$ |
46,576,994 |
$ |
78,979,179 |
$ |
21,759,000 |
$ |
132,000 |
$ |
706,802,723 |
|||||||||||
New investments |
5,513,545 |
1,500,000 |
1,100,000 |
2,146,000 |
— |
10,259,545 |
|||||||||||||||||
Reclassifications |
18,570,523 |
(18,570,523 |
) |
— |
— |
— |
— |
||||||||||||||||
Proceeds from sales of investments |
— |
— |
(1,437,000 |
) |
(37,000 |
) |
— |
(1,474,000 |
) |
||||||||||||||
Loan origination fees received |
(255,159 |
) |
— |
— |
— |
— |
(255,159 |
) |
|||||||||||||||
Principal repayments received |
(7,577,746 |
) |
(223,200 |
) |
(7,800,946 |
) |
|||||||||||||||||
PIK interest earned |
4,017,911 |
196,883 |
— |
— |
— |
4,214,794 |
|||||||||||||||||
PIK interest payments received |
(529,733 |
) |
— |
— |
— |
— |
(529,733 |
) |
|||||||||||||||
Accretion of loan discounts |
396,661 |
— |
— |
— |
— |
396,661 |
|||||||||||||||||
Accretion of deferred loan origination revenue |
706,745 |
27,349 |
— |
— |
— |
734,094 |
|||||||||||||||||
Realized gain |
578,782 |
— |
1,237,000 |
37,000 |
— |
1,852,782 |
|||||||||||||||||
Unrealized gain (loss) |
595,323 |
5,622 |
929,217 |
(181,006 |
) |
(24,000 |
) |
1,325,156 |
|||||||||||||||
Fair value, end of period |
$ |
581,372,402 |
$ |
29,513,125 |
$ |
80,808,396 |
$ |
23,723,994 |
$ |
108,000 |
$ |
715,525,917 |
|||||||||||
Weighted average yield on debt investments at end of period(1) |
14.8 |
% |
|||||||||||||||||||||
Weighted average yield on total investments at end of period(1) |
13.4 |
% |
|||||||||||||||||||||
Weighted average yield on total investments at end of period |
12.8 |
% |
(1) |
Excludes non-accrual debt investments. |
Three Months Ended
March 31, 2012:
|
Subordinated
Debt and 2nd
Lien Notes
|
Senior Debt
and 1st Lien
Notes
|
Equity
Shares
|
Equity
Warrants
|
Royalty
Rights
|
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
387,169,056 |
$ |
59,974,195 |
$ |
43,972,024 |
$ |
15,043,300 |
$ |
920,000 |
$ |
507,078,575 |
|||||||||||
New investments |
27,726,000 |
9,161,883 |
4,206,989 |
858,117 |
— |
41,952,989 |
|||||||||||||||||
Loan origination fees received |
(466,420 |
) |
(200,000 |
) |
— |
— |
— |
(666,420 |
) |
||||||||||||||
Principal repayments received |
(7,048,039 |
) |
(1,205,805 |
) |
— |
— |
— |
(8,253,844 |
) |
||||||||||||||
PIK interest earned |
2,837,384 |
424,087 |
— |
— |
— |
3,261,471 |
|||||||||||||||||
PIK interest payments received |
(260,426 |
) |
(296,683 |
) |
— |
— |
— |
(557,109 |
) |
||||||||||||||
Accretion of loan discounts |
316,068 |
58,273 |
— |
— |
— |
374,341 |
|||||||||||||||||
Accretion of deferred loan origination revenue |
416,175 |
60,337 |
— |
— |
— |
476,512 |
|||||||||||||||||
Unrealized gain (loss) |
(2,209,952 |
) |
464,934 |
1,325,000 |
1,276,700 |
(88,000 |
) |
768,682 |
|||||||||||||||
Fair value, end of period |
$ |
408,479,846 |
$ |
68,441,221 |
$ |
49,504,013 |
$ |
17,178,117 |
$ |
832,000 |
$ |
544,435,197 |
|||||||||||
Weighted average yield on debt investments at end of period(1) |
15.1 |
% |
|||||||||||||||||||||
Weighted average yield on total investments at end of period(1) |
14.0 |
% |
|||||||||||||||||||||
Weighted average yield on total investments at end of period |
13.8 |
% |
(1) |
Excludes non-accrual debt investments. |
Non-Accrual Assets
Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. As of March 31, 2013, the fair value of our non-accrual assets was approximately $2.6 million, which comprised 0.4% of the total fair value of
33
our portfolio, and the cost of our non-accrual assets was approximately $21.1 million, which comprised 3.0% of the total cost of our portfolio. As of December 31, 2012, the fair value of our non-accrual assets was approximately $2.4 million, which comprised 0.3% of the total fair value of our portfolio, and the cost of our non-accrual assets was approximately $14.9 million, which comprised 2.1% of the total cost of our portfolio.
Our non-accrual assets as of March 31, 2013 were as follows:
Gerli and Company
In November 2008, we placed our debt investment in Gerli and Company, or Gerli, on non-accrual status. As a result, under generally accepted accounting principles in the United States, or U.S. GAAP, we no longer recognize interest income on our debt investment in Gerli for financial reporting purposes. During the first quarter of 2011, we restructured our investment in Gerli. As a result of the restructuring, we received a new note from Gerli with a face amount of $3.0 million and a fair value of approximately $2.3 million and preferred stock with a liquidation preference of $0.4 million. In addition, we invested $375,000 in a Gerli senior subordinated note. Under the terms of the notes, interest on the notes is payable only if Gerli meets certain covenants, which they were not compliant with as of March 31, 2013. In the three months ended March 31, 2013, we recognized unrealized depreciation on our debt investments in Gerli of approximately $0.1 million. As of March 31, 2013, the cost of our debt investments in Gerli was $3.4 million and the fair value was $0.7 million.
Fire Sprinkler Systems, Inc.
In October 2008, we placed our debt investment in Fire Sprinkler Systems, Inc., or Fire Sprinkler Systems, on non-accrual status. As a result, under U.S. GAAP, we no longer recognize interest income on our debt investment in Fire Sprinkler Systems for financial reporting purposes. In the three months ended, March 31, 2013, we recorded unrealized appreciation of $0.1 million on our debt investment in Fire Sprinkler Systems. As of March 31, 2013, the cost of our debt investment in Fire Sprinkler Systems was $3.0 million and the fair value of such investment was $0.3 million.
Equisales, LLC
In May 2012, we placed our debt investment in Equisales, LLC, or Equisales, on non-accrual status. As a result, under U.S. GAAP, we no longer recognize interest income on our debt investment in Equisales for financial reporting purposes. In the three months ended March 31, 2013, we recorded unrealized depreciation of $0.1 million on our debt investment in Equisales. As of March 31, 2013, the cost of our debt investment in Equisales was $3.2 million and the fair value of such investment was $0.1 million.
Venture Technology Groups, Inc.
In November 2012, we placed our debt investment in Venture Technology Groups, Inc. or VTG, on non-accrual status. As a result, under U.S. GAAP, we no longer recognize interest income on our debt investment in VTG for financial reporting purposes. During the three months ended March 31, 2013, we recorded unrealized depreciation of $0.8 million on our debt investment in VTG. As of March 31, 2013, the cost of our debt investment in VTG was $5.7 million and the fair value of such investment was $0.7 million.
Xchange Technology Groups, LLC
In March 2013, we placed our debt investment in Xchange Technology Groups, LLC or XTG, on non-accrual status. As a result, under U.S. GAAP, we no longer recognize interest income on our debt investment in XTG for financial reporting purposes. During the three months ended March 31, 2013, we recorded unrealized depreciation of $0.8 million on our debt investment in XTG. As of March 31, 2013, the cost of our debt investment in XTG was $5.9 million and the fair value of such investment was $0.8 million.
PIK Non-Accrual Assets
In addition to our non-accrual assets, as of March 31, 2013, we had debt investments in two portfolio companies (our subordinated notes to Minco Technology Labs, LLC and FCL Holding SPV, LLC) that were on non-accrual only with respect to the PIK interest component of the loans. As of March 31, 2013, the fair value of these debt investments was approximately $3.4 million, or 0.5% of the total fair value of our portfolio and the cost of these assets was approximately $6.5 million, or 0.9% of the total cost of our portfolio.
34
In addition, as of March 31, 2013, our subordinated notes to Home Physicians were on non-accrual only with respect to the PIK interest component of the loans. As of March 31, 2013, the fair value of our subordinated debt investments in Home Physicians was approximately $10.4 million, or 1.5% of the total fair value of our portfolio and the cost of our subordinated debt investments in Home Physicians was approximately $11.9 million, or 1.7% of the total cost of our portfolio. Since December 31, 2012, the operating and financial outlook for Home Physicians has improved, and as a result we recorded unrealized appreciation of $4.2 million on our subordinated debt investments in Home Physicians in the three months ended March 31, 2013. If the outlook for Home Physicians continues to improve in the near term, we anticipate we will resume the accrual of PIK interest.
Results of Operations
Comparison of three months ended March 31, 2013 and March 31, 2012
Investment Income
For the three months ended March 31, 2013, total investment income was $24.5 million, a 28% increase from $19.1 million of total investment income for the three months ended March 31, 2012. This increase was primarily attributable to a $5.4 million increase in total loan interest, fee and dividend income, as well as an increase in PIK interest income. The increase in total loan interest, fee and dividend income was due to (i) a net increase in our portfolio investments from March 31, 2012 to March 31, 2013 and (ii) an increase in non-recurring fee income of approximately $0.1 million. Non-recurring fee income was $0.5 million for the three months ended March 31, 2013 as compared to $0.4 million for the three months ended March 31, 2012.
Expenses
For the three months ended March 31, 2013, expenses increased by 33% to $9.2 million from $6.9 million for the three months ended March 31, 2012. The increase in expenses was attributable to a $1.8 million increase in interest and other financing fees and a $0.5 million increase in general and administrative expenses. The increase in interest and other financing fees is related to (i) an increase in interest expense on our 2019 Notes of approximately $0.8 million due to the 2019 Notes only being outstanding for a portion of the three months ended March 31, 2012, (ii) interest on our 2022 Notes, which were issued in October 2012, of approximately $1.3 million for the quarter ended March 31, 2013, and (iii) an increase of $0.2 million in amortization of deferred financing fees related to costs associated with the 2019 and 2022 Notes, partially offset by lower interest expense related to SBA-guaranteed debentures in the quarter ended March 31, 2013 versus the quarter ended March 31, 2012. The decrease in interest expense on SBA-guaranteed debentures relates to lower SBA loan balances and lower weighted average rates on outstanding SBA-guaranteed debentures for the quarter ended March 31, 2013 as compared to loan balances and weighted average rates on outstanding SBA-guaranteed debentures for the quarter ended March 31, 2012. The increase in general and administrative expenses in the quarter ended March 31, 2013 was primarily related to increased salary and incentive compensation costs, as well as increased non-cash compensation expenses.
Net Investment Income
As a result of the $5.4 million increase in total investment income and the $2.3 million increase in expenses, net investment income increased by 25% to $15.2 million for the three months ended March 31, 2013 as compared to $12.2 million for the three months ended March 31, 2012.
Net Increase in Net Assets Resulting from Operations
In the three months ended March 31, 2013 we realized a gain on the sale of one affiliate investment of approximately $1.3 million and a gain on the refinancing of one non-control/non-affiliate investment totaling approximately $0.6 million. In addition, during the three months ended March 31, 2013, we recorded unrealized appreciation on 32 investments totaling approximately $11.4 million, unrealized depreciation on 27 investments totaling approximately $8.4 million and unrealized depreciation reclassification adjustments related to the realized gains noted above totaling $1.3 million.
In the three months ended March 31, 2012, we recorded net unrealized appreciation of investments totaling approximately $0.6 million comprised of unrealized appreciation on 33 investments totaling approximately $5.7 million and unrealized depreciation on 12 investments totaling approximately $5.1 million.
In the three months ended March 31, 2013 and March 31, 2012, we recognized a non-cash loss on the extinguishment of debt of approximately $0.4 million and $0.2 million, respectively, related to prepayments of SBA-guaranteed debentures.
35
As a result of these events, our net increase in net assets from operations was $18.4 million for the three months ended March 31, 2013 as compared to a net increase in net assets from operations of $12.6 million for the three months ended March 31, 2012.
Liquidity and Capital Resources
We believe that our current cash and cash equivalents on hand, our available leverage under our Credit Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.
In the future, depending on the valuation of Triangle SBIC’s assets and Triangle SBIC II’s assets pursuant to SBA guidelines, Triangle SBIC and Triangle SBIC II may be limited by provisions of the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to Triangle Capital Corporation that may be necessary to enable Triangle Capital Corporation to make the minimum required distributions to its stockholders and qualify as a RIC.
Cash Flows
For the three months ended March 31, 2013, we experienced a net decrease in cash and cash equivalents in the amount of $35.3 million. During that period, our operating activities used $0.7 million in cash, consisting primarily of portfolio investments of $10.3 million, partially offset by repayments received from portfolio companies of approximately $9.3 million. In addition, financing activities reduced cash by $34.6 million, consisting primarily of cash dividends paid in the amount of $14.1 million and voluntary repayments of SBA-guaranteed debentures of $20.5 million. At March 31, 2013, we had $37.0 million of cash and cash equivalents on hand.
For the three months ended March 31, 2012, we experienced a net increase in cash and cash equivalents in the amount of $75.6 million. During that period, our operating activities used $30.3 million in cash, consisting primarily of new portfolio investments of $42.0 million, partially offset by repayments received from portfolio companies totaling $8.3 million. In addition, financing activities provided $105.9 million of cash, consisting primarily of proceeds from public common stock offerings of $77.2 million and net proceeds from a public offering of Notes of $66.8 million, partially offset by cash dividends paid in the amount of $11.8 million, voluntary repayments of SBA-guaranteed debentures of $10.4 million and a repayment of borrowings under the Credit Facility of $15.0 million. At March 31, 2012, we had $142.5 million of cash and cash equivalents on hand.
Financing Transactions
Due to Triangle SBIC’s and Triangle SBIC II’s status as licensed SBICs, Triangle SBIC and Triangle SBIC II have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC (or group of SBICs under common control) can have outstanding at any time debentures guaranteed by the SBA up to two times (and in certain cases, up to three times) the amount of its regulatory capital, which generally is the amount raised from private investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by the SBA issued by a single SBIC is currently $150.0 million and by a group of SBICs under common control is $225.0 million. Debentures guaranteed by the SBA have a maturity of ten years, with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time, without penalty.
As of March 31, 2013, Triangle SBIC had issued $118.7 million of SBA-guaranteed debentures and had the current capacity to issue up to the statutory maximum of $150.0 million, subject to SBA approval. As of March 31, 2013, Triangle SBIC II had issued $75.0 million in face amount of SBA-guaranteed debentures. In addition to the one-time 1.0% fee on the total commitment from the SBA, the Company also pays a one-time 2.425% fee on the amount of each debenture issued (2.0% for SBA LMI debentures). These fees are capitalized as deferred financing costs and are amortized over the term of the debt agreements using the effective interest method. The weighted average interest rate for all SBA-guaranteed debentures as of March 31, 2013 was 4.07%. As of March 31, 2013, all SBA debentures were pooled. In the three months ended March 31, 2013, the Company prepaid approximately $20.5 million of SBA-guaranteed debentures and recognized a loss on extinguishment of debt of approximately $0.4 million.
In September 2012, we entered into a four-year senior secured credit facility to provide additional liquidity in support of our investment and operational activities. The Credit Facility, which has an initial commitment of $165.0 million supported by nine financial institutions, replaced our $75.0 million senior secured credit facility, or the Prior Facility. We entered into the Prior Facility in May 2011 with an initial commitment of $50.0 million, which was increased to $75.0 million in November 2011.
36
The Credit Facility has an accordion feature that allows for an increase in the total commitment size up to $215.0 million, subject to certain conditions, and also contains two one-year extension options, bringing the total potential borrowing term to six years from closing. The Credit Facility, which is structured to operate like a revolving credit facility, is secured primarily by our assets, excluding the assets of Triangle SBIC and Triangle SBIC II.
Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) the applicable base rate plus 1.95% or (ii) the applicable LIBOR rate plus 2.95%. The applicable base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the adjusted one-month LIBOR plus 2.0%. We pay a commitment fee of 0.375% per annum on undrawn amounts, which is included with interest and other financing fees on our Consolidated Statement of Operations. Borrowings under the Credit Facility are also limited to a borrowing base, which includes certain cash and a portion of eligible debt investments. As of March 31, 2013 and December 31, 2012, we had no borrowings outstanding under the Credit Facility.
As with the Prior Facility, the Credit Facility contains certain affirmative and negative covenants, including but not limited to (i) maintaining a minimum interest coverage ratio, (ii) maintaining minimum consolidated tangible net worth and (iii) maintaining its status as a regulated investment company and as a BDC. As of March 31, 2013, we were in compliance with all covenants of the Credit Facility.
In March 2012, we issued $69.0 million of 2019 Notes. The 2019 Notes mature on March 15, 2019, and may be redeemed in whole or in part at any time or from time to time at our option on or after March 15, 2015. The 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning June 15, 2012. The net proceeds from the sale of the 2019 Notes, after underwriting discounts and offering expenses, were approximately $66.7 million.
In October 2012, we issued $70.0 million of 2022 Notes and in November 2012, we issued $10.5 million of 2022 Notes pursuant to the exercise of an over-allotment option. The 2022 Notes mature on December 15, 2022, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 15, 2015. The 2022 Notes bear interest at a rate of 6.375% per year payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning December 15, 2012. The net proceeds from the sale of the 2022 Notes, after underwriting discounts and offering expenses, were approximately $77.8 million.
The indentures relating to the 2019 Notes and the 2022 Notes contain certain covenants, including but not limited to (i) a requirement that we comply with the asset coverage requirements of the 1940 Act or any successor provisions, and (ii) a requirement that we provide financial information to the holders of the notes and the trustee under the indenture if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934.
Distributions to Stockholders
We elected to be treated as a RIC under the Code, commencing with our taxable year ended December 31, 2007. In order to maintain our qualification as a RIC and to obtain RIC tax benefits, we must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then we are generally required to pay income taxes only on the portion of our taxable income and gains we do not distribute (actually or constructively) and certain built-in gains. We have historically met our minimum distribution requirements and continually monitor our distribution requirements with the goal of ensuring compliance with the Code. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act.
The minimum distribution requirements applicable to RICs require us to distribute to our stockholders each year at least 90% of our investment company taxable income, or ICTI, as defined by the Code. Depending on the level of ICTI earned in a tax year, we may choose to carry forward ICTI in excess of current year distributions into the next tax year and pay a 4% excise tax on such excess. Any such carryover ICTI must be distributed before the end of the next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.
ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. We may be required to recognize ICTI in certain circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments issued with warrants), we must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in ICTI other amounts that we have not yet received in cash, such as (i) PIK interest income and (ii) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is
37
recognized in ICTI. Because any original issue discount or other amounts accrued will be included in our ICTI for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the minimum distribution requirements, even though we will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
Current Market Conditions
We were able to secure access to additional liquidity in 2012, including public offerings of common stock and debt securities, new leverage through SBA-guaranteed debentures and entering into an expanded credit facility. There can be no assurances, however, that the current market conditions will continue and that debt or equity capital will be available to us in the future on favorable terms, if it all. In 2008, the debt and equity capital markets in the United States were severely impacted by significant write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated bank loan market, among other factors. These events, along with the deterioration of the housing market, led to an economic recession in the U.S. and abroad. Banks, investment companies and others in the financial services industry reported significant write-downs in the fair value of their assets, which led to the failure of a number of banks and investment companies, a number of distressed mergers and acquisitions and the government take-over of the nation's two largest government-sponsored mortgage companies. These events significantly impacted the financial and credit markets and reduced the availability of debt and equity capital for the market as a whole, and for financial firms in particular. Notwithstanding recent gains across both the equity and debt markets, recent U.S. budget deficit concerns and uncertainty regarding potential federal spending cuts and the federal debt ceiling, together with continued signs of deteriorating sovereign debt conditions in Europe, have increased the possibility that these unfavorable conditions in the debt and equity capital markets may reoccur in the future and could then continue for a prolonged period of time.
Recent Developments
In May 2013, we invested $7.6 million in subordinated debt and equity of Dyno Parent LLC ("Dyno”), a supplier of sewing products and seasonal decorative products. Under the terms of the investment, Dyno will pay interest on the subordinated debt at a rate of 14% per annum.
Critical Accounting Policies and Use of Estimates
The preparation of our unaudited financial statements in accordance with U.S. GAAP 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 in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. Under ASC Topic 820, a financial instrument is categorized within the ASC Topic 820 valuation hierarchy based upon the lowest level of input to the valuation process that is significant to the fair value measurement. The three levels of valuation inputs established by ASC Topic 820 are as follows:
Level 1 Inputs – include quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs – 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 – include inputs that are unobservable and significant to the fair value measurement.
Our investment portfolio is comprised of debt and equity instruments of privately held companies for which quoted prices or other inputs falling within the categories of Level 1 and Level 2 are not available. Therefore, we determine the fair value of our investments in good faith using Level 3 inputs, pursuant to a valuation policy and process that is established by our
38
management with the assistance of certain third-party advisors and subsequently approved by our Board of Directors. There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment. The recorded fair values of our investments may differ significantly from fair values that would have been used had an active market for the securities existed. 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.
Our valuation process is led by our executive officers and managing directors. The valuation process begins with a quarterly review of each investment in our investment portfolio by our executive officers and our investment committee. Valuations of each portfolio security are then prepared by our investment professionals, who have direct responsibility for the origination, management and monitoring of each investment. Under our valuation policy, each investment valuation is subject to (i) a review by the lead investment officer responsible for the portfolio company investment and (ii) a peer review by a second investment officer or executive officer. Generally, any investment that is valued below cost is subjected to review by one of our executive officers. After the peer review is complete, we engage two independent valuation firms, Duff & Phelps, LLC and Lincoln Partners Advisors LLC (collectively, the “Valuation Firms”), to provide third-party reviews of certain investments, as described further below. Finally, the Board of Directors has the responsibility for reviewing and approving, in good faith, the fair value of our investments in accordance with the 1940 Act.
The Valuation Firms provide third party valuation consulting services to us which consist of certain limited procedures that we identified and requested the Valuation Firms to perform (hereinafter referred to as the “Procedures”). The Procedures are performed with respect to 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 addition, the Procedures are generally performed with respect to a portfolio company when there has been a significant change in the fair value of the investment. In certain instances, we may determine that it is not cost-effective, and as a result is not in our stockholders’ best interest, to request the Valuation Firms to perform the Procedures on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined to be insignificant relative to the total investment portfolio.
The total number of investments and the percentage of our portfolio on which the Procedures were performed are summarized below by period:
For the quarter ended: |
Total
companies
|
Percent of total
investments at
fair value(1)
|
|
March 31, 2012 |
10 |
19% |
|
June 30, 2012 |
14 |
21% |
|
September 30, 2012 |
16 |
33% |
|
December 31, 2012 |
17 |
30% |
|
March 31, 2013 |
17 |
23% |
(1) |
Exclusive of the fair value of new investments made during the quarter. |
Upon completion of the Procedures, the Valuation Firms concluded that, with respect to each investment reviewed by each Valuation Firm, the fair value of those investments subjected to the Procedures appeared reasonable. Our Board of Directors is ultimately responsible for determining the fair value of our investments in good faith.
Investment Valuation Inputs
Under ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between a willing buyer and a willing seller at the measurement date. For our portfolio securities, fair value is generally the amount that we might reasonably expect to receive upon the current sale of the security. Under ASC Topic 820, the fair value measurement assumes that the sale occurs in the principal market for the security, or in the absence of a principal market, in the most advantageous market for the security. Under ASC Topic 820, if no market for the security exists or if we do not have access to the principal market, the security should be valued based on the sale occurring in a hypothetical market. The securities in which we invest are generally only purchased and sold in merger and acquisition transactions, in which case the entire portfolio company is sold to a third-party purchaser. As a result, unless we have the ability to control such a transaction, the assumed principal market for our securities is a hypothetical secondary market. The Level 3 inputs to our valuation process reflect management’s best estimate of the assumptions that would be used by market participants in pricing the investment in a transaction in a hypothetical secondary market.
39
Enterprise Value Waterfall Approach
In valuing equity securities (including warrants), we estimate fair value using an “Enterprise Value Waterfall” valuation model. We estimate the enterprise value of a portfolio company and then allocate the enterprise value to the portfolio company’s securities in order of their relative liquidation preference. In addition, the model assumes that any outstanding debt or other securities that are senior to our equity securities are required to be repaid at par. Additionally, we estimate the fair value of a limited number of its debt securities using the Enterprise Value Waterfall approach in cases where we do not expect to receive full repayment.
To estimate the enterprise value of the portfolio company, we primarily use a valuation model based on a transaction multiple, which generally is the original transaction multiple, and measures of the portfolio company’s financial performance. In addition, we consider other factors, including but not limited to (i) offers from third-parties to purchase the portfolio company, (ii) the implied value of recent investments in the equity securities of the portfolio company, (iii) publicly available information regarding recent sales of private companies in comparable transactions and, (iv) when management believes there are comparable companies that are publicly traded, we perform a review of these publicly traded companies and the market multiple of their equity securities.
The significant Level 3 inputs to the Enterprise Value Waterfall model are (i) an appropriate transaction multiple and (ii) a measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted, or Adjusted EBITDA, or revenues. Such inputs can be based on historical operating results, projections of future operating results, or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for certain non-recurring items. In determining the operating results input, we utilize the most recent portfolio company financial statements and forecasts available as of the valuation date. Management also consults with the portfolio company’s senior management to obtain updates on the portfolio company’s performance, including information such as industry trends, new product development, loss of customers 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; |
• |
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 security’s cost at the date of purchase and any contractual restrictions on the disposition of the security; |
• |
information as to any transactions or offers with respect to the security and/or sales to third parties of similar securities; |
• |
the issuer’s 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; |
• |
pending public offering of common stock by the issuer of the security; |
• |
special reports prepared by analysts; and |
• |
other pertinent factors. |
Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase in either the transaction multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher fair value for that security.
Income Approach
In valuing debt securities, we utilize an “Income Approach” model that considers factors including, but not limited to, (i) the stated yield on the debt security, (ii) the portfolio company’s current trailing twelve months, or TTM Adjusted EBITDA as compared to the portfolio company’s historical or projected Adjusted EBITDA as of the date the investment was made and
40
the portfolio company’s anticipated Adjusted EBITDA for the next twelve months of operations, (iii) the portfolio company’s current Leverage Ratio (defined as the portfolio company’s total indebtedness divided by Adjusted EBITDA) as compared to its Leverage Ratio as of the date the investment was made, (iv) publicly available information regarding current pricing and credit metrics for similar proposed and executed investment transactions of private companies and (v) when management believes a relevant comparison exists, current pricing and credit metrics for similar proposed and executed investment transactions of publicly traded debt. In addition, we 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. This risk rating system covers both qualitative and quantitative aspects of the business and the securities held.
We consider the factors above, particularly any significant changes in the portfolio company’s results of operations and leverage, and develop an expectation of the yield that a hypothetical market participant would require when purchasing the debt investment (the “Required Rate of Return”). The Required Rate of Return, along with the Leverage Ratio and Adjusted EBITDA are the significant Level 3 inputs to the Income Approach model. For investments where the Leverage Ratio and Adjusted EBITDA have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from management’s expectations as of the date the investment was made, and where there have been no significant fluctuations in the market pricing for such investments, we may conclude that the Required Rate of Return is equal to the stated rate on the investment and therefore, the debt security is appropriately priced. In instances where we determine that the Required Rate of Return is different from the stated rate on the investment, we discount the contractual cash flows on the debt instrument using the Required Rate of Return in order to estimate the fair value of the debt security.
Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in the Required Rate of Return or Leverage Ratio inputs for a particular debt security may result in a lower (higher) fair value for that security. A significant increase (decrease) in the Adjusted EBITDA input for a particular debt security may result in a higher (lower) fair value for that security.
The fair value of our royalty rights are calculated based on specific provisions contained in the pertinent operating or royalty agreements. The determination of the fair value of such royalty rights is not a significant component of our valuation process.
Revenue Recognition
Interest and Dividend Income
Interest income, adjusted for amortization of premium and accretion of original issue discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The cessation of recognition of such interest will negatively impact the reported fair value of the investment. We write off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. Dividend income is recorded on the ex-dividend date.
We may have to include in our ICTI, interest income, including OID income, from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. As a result, we may be required to make a distribution to our stockholders in order to satisfy the minimum distribution requirements to maintain our RIC status, even though we will not have received and may not ever receive any corresponding cash amount. Additionally, any loss recognized by us for federal income tax purposes on previously accrued interest income will be treated as a capital loss.
Fee Income
Origination, facility, commitment, consent and other advance fees received in connection with the origination of a loan, or Loan Origination Fees, are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized loan origination fees are recorded as investment income. In the general course of our business, we receive certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, certain investment banking and structuring fees and loan waiver and amendment fees, and are recorded as investment income when received.
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Payment-in-Kind (PIK) Interest Income
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 periodically added to the principal balance of the loan, rather than being paid to us in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment.
PIK interest, which is a non-cash source of income, is included in our taxable income and therefore affects the amount we are required to distribute to our stockholders to maintain our qualification as a RIC for federal income tax purposes, even though we have not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing PIK interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. We write off any previously accrued and uncollected PIK interest when it is determined that the PIK interest is no longer collectible.
We may have to include in our ICTI, PIK interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. As a result, we may be required to make a distribution to our stockholders in order to satisfy the minimum distribution requirements, even though we will not have received and may not ever receive any corresponding cash amount.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risk. Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies we invest in; conditions affecting the general economy; overall market changes; legislative reform; local, regional, national or global political, social or economic instability; and interest rate fluctuations.
The U.S economy recently experienced a severe recession. To the extent that recessionary conditions recur, the economy remains stagnate, any further downgrades to U.S. government’s sovereign credit rating occur, the European credit crisis continues, or the economy fails to return to pre-recession levels, the financial position and results of operations of certain of the lower middle market companies in our portfolio could be further affected adversely, which ultimately could lead to difficulty in our portfolio companies meeting debt service requirements and lead to an increase in defaults. There can be no assurance that the performance of our portfolio companies will not be further impacted by economic conditions, which could have a negative impact on our future results.
During 2011, we experienced a $6.4 million increase in the fair value of our investment portfolio related to unrealized appreciation of investments. In 2012, we experienced a $1.7 million increase in the fair value of our investment portfolio related to unrealized appreciation of investments, exclusive of $4.6 million of unrealized depreciation reclassification adjustments related to certain realized gains and losses. In the first three months of 2013, we experienced a $3.0 million increase in the fair value of our investment portfolio related to unrealized appreciation of investments, exclusive of $1.3 million of unrealized depreciation reclassification adjustments related to certain realized gains.
As of March 31, 2013, the fair value of our non-accrual assets was approximately $2.6 million, which comprised approximately 0.4% of the total fair value of our portfolio, and the cost of our non-accrual assets was approximately $21.1 million, or 3.0% of the total cost of our portfolio.
In addition to our non-accrual assets, as of March 31, 2013, we had debt investments in two portfolio companies (our subordinated notes to Minco Technology Labs, LLC and FCL Holding SPV, LLC) that were on non-accrual only with respect to the PIK interest component of the loans. As of March 31, 2013, the fair value of these debt investments was approximately $3.4 million, or 0.5% of the total fair value of our portfolio and the cost of these assets was approximately $6.5 million, or 0.9% of the total cost of our portfolio.
In addition, as of March 31, 2013, our subordinated notes to Home Physicians were on non-accrual only with respect to the PIK interest component of the loans. As of March 31, 2013, the fair value of our subordinated debt investments in Home
42
Physicians was approximately $10.4 million, or 1.5% of the total fair value of our portfolio and the cost of our subordinated debt investments in Home Physicians was approximately $11.9 million, or 1.7% of the total cost of our portfolio. Since December 31, 2012, the operating and financial outlook for Home Physicians has improved, and as a result we recorded unrealized appreciation of $4.2 million on our subordinated debt investments in Home Physicians in the three months ended March 31, 2013. If the outlook for Home Physicians continues to improve in the near term, we anticipate we will resume the accrual of PIK interest.
In addition, we are subject to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Our investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. We regularly measure exposure to interest rate risk and determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. As of March 31, 2013, we were not a party to any hedging arrangements.
As of March 31, 2013, approximately 97.9%, or $620.4 million (at cost) of our debt portfolio investments bore interest at fixed rates and approximately 2.1%, or $13.2 million (at cost) of our debt portfolio investments bore interest at variable rates, which are either Prime-based or LIBOR-based. A 200 basis point increase or decrease in the interest rates on our variable-rate debt investments would increase or decrease, as applicable, our investment income by approximately $0.3 million on an annual basis. All of our SBA-guaranteed debentures, our 2019 Notes and our 2022 Notes bear interest at fixed rates. Our Credit Facility bears interest, subject to our election, on a per annum basis equal to (i) the applicable base rate plus 1.95% or (ii) the applicable LIBOR rate plus 2.95%. The applicable base rate is equal to the greater of (i) prime rate, (ii) the federal funds rate plus 0.5% or (iii) the adjusted one-month LIBOR plus 2.0%.
Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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 first quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
43
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Neither Triangle Capital Corporation nor any of its subsidiaries is currently a party to any material pending legal proceedings.
Item 1A. Risk Factors.
In addition to the risk below and the other information set forth in this report, you should carefully consider the factors discussed in Part I., “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which could materially affect our business, financial condition or operating results. The risks described herein and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Pending legislation may allow us to incur additional leverage.
As a BDC, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Legislation pending reintroduction to the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that business development companies may incur by modifying the percentage from 200% to 150%. In addition, recent legislation introduced in the U.S. Congress would modify SBA regulations in a manner that may permit us to incur additional SBA leverage. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
44
Item 6. Exhibits.
Number |
Exhibit |
3.1 |
Articles of Amendment and Restatement of the Registrant (Filed as Exhibit (a)(3) to the Registrant’s 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 |
Third Amended and Restated Bylaws of the Registrant (Filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2011 and incorporated herein by reference). |
4.1 |
Form of Common Stock Certificate (Filed as Exhibit (d) to the Registrant’s Post-Effective Amendment No. 1 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 Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 12, 2008 and incorporated herein by reference). |
4.3 |
Agreement to Furnish Certain Instruments (Filed as Exhibit 4.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on February 25, 2009 and incorporated herein by reference). |
4.4 |
Indenture, dated March 2, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit (d)(5) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.5 |
First Supplemental Indenture, dated March 2, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit (d)(6) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.6 |
Form of 7.00% 2019 Note (Contained in the First Supplemental Indenture filed as Exhibit (d)(6) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.7 |
Second Supplemental Indenture, dated October 19, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2012 and incorporated herein by reference). |
4.8 |
Form of 6.375% 2022 Note (Contained in the Second Supplemental Indenture filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2012 and incorporated herein by reference). |
31.1 |
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
31.2 |
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
32.1 |
Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
32.2 |
Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
* |
Filed Herewith. |
** |
Furnished Herewith. |
45
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: |
May 8, 2013 |
/s/ Garland S. Tucker, III |
|
Garland S. Tucker, III |
|||
President, Chief Executive Officer and |
|||
Chairman of the Board of Directors |
|||
Date: |
May 8, 2013 |
/s/ Steven C. Lilly |
|
Steven C. Lilly |
|||
Chief Financial Officer and Director |
|||
Date: |
May 8, 2013 |
/s/ C. Robert Knox, Jr. |
|
C. Robert Knox, Jr. |
|||
Principal Accounting Officer |
46
EXHIBIT INDEX
Number |
Exhibit |
3.1 |
Articles of Amendment and Restatement of the Registrant (Filed as Exhibit (a)(3) to the Registrant’s 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 |
Third Amended and Restated Bylaws of the Registrant (Filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2011 and incorporated herein by reference). |
4.1 |
Form of Common Stock Certificate (Filed as Exhibit (d) to the Registrant’s Post-Effective Amendment No. 1 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 Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 12, 2008 and incorporated herein by reference). |
4.3 |
Agreement to Furnish Certain Instruments (Filed as Exhibit 4.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on February 25, 2009 and incorporated herein by reference). |
4.4 |
Indenture, dated March 2, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit (d)(5) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.5 |
First Supplemental Indenture, dated March 2, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit (d)(6) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.6 |
Form of 7.00% 2019 Note (Contained in the First Supplemental Indenture filed as Exhibit (d)(6) to the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed with the Securities and Exchange Commission on March 2, 2012 and incorporated herein by reference). |
4.7 |
Second Supplemental Indenture, dated October 19, 2012 between the Registrant and the Bank of New York Mellon Trust Company, N.A. (Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2012 and incorporated herein by reference). |
4.8 |
Form of 6.375% 2022 Note (Contained in the Second Supplemental Indenture filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2012 and incorporated herein by reference). |
31.1 |
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
31.2 |
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
32.1 |
Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
32.2 |
Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
* |
Filed Herewith. |
** |
Furnished Herewith. |
47