UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
 
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
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: 814-00939
________________ 
HMS Income Fund, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
 
45-3999996
(I.R.S. Employer
Identification No.)
 
 
 
2800 Post Oak Boulevard
Suite 5000
Houston, Texas
(Address of Principal Executive Offices)
 
77056-6118
(Zip Code)
 
(888) 220-6121
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o 
 
Accelerated filer o 
 
Non-accelerated filer þ 
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo þ
 
The issuer had 25,518,142 shares of common stock outstanding as of November 7, 2014.





TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
 
Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013
 
Unaudited Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2014 and 2013
 
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013
 
Consolidated Schedules of Investments as of September 30, 2014 (Unaudited) and December 31, 2013
 
Notes to the Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II — OTHER INFORMATION 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 
Exhibit Index
 
  




PART I — FINANCIAL INFORMATION

Item 1.    Financial Statements

HMS Income Fund, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Portfolio investments at fair value:
 
 
 
Non-Control/Non-Affiliate investments (amortized cost: $361,709 and $66,410 as of September 30, 2014 and December 31, 2013, respectively)
$
360,548

 
$
66,882

Affiliate investments (amortized cost: $3,100 and zero as of September 30, 2014 and December 31, 2013, respectively)
3,106

 

Total portfolio investments (amortized cost: $364,809 and $66,410 as of September 30, 2014 and December 31, 2013, respectively)
363,654

 
66,882

 
 
 
 
Cash and cash equivalents
10,839

 
6,356

Interest receivable
3,198

 
399

Receivable for securities sold
2,000

 

Prepaid and other assets
578

 
109

Due from Main Street Capital Corporation
15

 
19

Deferred offering costs (net of accumulated amortization of $3,077 and $631 as of September 30, 2014 and December 31, 2013, respectively)
2,994

 
3,688

Deferred financing costs (net of accumulated amortization of $409 and $144 as of September 30, 2014 and December 31, 2013, respectively)
2,339

 
168

Total assets
$
385,617

 
$
77,621

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and other liabilities
$
295

 
$
71

Payable for unsettled trades
2,682

 
2,608

Stockholder distributions payable
1,196

 
295

Due to affiliates
3,461

 
3,771

Payable for securities purchased
43,981

 
8,799

Notes payable
141,864

 
14,000

Total liabilities
193,479

 
29,544

 
 
 
 
Commitments and Contingencies (Note 11)
 
 
 
 
 
 
 
NET ASSETS
 

 
 

Common stock, $.001 par value; 150,000,000 shares authorized, 21,866,601 and 5,396,967 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
22

 
5

Additional paid in capital
193,271

 
47,600

Accumulated net investment income, net of stockholder distributions

 

Accumulated net realized gain on investment, net of stockholder distributions

 

Distributions in excess of accumulated net investment income and net realized gains

 

Net unrealized appreciation (depreciation)
(1,155
)
 
472

Total net assets
192,138

 
48,077

 
 
 
 
Total liabilities and net assets
$
385,617

 
$
77,621

 
 
 
 
Net asset value per share
$
8.79

 
$
8.91

See notes to the financial statements.

1



HMS Income Fund, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
INVESTMENT INCOME:
 

 
 

 
 

 
 

Interest income:
 

 
 

 
 

 
 

Non-Control/Non-Affiliate investments
$
5,610

 
$
808

 
$
10,481

 
$
1,759

Affiliate investments
37

 

 
37

 

Total interest income
5,647

 
808

 
10,518

 
1,759

EXPENSES:
 

 
 

 
 

 
 

Interest expense
1,135

 
118

 
1,857

 
273

Base management and incentive fees
1,642

 
268

 
3,349

 
470

Administrative services expenses
371

 
234

 
1,084

 
689

Professional fees
131

 
80

 
419

 
270

Insurance
49

 
47

 
144

 
140

Other general and administrative
166

 
65

 
409

 
180

Expenses before fee and expense waivers
3,494

 
812

 
7,262

 
2,022

Waiver of management and incentive fees
(821
)
 
(268
)
 
(1,675
)
 
(470
)
Waiver of administrative services expenses
(371
)
 
(234
)
 
(1,084
)
 
(689
)
Expense support payment from Adviser
(328
)
 

 
(328
)
 

Total expenses, net of fee and expense waivers
1,974

 
310

 
4,175

 
863

 
 
 
 
 
 
 
 
NET INVESTMENT INCOME
3,673

 
498

 
6,343

 
896

 
 
 
 
 
 
 
 
NET REALIZED GAIN FROM INVESTMENTS
 

 
 

 
 

 
 

Non-Control/Non-Affiliate investments
65

 

 
216

 
4

Affiliate investments

 

 

 

Total realized gain from investments
65

 

 
216

 
4

 
 
 
 
 
 
 
 
NET REALIZED INCOME
3,738

 
498

 
6,559

 
900

 
 
 
 
 
 
 
 
NET UNREALIZED APPRECIATION (DEPRECIATION)
 

 
 

 
 

 
 

Non-Control/Non-Affiliate investments
(1,906
)
 
250

 
(1,633
)
 
388

Affiliate investments
6

 

 
6

 

Total net unrealized appreciation (depreciation)
(1,900
)
 
250

 
(1,627
)
 
388

 
 
 
 
 
 
 
 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
1,838

 
$
748

 
$
4,932

 
$
1,288

NET INVESTMENT INCOME PER SHARE – BASIC AND DILUTED
$
0.20

 
$
0.17

 
$
0.51

 
$
0.42

NET REALIZED INCOME PER SHARE
$
0.20

 
$
0.17

 
$
0.52

 
$
0.42

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE – BASIC AND DILUTED
$
0.10

 
$
0.26

 
$
0.39

 
$
0.61

DISTRIBUTIONS DECLARED PER SHARE
$
0.17

 
$
0.17

 
$
0.52

 
$
0.52

WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
18,334,912

 
2,904,245

 
12,528,035

 
2,123,132

 
See notes to the financial statements.

2



HMS Income Fund, Inc.
Consolidated Statements of Change in Net Assets
For the Nine Months Ended September 30, 2014 and September 30, 2013
(in thousands, except number of shares)
(Unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-In
Capital
 
Accumulated Net Investment Income, Net
of Stockholder
Distributions
 
Accumulated Net Realized Gain, Net of Stockholder Distributions
 
Distributions from Other Sources (1)
 
Net Unrealized
Appreciation (Depreciation)
 
Total Net
Assets
Balance at December 31, 2013
5,396,967

 
$
5

 
$
47,600

 
$

 
$

 
$

 
$
472

 
$
48,077

Issuance of common stock
16,481,459

 
17

 
163,017

 

 

 

 

 
163,034

Redemption of common stock
(11,825
)
 

 
(101
)
 

 

 

 

 
(101
)
Selling commissions and dealer manager fees

 

 
(14,799
)
 

 

 

 

 
(14,799
)
Offering costs

 

 
(2,446
)
 

 

 

 

 
(2,446
)
Stockholder distributions declared

 

 

 
(6,343
)
 
(216
)
 

 

 
(6,559
)
Net increase in net assets resulting from operations

 

 

 
6,343

 
216

 

 
(1,627
)
 
4,932

Balance at September 30, 2014
21,866,601

 
$
22

 
$
193,271

 
$

 
$

 
$

 
$
(1,155
)
 
$
192,138



 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-In
Capital
 
Accumulated Net Investment Income, Net
of Stockholder
Distributions
 
Accumulated Net Realized Gain, Net of Stockholder Distributions
 
Distributions from Other Sources (1)
 
Net Unrealized
Appreciation
 
Total Net
Assets
Balance at December 31, 2012
1,289,472

 
$
1

 
$
11,248

 
$
109

 
$
14

 
$

 
$
51

 
$
11,423

Issuance of common stock
2,028,703

 
2

 
20,054

 

 

 

 

 
20,056

Selling commissions and dealer manager fees

 

 
(1,792
)
 

 

 

 

 
(1,792
)
Offering costs

 

 
(301
)
 

 

 

 

 
(301
)
Stockholder distributions declared

 

 

 
(1,005
)
 
(18
)
 
(89
)
 

 
(1,112
)
Net increase in net assets resulting from operations

 

 

 
896

 
4

 

 
388

 
1,288

Balance at September 30, 2013
3,318,175

 
$
3

 
$
29,209

 
$

 
$

 
$
(89
)
 
$
439

 
$
29,562


See notes to the financial statements.

(1) Please see discussion of Other Sources of Distributions in Note 6-Stockholder Distributions.

3



HMS Income Fund, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
Nine Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net increase in net assets resulting from operations
$
4,932

 
$
1,288

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
 
 


Principal repayments received and proceeds from sales of investments in portfolio companies
69,405

 
7,951

Investments in portfolio companies
(333,882
)
 
(31,202
)
Net unrealized depreciation (appreciation) of portfolio investments
1,627

 
(388
)
Net realized (gain) on sale of portfolio investments
(216
)
 
(4
)
Amortization of deferred financing costs
265

 
65

Accretion of unearned income
(642
)
 
(50
)
Net payment-in-kind interest accrual
(144
)
 
(112
)
Changes in other assets and liabilities:


 
 

Interest receivable
(2,799
)
 
(193
)
Prepaid and other assets
(208
)
 
(52
)
Due from Main Street Capital Corporation
4

 
932

Due to affiliates
2,828

 
(23
)
Accounts payable and other liabilities
202

 
(2
)
Payable for unsettled trades
74

 
971

Net cash used in operating activities
(258,554
)
 
(20,819
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of common stock
158,008

 
19,534

Redemption of common shares
(101
)
 

Payment of selling commissions and dealer manager fees
(14,796
)
 
(1,792
)
Payment of offering costs
(2,447
)
 
(322
)
Payment of stockholder distributions
(3,077
)
 
(781
)
Repayments on notes payable
(95,636
)
 
(5,000
)
Proceeds from notes payable
223,500

 
9,300

Payment of deferred financing costs
(2,414
)
 
(34
)
Net cash provided by financing activities
263,037

 
20,905

 
 
 
 
Net increase in cash and cash equivalents
4,483

 
86

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
6,356

 
1,832

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
$
10,839

 
$
1,918

 
See notes to the financial statements.


4



HMS Income Fund, Inc.
Consolidated Schedule of Investments
As of September 30, 2014
(dollars in thousands)
(Unaudited)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Principal (7)
Cost (7)
Fair Value
 
 
 
 
 
 
Affiliate Investments (4)
Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
Common Stock (1,468 shares)
 
$
680

$
680

 
 
12.00% Secured Debt (Maturity Date -August 15, 2019)
$
2,500

2,420

2,426

 
 
 
 
3,100

3,106

 
 
 
 
 
 
Subtotal Affiliate Investments (4) (1% of total investments at fair value)
 
 
$
3,100

$
3,106

 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
Ability Network Inc. (8)
Health Care Information Technology
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - May 14, 2021)
$
4,988

$
4,933

$
5,000

Accuvant Finance LLC (8)
Cyber Security Value Added Reseller
LIBOR Plus 4.75% (Floor 1%), Current Coupon 5.75%, Secured Debt (Maturity - October 22, 2020)
2,868

2,841

2,854

Allflex Holdings III Inc. (8) (12)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
8,422

8,532

8,392

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
18% Secured Debt, (Maturity - March 9, 2017)
750

750

750

AMF Bowling Centers, Inc. (8) (12)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1%), Current Coupon 7.25%, Secured Debt (Maturity - September 18, 2021)
8,000

7,932

7,995

Ancile Solutions, Inc. (8)
Provider of eLearning Solutions
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - July 15, 2018)
1,083

1,079

1,086

Answers Corporation (8)
Consumer Internet Search Services Provider
LIBOR Plus 5.50% (Floor 1%), Current Coupon 6.50%, Secured Debt (Maturity - December 20, 2018)
3,156

3,165

3,195

Aptean, Inc. (8)
Enterprise Application Software Provider
LIBOR Plus 4.25% (Floor 1%), Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
4,471

4,471

4,454

Artel, LLC (8)
Land-Based and Commercial Satellite Provider
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - November 27, 2017)
942

921

928

Ascend Learning, LLC (8)
Technology Based Healthcare Learning Solutions
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - July 31, 2019)
994

985

999

Atkins Nutritionals Holdings II, Inc. (8)
Weight Management Food Products
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - January 2, 2019)
956

948

951

Blackbrush Oil and Gas LP (8) (12)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - July 30, 2021) (14)
10,085

9,965

9,959

Blackhawk Specialty Tools LLC (8)
Oilfield Equipment & Services
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
1,443

1,443

1,443

Blue Bird Body Company (8)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1%), Current Coupon 6.50%, Secured Debt (Maturity - June 26, 2020)
6,000

5,914

5,925

Bluestem Brands, Inc. (8)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 6.50% (Floor 1%), Current Coupon 7.50%, Secured Debt (Maturity - December 6, 2018)
1,644

1,637

1,650

Brasa Holdings, Inc. (8) (12)
Upscale Full Service Restaurants

LIBOR Plus 9.50% (Floor 1.5%), Current Coupon 11.00%, Secured Debt (Maturity - January 20, 2020) (14)
10,000

10,100

10,106

Brundage-Bone Concrete Pumping, Inc.
Construction Services Provider
10.38% Secured Bond (Maturity - September 1, 2021) (14)
4,000

4,049

4,120

California Healthcare Medical Billing, Inc. (10) (13)
Outsourced Billing & Revenue Cycle Management
9.00% Secured Debt, (Maturity - October 17, 2016)
750

744

750

California Pizza Kitchen, Inc. (8)
Casual Dining Restaurant Chain
LIBOR Plus 4.25% (Floor 1%), Current Coupon 5.25%, Secured Debt (Maturity - March 29, 2018)
5,979

5,735

5,745

Cedar Bay Generation Company LP (8)
Coal-Fired Cogeneration Plant
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - April 23, 2020)
1,511

1,511

1,518

Charlotte Russe, Inc. (8)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019)
5,486

5,486

5,404

Clarius BIGS, LLC (11)
Prints & Advertising Film Financing

12.00% PIK Secured Debt (Maturity - January 5, 2015)
3,286

3,028

3,028

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers

8.75% Secured Debt (Maturity - August 1, 2019)
5,000

5,000

4,975

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
2,382

2,367

2,382

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
Member Units (717 units)
 
670

670

 
 
10.50% Secured Debt (Maturity - May 30, 2019)
1,245

1,221

1,221

 
 
8.00% Secured Revolving Debt (Maturity - May 29, 2015)
50

50

50

 
 
 
 
1,941

1,941

Energy & Exploration Partners, LLC (8)
Oil & Gas Exploration and Production
LIBOR plus 6.75% (Floor 1%), Current Coupon 7.75%, Secured Debt (Maturity - January 22, 2019)
1,995

1,966

1,959

e-Rewards, Inc. (8)
Provider of Digital Data Collection
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - October 29, 2018)
5,906

5,892

5,847

Excelitas Technologies Corp. (8)
Lighting and Sensor Components
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - November 2, 2020)
3,461

3,476

3,464

FishNet Security, Inc. (8)
Information Technology Value-Added Reseller
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - November 30, 2017)
2,776

2,769

2,773

Fram Group Holdings, Inc. (8)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.00% (Floor 1.50%), Current Coupon 6.50%, Secured Debt (Maturity - July 29, 2017)
3,487

3,475

3,494

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1%), Current Coupon 6.50%, Secured Debt (Maturity Date - July 10, 2020)
10,000

9,903

9,925

Guerdon Modular Holdings, Inc. (10) (13)
Modular Construction Company
Common Stock (42,644 shares)
 
600

600

 
 
11.00% Secured Debt (Maturity - August 13, 2019)
2,800

2,743

2,750

 
 
 
 
3,343

3,350

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Bond (Maturity - April 15, 2019)
7,000

6,709

6,300

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 5.50% (Floor 1%), Current Coupon 6.50%, Secured Debt (Maturity Date - August 5, 2019)
6,000

5,882

5,948

ICON Health and Fitness, Inc.
Producer of Fitness Products

11.88% Secured Bond (Maturity - October 15, 2016)
5,000

5,012

4,938

iEnergizer Limited (8) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
5,493

5,470

5,274

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Bond (Maturity - November 30, 2020)
7,980

7,925

7,740

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
5,921

5,771

5,417

IronGate Energy Services, LLC
Oil and Gas Services
11.00% Secured Bond (Maturity - July 1, 2018)
2,500

2,488

2,506

Jackson Hewitt Tax Service Inc. (8)
Tax Preparation Service Provider
LIBOR Plus 8.50% (Floor 1.50%), Current Coupon 10.00%, Secured Debt (Maturity - October 16, 2017)
3,258

3,266

3,258

John Deere Landscapes, LLC (8) (11)
Distributor of Landscaping Supplies
LIBOR Plus 4.00% (Floor 1%), Current Coupon 5.00%, Secured Debt (Maturity - December 23, 2019)
7,980

7,611

7,601

Keypoint Government Solutions, Inc. (8)
Pre-Employment Screening Services
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2017)
1,839

1,836

1,849

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.25% (Floor 1%), Current Coupon 8.25%, Secured Debt (Maturity - August 7, 2019)
741

744

754

LJ Host Merger Sub, Inc. (8)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
5,418

5,400

5,418

 
 
LIBOR Plus 8.75% (Floor 1.25%), Current Coupon 10.00%, Secured Debt (Maturity - December 11, 2020) (14)
500

497

498

 
 
 
 
5,897

5,916

MAH Merger Corporation (8)
Sports-Themed Casual Dining Chain
LIBOR Plus 4.50% (Floor 1.25%), Current Coupon 5.75%, Secured Debt (Maturity - July 19, 2019)
1,485

1,485

1,489

MediMedia USA, Inc. (8) (12)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
7,152

7,059

6,991

MedSolutions Holdings, Inc. (8)
Specialty Benefit Management
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - July 8, 2019)
1,899

1,902

1,909

Milk Specialties Company (8) (12)
Processor of Nutrition Products
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - November 9, 2018)
7,665

7,654

7,636

Minute Key, Inc. (10) (13)
Automated Key Duplication Kiosk
10% Current / 2% PIK Secured Debt (Maturity Date - September 19, 2019) (14)
1,000

985

985

Mood Media Corporation (8) (9) (12)
Electronic Equipment and Instruments
LIBOR Plus 6.00% (Floor 1%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
7,965

7,989

7,846

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1%), Current Coupon 7.25%, Secured Debt (Maturity - June 3, 2020)
6,484

6,357

6,403

Nice-Pak Products, Inc. (8)
Pre-Moistened Wipes Manufacturer
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity - June 18, 2015)
7,496

7,472

7,421

North Atlantic Trading Company, Inc. (8) (12)
Marketer/Distributor of Tobacco
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity -January 13, 2020)
7,474

7,527

7,521

Panolam Industries International, Inc. (8)
Decorative Laminate Manufacturer
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - August 23, 2017)
856

846

856

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
1,910

1,887

1,948

Pernix Therapeutical Holdings, Inc. (9) (11)
Pharmaceutical Royalty - Anti-Migraine
12.00% Secured Bond (Maturity - August 1, 2020)
3,500

3,500

3,500

Peroxychem, LLC. (8)
Chemical Manufacturer
LIBOR Plus 6.50% (Floor 1%), Current Coupon 7.5%, Secured Debt (Maturity - February 28, 2020)
4,478

4,456

4,545

Pitney Bowes Management Services Inc. (8) (12)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.5%, Secured Debt (Maturity - July 7, 2020)
6,000

5,942

5,910

Polyconcept Financial B.V. (8)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
5,921

5,909

5,913

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - November 1, 2018)
4,975

5,001

4,950

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
2,328

2,341

2,322

Quad-C JH Holdings (8)
Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
4,468

4,443

4,462

Ravago Holdings America, Inc. (8)
Polymers Distributor
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
5,970

6,011

5,992

RCHP, Inc. (8)
Region Non-Urban Hospital Owner/Operator
LIBOR Plus 9.50% (Floor 1%), Current Coupon 10.50%, Secured Debt (Maturity - October 23, 2019) (14)
6,500

6,454

6,565

Recorded Books, Inc. (8)
Audiobook and Digital Content Publisher
LIBOR Plus 4.25% (Floor 1%), Current Coupon 5.25%, Secured Debt (Maturity - January 31, 2020)
4,388

4,369

4,355

Relativity Media, LLC (11)
Full-scale Film and Television Production and Distribution
10.00% Secured Debt (Maturity - May 30, 2015)
3,693

3,693

3,703

 
 
15.00% PIK Secured Debt (Maturity - May 30, 2015) (14)
3,143

3,143

3,206

 
 
 
 
6,836

6,909

Renaissance Learning, Inc. (8)
Technology-based K-12 learning solutions
LIBOR Plus 7.00% (Floor 1%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
2,000

1,981

1,963

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
4,000

3,881

3,968

RLJ Entertainment, Inc. (8) (11)
Movie and TV Programming Licensee and Distributor
Prime Plus 8.75% (Floor .25%), Current Coupon 9.00%, Secured Debt (Maturity - September 11, 2019)
10,000

9,703

9,703

SCE Partners, LLC (8) (11)
Hotel & Casino Operator
LIBOR Plus 7.25% (Floor 1%), Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
1,000

991

1,005

Sotera Defense Solutions, Inc. (8)
Defense Industry Intelligence Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.00%, Secured Debt (Maturity - April 21, 2017)
3,773

3,561

3,490

Sutherland Global Services, Inc. (8) (9)
Business Process Outsourcing Provider
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - March 6, 2019)
1,655

1,647

1,659

Symphony Teleca Services, Inc. (8)
Outsourced Product Development
LIBOR Plus 4.75% (Floor 1.00%), Current Coupon 5.75%, Secured Debt (Maturity - August 7, 2019)
6,000

5,942

5,970

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
3,975

3,958

3,910

Teleguam Holdings, LLC (8)
Cable and Telecom Services Provider
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (14)
3,000

3,022

3,019

Templar Energy, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.50% (Floor 1%), Current Coupon 8.50%, Secured Debt (Maturity - November 25, 2020) (14)
3,000

2,978

2,914

Tervita Corporation (8) (9)
Oil and Gas Environmental Services
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
2,481

2,493

2,473

The Topps Company, Inc. (8)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
993

984

980

Therakos, Inc. (8)
Immune System Disease Treatment
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - December 27, 2017)
1,450

1,428

1,463

Travel Leaders Group, LLC (8) (12)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1%), Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
8,542

8,510

8,504

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
7,967

7,944

7,948

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - June 15, 2017)
1,000

1,000

970

Vision Solutions, Inc. (8) (12)
Provider of Information Availability Software
LIBOR Plus 4.50% (Floor 1.50%), Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
6,052

6,069

6,036

 
 
LIBOR Plus 8.00% (Floor 1.50%), Current Coupon 9.50%, Secured Debt (Maturity - July 23, 2017) (14)
875

868

868

 
 
 
 
6,937

6,904

YP Holdings LLC (8)
Online and Offline Advertising Operator
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
3,397

3,412

3,414

 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (99% of total portfolio investments at fair value)
 
 
$
361,709

$
360,548

 
 
 
 
 
 
Total Investments
 
 
 
$
364,809

$
363,654

(1) All investments are Private Placement portfolio investments, unless otherwise noted. All of the Company's assets are encumbered as security for the Company's credit agreements. See Note 4 - Borrowings.
(2) Debt investments are income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted.
(3) See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies.
(4) Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments.
(5) Non-Control/Non-Affiliate investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”) as investments that are neither Control investments nor Affiliate investments.
(6) Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. As of September 30, 2014, the Company did not own any Control investments.
(7) Principal is net of repayments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(8) Index based floating interest rate is subject to contractual minimum interest rates.
(9) The investment is not a qualifying asset under the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC's total assets.
(10) Investment is classified as a Lower middle market investment.
(11) Investment is classified as a Private Loan portfolio investment.
(12) Investment or portion of investment is under contract to purchase and met trade date accounting criteria as of September 30, 2014. Settlement occurred or is scheduled to occur after September 30, 2014. See Note 2 for summary of Security Transactions.
(13) Investment serviced by Main Street Partners pursuant to the Servicing Agreement. See Note 2 for summary of Investment Classification.
(14) Second lien secured debt investment.


See notes to the financial statements.


5



HMS Income Fund, Inc.
Consolidated Schedule of Investments
As of December 31, 2013
(dollars in thousands)
Portfolio Company (1)
Business Description
Type of Investment (1)
Principal (5)
Cost (5)
Fair Value
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (2)
ABG Intermediate Holdings 2, LLC (6)
Trademark Licensing of Clothing
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
$
1,500

$
1,492

$
1,496

Allflex Holdings III Inc. (6) (11)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021)
950

969

964

Ameritech College Operations, LLC (8) (10)
For-Profit Nursing and Healthcare College
18% Secured Debt (Maturity - March 9, 2017)
750

750

750

AMF Bowling Centers, Inc. (6)
Bowling Alley Operator
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 29, 2018)
988

959

995

Ancile Solutions, Inc. (6)
Provider of eLearning Solutions
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - July 15, 2018)
1,234

1,224

1,234

Answers Corporation (6) (9)
Consumer Internet Search Services Provider
LIBOR Plus 5.50% (Floor 1%), Current Coupon 6.50%, Secured Debt (Maturity - December 20, 2018)
1,500

1,485

1,485

Apria Healthcare Group, Inc. (6)
Home Healthcare Equipment
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - April 6, 2020)
995

995

1,000

Artel, LLC (6) (9)
Land-Based and Commercial Satellite Provider
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - November 27, 2017)
1,188

1,152

1,170

Atkins Nutritionals Holdings II, Inc. (6)
Weight Management Food Products
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - January 2, 2019)
993

983

1,005

BBTS Borrower LP (6)
Oil & Gas Exploration and Midstream Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - June 4, 2019)
1,489

1,482

1,503

Blackhawk Specialty Tools LLC (6)
Oilfield Equipment & Services
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - August 1, 2019)
1,500

1,500

1,496

Bluestem Brands, Inc. (6)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 6.50% (Floor 1%), Current Coupon 7.50%, Secured Debt (Maturity - December 6, 2018)
1,000

980

990

California Healthcare Medical Billing, Inc. (8) (10)
Outsourced Billing & Revenue Cycle Management
12% Secured Debt, (Maturity - October 17, 2015)
750

750

750

CDC Software Corporation (6)
Enterprise Application Software
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - August 6, 2018)
743

737

749

Cedar Bay Generation Company LP (6)
Coal-Fired Cogeneration Plant
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - April 23, 2020)
885

876

892

Collective Brands Finance, Inc. (6)
Specialty Footwear Retailer
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 19, 2019)
496

496

499

e-Rewards, Inc. (6)
Provider of Digital Data Collection
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - October 29, 2018)
1,000

980

994

Excelitas Technologies Corp. (6)
Lighting and Sensor Components
LIBOR Plus 5.00% (Floor 1%), Current Coupon 6.00%, Secured Debt (Maturity - November 2, 2020)
989

980

997

Fender Musical Instruments Corporation (6)
Manufacturer of Musical Instruments
LIBOR Plus 4.50% (Floor 1.25%), Current Coupon 5.75%, Secured Debt (Maturity - April 3, 2019)
448

443

455

FishNet Security, Inc. (6)
Information Technology Value-Added Reseller
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - November 30, 2017)
1,980

1,963

1,989

Fram Group Holdings, Inc. (6) (9)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.00% (Floor 1.50%), Current Coupon 6.50%, Secured Debt (Maturity - July 31, 2017)
1,500

1,489

1,489

Getty Images, Inc. (6)
Digital Photography and Video Content Marketplace
LIBOR Plus 3.50% (Floor 1.25%), Current Coupon 4.75%, Secured Debt (Maturity - October 18, 2019)
997

895

933

Golden Nugget, Inc. (6)
Hotels & Casinos in Las Vegas and Louisiana
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - November 21, 2019)
700

693

712

iEnergizer Limited (6) (7) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1,437

1,413

1,417

Inn of the Mountain Gods Resort and Casino
Hotel & Casino
9.25% Secured Bond (Maturity - November 30, 2020)
1,000

955

968

Ipreo Holdings LLC (6) (9)
Application Software for Capital Markets
LIBOR Plus 4.00% (Floor 1%), Current Coupon 5.00%, Secured Debt (Maturity - August 5, 2017)
732

732

743

Jackson Hewitt Tax Service Inc. (6)
Tax Preparation Services
LIBOR Plus 8.50% (Floor 1.50%), Current Coupon 10.00%, Secured Debt (Maturity - October 16, 2017)
1,000

1,000

995

Joernes Healthcare, LLC (6)
Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - March 28, 2018)
993

984

973

Keypoint Government Solutions, Inc. (6)
Pre-Employment Screening Services
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - November 13, 2017)
920

915

910

Larchmont Resources, LLC (6)
Oil & Gas Exploration & Production
LIBOR Plus 7.25% (Floor 1.25%), Current Coupon 8.50%, Secured Debt (Maturity - August 7, 2019)
746

750

760

Learning Care Group (US) No. 2 Inc. (6)
Provider of Early Childhood Education
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - May 8, 2019)
998

988

1,004

LJ Host Merger Sub, Inc. (6) (9)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
1,000

990

995

 
 
LIBOR Plus 8.75% (Floor 1.25%), Current Coupon 10.00%, Secured Debt (Maturity - December 11, 2020) (11)
500

490

498

 
 
 
 
1,480

1,493

MAH Merger Corporation (6)
Sports-Themed Casual Dining Chain
LIBOR Plus 4.50% (Floor 1.25%), Current Coupon 5.75%, Secured Debt (Maturity - July 19, 2019)
1,500

1,500

1,493

MediMedia USA, Inc. (6)
Provider of Health Care Media and Marketing
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - November 20, 2018)
995

967

973

MedSolutions Holdings, Inc. (6)
Specialty Benefit Management
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity - July 8, 2019)
975

966

974

Mitel US Holdings, Inc. (6)
Manufacturer of Battery Components
LIBOR Plus 5.75% (Floor 1.25%), Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
893

884

896

MP Assets Corporation (6)
Manufacturer of Battery Components
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - December 19, 2019)
1,000

990

998

National Vision, Inc. (6)
Discount Optical Retailer
LIBOR Plus 5.75% (Floor 1.25%), Current Coupon 7.00%, Secured Debt (Maturity - August 2, 2018)
730

721

732

Neenah Foundry Company (6)
Operator of Iron Foundries
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - August 26, 2017)
12

12

12

NRC US Holding Company LLC (6)
Environmental Services Provider
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - July 30, 2019)
975

970

977

Orbitz Worldwide, Inc. (6) (7)
Online Travel Agent
LIBOR Plus 4.75% (Floor 1%), Current Coupon 5.75%, Secured Debt (Maturity - March 25, 2019)
498

498

500

Panolam Industries International, Inc. (6)
Decorative Laminate Manufacturer
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - August 23, 2017)
905

897

875

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
910

888

896

Pitney Bowes Management Services Inc. (6)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - October 1, 2019)
998

988

1,005

Polyconcept Financial B.V. (6)
Promotional Products to Corporations and Consumers
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - June 28, 2019)
975

966

979

Ravago Holdings America, Inc. (6) (9)
Polymers Distributor
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
1,250

1,238

1,253

Relativity Media, LLC
Full-scale Film and Television Production and Distribution
10.00% Secured Debt (Maturity - May 30, 2015)
1,976

1,976

1,976

SCE Partners, LLC (6)
Hotel & Casino Operator
LIBOR Plus 7.25% (Floor 1%), Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
1,000

990

930

Sotera Defense Solutions, Inc. (6)
Defense Industry Intelligence Services
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.50%, Secured Debt (Maturity - April 21, 2017)
944

913

849

Sutherland Global Services, Inc. (6)
Business Process Outsourcing Provider
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - March 6, 2019)
963

945

965

Synagro Infrastructure Company, Inc. (6)
Waste Management Services
LIBOR Plus 5.25% (Floor 1%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
998

978

989

TeleGuam Holdings, LLC (6)
Cable and Telecom Services Provider
LIBOR Plus 4.00% (Floor 1.25%), Current Coupon 5.25%, Secured Debt (Maturity - December 10, 2018)
499

499

498

 
 
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (11)
1,000

1,006

1,005

 
 
 
 
1,505

1,503

Tervita Corporation (6) (7)
Oil and Gas Environmental Services
LIBOR Plus 5.00% (Floor 1.25%), Current Coupon 6.25%, Secured Debt (Maturity - May 15, 2018)
996

990

1,002

The Topps Company, Inc. (6)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
1,000

990

1,003

Therakos, Inc. (6)
Immune System Disease Treatment
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - December 27, 2017)
1,489

1,460

1,494

ThermaSys Corporation (6)
Manufacturer of Industrial Heat Exchanges
LIBOR Plus 4.00% (Floor 1.25%), Current Coupon 5.25%, Secured Debt (Maturity - May 3, 2019)
1,500

1,482

1,489

Totes Isotoner Corporation (6)
Weather Accessory Retail
LIBOR Plus 5.75% (Floor 1.50%), Current Coupon 7.25%, Secured Debt (Maturity - July 7, 2017)
944

952

949

Travel Leaders Group, LLC (6)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1%), Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
1,500

1,470

1,481

Universal Fiber Systems, LLC (6)
Manufacturer of Synthetic Fibers
LIBOR Plus 5.75% (Floor 1.75%), Current Coupon 7.50%, Secured Debt (Maturity - June 26, 2015)
1,699

1,678

1,707

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - August 7, 2017)
1,000

1,000

1,030

Visant Corporation (6) (10)
School Affinity Stores
LIBOR Plus 4.00% (Floor 1.25%), Current Coupon 5.25%, Secured Debt (Maturity - December 22, 2016)
691

691

683

Vision Solutions, Inc. (6)
Provider of Information Availability Software
LIBOR Plus 4.50% (Floor 1.50%), Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
1,000

990

1,004

Walker & Dunlop Inc. (6) (7) (9)
Real Estate Financial Services
LIBOR Plus 4.50% (Floor 1%), Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
750

743

746

YP Holdings LLC (6)
Online and Offline Advertising Operator
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - June 4, 2018)
700

682

709

Total Non-Control/Non-Affiliate Investments (2) (3) (4) (100% of total Portfolio Investments at fair value)
 
$
66,410

$
66,882


(1)
See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies
(2)
Non-Control/Non-Affiliate investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”) as investments that are neither Control investments nor Affiliate investments.
(3)
Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. As of December 31, 2013, the Company did not own any Control investments
(4)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments. As of December 31, 2013, the Company did not own any Affiliate investments.
(5)
Principal is net of payments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(6)
Index based floating interest rate is subject to contractual minimum interest rates.
(7)
The investment is not a qualifying asset under the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC's total assets.
(8)
Lower middle market investment.
(9)
Investment is under contract to purchase and met trade date accounting criteria as of December 31, 2013. Settlement occurred after December 31, 2013. See Note 2 for summary of Security Transactions.
(10)
Investment serviced by Main Street Partners pursuant to the Servicing Agreement. See Note 2 for summary of Investment Classification.
(11)
Second lien secured debt investment.

See notes to the financial statements.


6



HMS Income Fund, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
 
Note 1. Principal Business and Organization

HMS Income Fund, Inc. (the “Company”) was formed as a Maryland corporation on November 28, 2011 under the General Corporation Law of the State of Maryland. The Company is an externally managed, non-diversified closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s primary investment objective is to generate current income through debt and equity investments. A secondary objective of the Company is to generate long-term capital appreciation through such investments. On December 16, 2011, the Company filed a registration statement on Form N-2, as amended (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register for sale up to $1.5 billion of shares of common stock (the “Offering”). As of September 30, 2014, the Company had raised approximately $205.1 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $3.0 million.

The business of the Company is managed by HMS Adviser LP (the “Adviser”), a Texas limited partnership and affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to an Investment Advisory and Administrative Services Agreement dated May 31, 2012, as amended (the “Advisory Agreement”). On May 31, 2012, the Company and the Adviser also retained Main Street Capital Corporation (“Main Street”), a New York Stock Exchange listed BDC, as the Company’s investment sub-adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), pursuant to an Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement”) to identify, evaluate, negotiate and structure prospective investments, make investment and portfolio management recommendations for approval by the Adviser, monitor the Company’s investment portfolio and provide certain ongoing administrative services to the Adviser including valuation assistance. Main Street obtained a no-action letter from the SEC in November 2013 that permitted it to assign investment sub-adviser duties under the Sub-Advisory Agreement to MSC Adviser I, LLC (“MSC Adviser”), a wholly owned subsidiary of Main Street, and Main Street assigned such duties, and the Sub-Advisory Agreement was amended to reflect such change on December 31, 2013. The term “Sub-Adviser,” as used herein, refers to Main Street until December 31, 2013 and MSC Adviser thereafter. The Adviser and Sub-Adviser are collectively referred to herein as the “Advisers.” Upon the execution of the Sub-Advisory Agreement, Main Street became an affiliate of the Company. The Company has engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of the Adviser, to serve as the dealer manager for the Offering. The Dealer Manager is responsible for marketing the Company’s shares of common stock being offered pursuant to the Offering.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X, the Company is precluded from consolidating its investments in portfolio companies, including those in which it has a controlling interest, unless a portfolio company is another investment company. An exception to this general principle occurs if the Company owns a controlled operating company whose purpose is to provide services directly to the Company such as an investment adviser or transfer agent. None of the investments made by the Company qualify for this exception. Therefore, the Company’s portfolio investments are carried on the balance sheet at fair value, as discussed below, with changes to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the Statement of Operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a “Net Realized Gain (Loss) from Investments.”
  
Use of Estimates

The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amounts and disclosures of assets, liabilities and contingencies as of the date of the financial statements and accompanying notes. The Company evaluates its assumptions and estimates on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Additionally, application of the Company’s accounting policies involves exercising judgments regarding assumptions as to future uncertainties. Actual results may differ from these estimates under different assumptions or conditions. Significant

7



estimates are used in the determination of fair value of investments. See Note 3 - Fair Value Hierarchy for Investments for a description of these estimates.

Reclassifications

The presentation of distributions on the Consolidated Statements of Changes in Net Assets in the prior periods have been reclassified to conform to the presentation for the nine months ended September 30, 2014. Additionally, in Note 3 - Fair Value Hierarchy for Investments and throughout, certain loans that were previously presented as "Private placement investments" are now presented as "Private Loans." The prior periods have been reclassified to conform to this presentation as of September 30, 2014.

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, (a) “Control” investments are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to nominate greater than 50% of the directors or managers of the companies, (b) “Affiliate” investments are defined as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments and (c) “Non-Control/Non-Affiliate” investments are defined as investments that are neither Control investments nor Affiliated investments.
 
Valuation of Portfolio Investments
 
The Company accounts for its portfolio investments at fair value under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that the portfolio investment is to be sold in the principal market to independent market participants. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable, and willing and able to transact. For those investments in which there is an absence of a principal market, the Company incorporates the income approach to estimate the fair value of its portfolio debt investments primarily through the use of a yield to maturity model.

The Company determines in good faith the fair value of its portfolio investments pursuant to a valuation policy in accordance with ASC 820 and valuation policies approved by the Company’s board of directors and in accordance with the 1940 Act. The Company reviews external events, including private mergers, sales and acquisitions involving comparable companies, and considers these events in the valuation process.  The Company’s valuation policy and process are intended to provide a consistent basis for determining the fair value of the portfolio.

The Company’s portfolio strategy calls for it to invest in illiquid securities issued by private companies with annual revenues generally between $10 million and $150 million. These securities are also defined herein as lower middle market (“LMM”) investments. These portfolio investments may be subject to restrictions on resale and will generally have either no established trading market or established markets that are inactive; therefore, market quotations are generally not readily available. Generally, following the origination of a LMM debt investment, the cost basis of the investment, which is the principal less fees received, is considered to be representative of fair value. The fair value of these investments will continue to be equal to the cost basis to the extent that the portfolio company continues to perform in accordance with expectations and there is no indication of a decline in fair value. To the extent that the investment is out-performing or under-performing relative to expectations, the Company determines the fair value primarily using a yield to maturity approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each of these portfolio investments at each reporting date. The Company’s estimate of the expected repayment date of a debt security is generally the legal repayment date of the instrument. The yield to maturity analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. The Company will use the value determined by the yield analysis as the fair value for that security. However, it is the Company’s position that assuming a borrower is out-performing underwriting expectations and because many of these respective investments do not contain pre-payment penalties, the borrower would most likely prepay or refinance the borrowing if the market interest rate, given the borrower’s current credit quality, is lower than the stated loan interest rate. Therefore, the Company does not believe that a market participant would pay a premium for the investment, and because of the Company’s general intent to hold its loans to repayment, the Company generally does not believe that the fair value of the investment should be adjusted in excess of the principal amount. However, adjustments to investment values will be made for declines in fair value due to market changes or borrower specific credit deterioration. As of September 30, 2014 and December 31, 2013, the Company owned

8



seven and two LMM debt investments, respectively, which had a total estimated fair value of $8.9 million and $1.5 million, respectively, which is approximately 2.5% and 2.2% of the Company’s portfolio investments at fair value, respectively.

The Company will generally review external events, including private mergers, sales and acquisitions involving comparable companies and include these events in the valuation process by using an enterprise value waterfall (“Waterfall”) for its LMM equity investments. For two quarters following an acquisition of a LMM equity investment, the investment's fair value is deemed to be at cost, unless there are external events indicative of a change in fair value. After holding an equity investment for two quarters, the Waterfall valuation method will be performed by our Advisers and reviewed by the Company to determine fair value. Under the Waterfall valuation method, the Company estimates the enterprise value of a portfolio company using a combination of market and income approaches or other appropriate valuation methods, such as considering recent transactions in the equity securities of the portfolio company or third-party valuations of the portfolio company, and then performs a waterfall calculation by using the enterprise value over the portfolio company’s securities in order of their preference relative to one another. The Waterfall method assumes the loans and equity securities are sold to the same market participant, which the Company believes is consistent with its Sub-Adviser's past transaction history and standard industry practices. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, private companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for estimating enterprise value. For any one portfolio company, enterprise value is generally described as a range of values from which a single estimate of enterprise value is derived. In estimating the enterprise value of a portfolio company, the Company analyzes various factors including the portfolio company’s historical and projected financial results. The operating results of a portfolio company may include unaudited, projected, budgeted or pro forma financial information and may require adjustments for non-recurring items or to normalize the operating results that may require significant judgment in its determination. In addition, projecting future financial results requires significant judgment regarding future growth assumptions. In evaluating the operating results, the Company also analyzes the impact of exposure to litigation, loss of customers or other contingencies. After determining the appropriate enterprise value, the Company allocates the enterprise value to investments in order of the legal priority of the various components of the portfolio company’s capital structure. In applying the Waterfall valuation method, it is assumed that the loans are paid off at the principal amount in a change in control transaction and are not assumed by the buyer. As of September 30, 2014 and December 31, 2013, the Company had three and zero LMM equity investments, which had estimated fair value of $2.0 million and $0 respectively, which is approximately 0.5% and 0% of the Company's portfolio investments at fair value, respectively. Recent acquisitions of LMM equity investments during the quarters ended September 30, 2014 and June 30, 2014, are valued at cost as of September 30, 2014, which the Company determined to be the best indicator of fair value.

The Company’s portfolio strategy also calls for it to invest in private placement debt securities that are generally larger in size than LMM investments ("Middle Market companies"). Private placement debt securities generally have established markets that are not active; however, market quotations are generally readily available. For these private placement investments, the Company uses observable inputs, such as third party quotes or other independent pricing of identical or similar assets in non-active markets, to determine the fair value of those investments. However, the Company often cannot observe the inputs considered by the third party in determining their quotes. The fair value of these investments on the reporting date is determined by taking the midpoint between the bid-ask spread as of the reporting date obtained from a third party pricing service. The receivable and liability for securities under contract to sell and purchase have been valued at the contract price. As of September 30, 2014 and December 31, 2013, the Company owned 75 and 62 private placement investments, respectively, which had a total estimated fair value of $321.0 million and $62.5 million or approximately 88.3% and 93.4% of the Company’s portfolio investments at fair value, respectively.

The Company categorizes some of its investments in LMM companies and Middle Market companies as Private Loan portfolio investments, which are primarily debt securities issued by companies that are consistent in size with either the LMM companies or companies larger than LMM companies, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. These investments have not been originated by the Adviser or Sub-Adviser. The structure, terms and conditions for these Private Loan investments are typically consistent with the structure, terms and conditions for the investments made in the Company's LMM portfolio. Private Loan investments may include investments which have no established trading market or have established markets that are not active. The Company generally estimates the fair value of Private Loan portfolio investments in debt securities for which it has determined that third-party quotes or other independent pricing are not available or appropriate based on the assumptions that it believes hypothetical market participants would use to value the investment in a current hypothetical sale using the yield to maturity valuation method. As of September 30, 2014 and December 31, 2013, the Company had seven and two Private Loan investments, which had estimated

9



fair value of $31.7 million and $2.9 million respectively, which is approximately 8.7% and 4.3% of the Company's portfolio investments at fair value, respectively.

Due to the inherent uncertainty in the valuation process, the Company’s estimate of fair value may differ materially from the values that would have been used had an active market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the amounts ultimately realized upon sale, liquidation or other exit of these investments to be materially different than the valuations currently assigned. The Company estimates the fair value of each individual investment and records changes in fair value as unrealized appreciation (depreciation) in the Statements of Operations.
 
Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.

Security Transactions

Security transactions are accounted for on the trade date. As of the trade date, the investment is derecognized for security sales and recognized for security purchases. As of September 30, 2014 and December 31, 2013, the Company had eleven and nine investments at contract prices of $44.0 million and $8.8 million, respectively, under contract to purchase which had not yet settled. These investments have been recognized by the Company and are included in the schedule of investments at fair value. The settlement obligations are presented on the balance sheet in the line item “Payable for securities purchased" at the contract price. As of September 30, 2014 and December 31, 2013, the Company had two and zero investments at contract prices of $2.0 million and $0, respectively, under contract to sell which had not yet settled. These investments were derecognized by the Company and are not included in the schedule of investments. The sale trades are presented on the balance sheet in the line item “Receivable for securities sold” at the contract price.

 Interest Income
 
Interest income is recorded on the accrual basis to the extent amounts are expected to be collected. Prepayment penalties received by the Company are recorded as income upon receipt. Accrued interest is evaluated for collectability. When a debt security becomes 90 days or more past due and the Company does not expect the debtor to be able to service all of its debt or other obligations, the debt security will generally be placed on non-accrual status and the Company will cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a debt security’s status significantly improves with respect to the debtor’s ability to service the debt or other obligations, or if a debt security is fully impaired, sold or written off, it will be removed from non-accrual status. As of September 30, 2014 and December 31, 2013, the Company did not have any investments that were more than 90 days past due or on non-accrual status. Additionally, the Company is not aware of any material changes to the creditworthiness of the borrowers underlying its debt investments.

From time to time, the Company may hold debt instruments in its investment portfolio that contain a payment-in-kind (“PIK”) interest provision. If these borrowers elect to pay or are obligated to pay interest under the optional PIK provision, and if deemed collectible in management’s judgment, then the interest would be computed at the contractual rate specified in the investment’s credit agreement, added to the principal balance of the investment, and recorded as interest income. Thus, the actual collection of this interest would be deferred until the time of debt principal repayment. As of September 30, 2014 and December 31, 2013, the Company held three and zero investments which contained a PIK provision. For the three months ended September 30, 2014 and September 30, 2013, the Company recognized $100,000 and $53,000, respectively, of PIK interest income. For the nine months ended September 30, 2014 and September 30, 2013, the Company recognized $144,000 and $112,000 of PIK interest income.
 
Unearned Income – Original Issue Discount / Premium to Par Value

The Company may purchase debt investments at a value different than par value. For purchases at less than par value a discount is recorded, which is accreted into interest income based on the effective interest method over the life of the debt investment. For purchases at greater than par value, a premium is recorded, which is amortized as a reduction to interest income based on the effective interest method over the life of the investment. Upon repayment or sale, any unamortized discount or premium is also amortized as an adjustment to interest income. For the three months ended September 30, 2014 and September 30, 2013, the Company accreted approximately $229,000 and $29,000, respectively, into interest income, which was

10



net of premiums. For the nine months ended September 30, 2014 and September 30, 2013, the Company accreted approximately $642,000 and $50,000, respectively, into interest income, which was net of premiums.
 
Net Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation (Depreciation) from Investments

Generally, net realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the principal amount, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation from investments reflects the net change in the fair value of the investment portfolio and the reclassification of any prior period unrealized appreciation (depreciation) on exited investments to realized gains or losses.

Due from Main Street

Due from Main Street represents principal and interest payments from portfolio investments serviced and received by Main Street on the Company’s behalf.  The amounts due to the Company as of September 30, 2014 and December 31, 2013 were subsequently collected.
 
Deferred Financing Costs
 
Deferred financing costs represent fees and other direct costs incurred in connection with arranging the Company’s borrowings. These costs were incurred in connection with the Company’s revolving credit facilities (see Note 4-Borrowings for a discussion regarding the Company’s Credit Facility, Syndicated Credit Facility and HMS Funding Facility) and have been capitalized. The deferred financing costs are being amortized to interest expense using the straight-line method over the life of the related credit facility, which the Company believes is materially consistent with the effective interest method. For the three months ended September 30, 2014 and September 30, 2013, the Company amortized approximately $141,000 and $25,000 respectively, into interest expense related to deferred financing costs. For the nine months ended September 30, 2014 and September 30, 2013, the Company amortized approximately $265,000 and $65,000 respectively, into interest expense related to deferred financing costs.
 
Organizational and Offering Costs
 
In accordance with the Advisory Agreement and the Sub-Advisory Agreement, the Company will reimburse the Adviser and Sub-Adviser for any organizational expenses and Offering costs that are paid on the Company’s behalf, which consist of, among other costs, expenses of the Company’s organization, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, data processing fees, advertising and sales literature and other Offering-related costs. Pursuant to the terms of the Advisory Agreement and Sub-Advisory Agreement, the Advisers are responsible for the payment of Offering costs to the extent they exceed 1.5% of the aggregate gross proceeds from the Offering.

As of September 30, 2014 and December 31, 2013, the Adviser and Sub-Adviser have incurred approximately $6.1 million and $4.3 million, respectively, of Offering costs on the Company’s behalf. The Company has recorded a due to affiliates liability and capitalized the deferred Offering costs as it is probable that aggregate gross proceeds from the Offering will be at a level that will require the Company to reimburse the Advisers for these costs. As of September 30, 2014, the balance of the due to affiliate liability related to organizational and Offering costs was $3.0 million. On a regular basis, management reviews capital raise projections to evaluate the likelihood of the capital raise reaching a level that would require the Company to reimburse the Advisers for the Offering costs incurred on the Company's behalf. Based on the $6.1 million of Offering costs incurred by the Advisers through September 30, 2014, the Company would have to raise approximately $406.7 million to be obligated to reimburse the Advisers for all of these costs. Commencing with the Company’s initial closing, which occurred on September 17, 2012, and continuing with every closing thereafter, 1.5% of the proceeds of such closings will be amortized as a charge to additional paid in capital and a reduction of deferred Offering costs, until such asset is fully amortized. As of September 30, 2014, approximately $3.1 million has been amortized.  The Company expects to reimburse the Advisers for such costs incurred on its behalf on a monthly basis up to a maximum aggregate amount of 1.5% of the gross Offering proceeds.
 
Payable for Unsettled Trades
 
The Company accepts stockholder’s subscriptions on a weekly basis. For subscriptions received, for which shares of common stock were not issued by September 30, 2014, the amounts of such subscriptions are presented as cash and as a payable for unsettled trades. The shares issued in exchange for the subscriptions were issued and outstanding on October 2, 2014.
 

11



Per share Information
 
Net increase in net assets resulting from operations per share, net investment income per share, and net realized income per share are calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.
 
Concentration of Credit Risk
 
The Company has cash deposited in a financial institution in excess of federally insured levels. Management regularly monitors the financial stability of these financial institutions in an effort to manage the Company’s exposure to any significant credit risk in cash. The Federal Deposit Insurance Corporation generally only insures limited amounts per depositor per insured bank.
 
Fair Value of Financial Instruments
 
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash, accounts receivable from affiliates, interest payable to affiliates, other accrued expenses and liabilities, and notes payable approximate the fair values of such items.
 
Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that have been issued and any that are not yet effective will not have a material impact on its financial statements upon adoption.


12



Note 3 — Fair Value Hierarchy for Investments
 
Fair Value Hierarchy
 
ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
 
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
 
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable for essentially the full term of the investment. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in non-active markets (for example, thinly traded public companies), pricing models whose inputs are observable for substantially the full term of the investment, and pricing models whose inputs are derived principally from or corroborated by, observable market data through correlation or other means for substantially the full term of the investment.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Such information may be the result of consensus pricing information or broker quotes for which sufficient observable inputs were not available.

As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such investments categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). The Company conducts reviews of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain investments.
 
The Company’s investment portfolio as of September 30, 2014 was comprised of debt securities and equity investments. The Company's investment portfolio as of December 31, 2013 was comprised exclusively of debt securities. The fair value determination for these investments primarily consisted of both observable (Level 2) and unobservable (Level 3) inputs.

The fair value determination of the Level 3 securities required one or more of the following unobservable inputs:
 
Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
Current and projected financial condition of the portfolio company;
Current and projected ability of the portfolio company to service its debt obligations;
Type and amount of collateral, if any, underlying the investment;
Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/EBITDA ratio) applicable to the investment;
Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
Pending debt or capital restructuring of the portfolio company;
Projected operating results of the portfolio company;
Current information regarding any offers to purchase the investment;
Current ability of the portfolio company to raise any additional financing as needed;
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
Qualitative assessment of key management;
Contractual rights, obligations or restrictions associated with the investment;

13



Third party pricing for securities with limited observability of inputs determining the pricing; and
Other factors deemed relevant.

The following table presents fair value measurements of investments, by security class, as of September 30, 2014 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investment
$

 
$

 
$
309,109

 
$
309,109

Second lien secured debt investment

 

 
52,595

 
52,595

LMM equity investment

 

 
1,950

 
1,950

Total
$

 
$

 
$
363,654

 
$
363,654

 
The following table presents fair value measurements of investments, by security class, as of at December 31, 2013 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investment
$

 
$
4,728

 
$
59,686

 
$
64,414

Second lien secured debt investment

 

 
2,468

 
2,468

Total
$

 
$
4,728

 
$
62,154

 
$
66,882

 
The following table presents fair value measurements of investments segregated by investment type as of September 30, 2014 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$

 
$

 
$
10,882

 
$
10,882

Private Loan investments

 

 
31,747

 
31,747

Private placement investments

 

 
321,025

 
321,025

Total
$

 
$

 
$
363,654

 
$
363,654

 
The following table presents fair value measurements of investments segregated by investment types as of December 31, 2013 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$

 
$

 
$
1,500

 
$
1,500

Private Loan investments

 

 
2,906

 
2,906

Private placement investments

 
4,728

 
57,748

 
62,476

Total
$

 
$
4,728

 
$
62,154

 
$
66,882


The Company’s investment portfolio as of September 30, 2014 consisted of debt securities and equity investments. The Company's investment portfolio as of December 31, 2013 was comprised exclusively of debt securities. The debt securities owned as of September 30, 2014 and December 31, 2013 include LMM investments, Private Loans, and private placement investments. The significant unobservable input utilized in the determination of the fair value of the LMM portfolio investments is the risk adjusted discount rate utilized in the discounted cash flow approach. The discount rate is based on the underlying credit quality of the borrower as of September 30, 2014 and December 31, 2013. The use of a higher discount rate would result in a lower fair value, and conversely the use of a lower discount rate would result in a higher fair value. Given that the loans generally have no prepayment penalties, assuming that the loan is outperforming underwriting and market interest rates have declined, the lower interest rate would result in a higher fair value of the investment; however, due to the lack of prepayment penalties, the Company does not believe that any significant value in excess of the par value would ever be realized. Therefore, the Company will not value the LMM loans and Private Loans at a value in excess of the principal amount due. Generally, following the origination of these debt investments, the investments are carried at cost, which is principal less

14



unamortized fees. The fair value of these investments may continue to be equal to the cost basis to the extent that the investment company continues to perform in accordance with expectations and there is no indication of a change in fair value.

The fair value determination for the private placement investments was generally based upon quotes obtained through a third party pricing service. If available and determined to be reliable, the Company uses the third party quotes, to estimate the fair value of its private placement investments owned. The inputs for determining the third party quotes are often unobservable to the Company. These valuations consist of a combination of observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, observable inputs in the non-active market for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. The third party quotes are reviewed and discussed with the Company's Sub-Adviser. As a result, a portion of the Company's private placement investments was categorized as Level 2 as of December 31, 2013 and none of the Company's private placement investments was categorized as Level 2 as of September 30, 2014. For the private placement investments for which sufficient observable inputs were not available to determine the fair value of the investments, the Company categorized such investments as Level 3 as of September 30, 2014 and December 31, 2013.

As of September 30, 2014, the Company had three equity LMM investments that were made during the nine months ended September 30, 2014. For two quarters following an acquisition of a LMM equity investment, the investment's fair value is deemed to be at cost, unless there are external events indicative of a change in fair value. After holding an equity investment for two quarters, the Waterfall valuation method will be performed by our Advisers and reviewed by the Company to determine fair value. Note 2 - Basis of Presentation and Summary of Significant Accounting Principles further describes the procedures and considerations under the Waterfall method. As of September 30, 2014 and December 31, 2013, the Company had three and zero LMM equity investments, which had estimated fair value of $2.0 million and zero respectively. Given the recent acquisitions of the LMM equity investments during the quarter ended September 30, 2014 and the quarter ended June 30, 2014, the investments are valued as of September 30, 2014, at cost, which the Company determined to be the best indicator of fair value.

The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of September 30, 2014 (in thousands):
 
 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Input
 
Range
 
Weighted
Average
LMM equity investments
$
1,950

 
Market Approach
 
EBITDA Multiples for
Recent Transactions (1)
 
4.3x - 8.2x
 
5.3x
 
 
 
 
 
 
 
 
 
 
LMM debt portfolio investments
$
8,932

 
Discounted Cash Flows
 
Expected Principal Recovery
 
N/A
 
100.0%
 
 

 
 
 
Risk Adjusted Discount Rate
 
8% - 18%
 
11.5%
 
 
 
 
 
 
 
 
 
 
Private Loan investments
$
11,415

 
Market Approach
 
Third Party Quotes
 
100% - 102%
 
100.7%
 
 
 
 
 
 
 
 
 
 
Private Loan investments
$
20,332

 
Market Approach
 
Recent Transactions
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
Private placement investments
$
321,025

 
Market Approach
 
Third Party Quotes
 
90% - 103%
 
99.0%
 
$
363,654

 
 
 
 
 
 
 
 
(1) EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances related to each investment.






15



The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of December 31, 2013 (in thousands):

 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Input
 
Range
 
Weighted
Average
LMM debt portfolio investments
$
1,500

 
Discounted Cash Flows
 
Expected Principal Recovery
 
N/A
 
100.0%
 
 

 
 
 
Risk Adjusted Discount Factor
 
12% - 18%
 
15.0%
 
 
 
 
 
 
 
 
 
 
Private Loan investments
$
2,906

 
Market Approach
 
Third Party Quotes
 
99% - 100%
 
99.8%
 
 
 
 
 
 
 
 
 
 
Private placement investments
$
57,748

 
Market Approach
 
Third Party Quotes
 
88% - 103%
 
99.7%
 
$
62,154

 
 
 
 
 
 
 
 

The following table provides a summary of changes in fair value of the Company’s Level 3 portfolio investments for the nine months ended September 30, 2014 (in thousands):

Type of Investment
January 1, 2014 Fair Value
 
Transfers Into Level 3 Hierarchy
 
Payment-in-Kind Interest Accrual
 
New
Investments
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation) (1)
 
Net Realized Gain (Loss)
 
September 30, 2014 Fair Value
LMM Equity
$

 
$

 
$

 
$
1,950

 
$

 
$

 
$

 
$
1,950

LMM Debt
1,500

 

 

 
7,453

 
(40
)
 
19

 

 
8,932

Private Loans
2,906

 

 
144

 
28,582

 
(20
)
 
135

 

 
31,747

Private Placement
57,748

 
4,728

 

 
331,722

 
(71,608
)
 
(1,781
)
 
216

 
321,025

Total
$
62,154

 
$
4,728

 
$
144

 
$
369,707

 
$
(71,668
)
 
$
(1,627
)
 
$
216

 
$
363,654


(1) Column includes changes to investments due to the net accretion of discounts/premiums and amortization of fees.

For the nine months ended September 30, 2014, there were transfers of $4.7 million between Level 2 and Level 3 portfolio investments. The transfers represent private placement investments which are valued based upon third party quotes with limited activity and observability of inputs. In prior periods, these were classified as Level 2 fair value measurements. As of September 30, 2014, the Company obtained information regarding the quotes, including the number of quotes used to value these investments. Given the lack of observable inputs of the third party quotes, these investments were determined to be Level 3 fair value measurements as of September 30, 2014. There were no transfers into Level 3 during the nine months ended September 30, 2013.

16




Portfolio Investment Composition
 
The composition of the Company’s investments as of September 30, 2014, at cost and fair value, was as follows (in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
310,285

 
85.1
%
 
$
309,109

 
85.0
%
Second lien secured debt investments
52,574

 
14.4
%
 
52,595

 
14.5
%
LMM equity investments
1,950

 
0.5
%
 
1,950

 
0.5
%
Total
$
364,809

 
100.0
%
 
$
363,654

 
100.0
%
  
The composition of the Company’s investments as of December 31, 2013, at cost and fair value, was as follows (in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
63,945

 
96.3
%
 
$
64,414

 
96.3
%
Second lien secured debt investments
2,465

 
3.7
%
 
2,468

 
3.7
%
Total
$
66,410

 
100.0
%
 
$
66,882

 
100.0
%
 
The composition of the Company’s investments by geographic region of the United States as of September 30, 2014, at cost and fair value, is set forth in the table below (in thousands).
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
91,995

 
25.2
%
 
$
91,640

 
25.2
%
Southeast
71,656

 
19.6
%
 
71,724

 
19.7
%
West
67,183

 
18.5
%
 
66,727

 
18.3
%
Southwest
66,190

 
18.1
%
 
65,677

 
18.1
%
Midwest
52,919

 
14.5
%
 
53,152

 
14.6
%
Non-United States
14,866

 
4.1
%
 
14,734

 
4.1
%
Total
$
364,809

 
100.0
%
 
$
363,654

 
100.0
%
 
The composition of the Company’s investments by geographic region of the United States as of December 31, 2013, at cost and fair value, is set forth in the table below (in thousands).
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
20,459


30.8
%

$
20,611


30.8
%
Southwest
9,545


14.4
%

9,645

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