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 March 31, 2015
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 44,110,316 shares of common stock outstanding as of April 30, 2015.





TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Changes in Net Assets
 
Condensed Consolidated Statements of Cash Flows
 
Condensed Consolidated Schedules of Investments
 
Notes to the Condensed Consolidated Financial Statements
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.    Condensed Consolidated Financial Statements

HMS Income Fund, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Portfolio investments at fair value:
 
 
 
Non-Control/Non-Affiliate investments (amortized cost: $646,600 and $465,663 as of March 31, 2015 and December 31, 2014, respectively)
$
635,767

 
$
451,917

Affiliate investments (amortized cost: $8,639 and $7,420 as of March 31, 2015 and December 31, 2014, respectively)
9,572

 
7,424

Control investments (amortized cost: $14,527 and $14,521 as of March 31, 2015 and December 31, 2014, respectively)
14,527

 
14,521

Total portfolio investments (amortized cost: $669,766 and $487,604 as of March 31, 2015 and December 31, 2014, respectively)
659,866

 
473,862

 
 
 
 
Cash and cash equivalents
23,909

 
19,868

Interest receivable
6,006

 
4,328

Receivable for securities sold
1,000

 
3,014

Prepaid and other assets
1,703

 
338

Deferred offering costs (net of accumulated amortization of $5,904 and $4,428 as of March 31, 2015 and December 31, 2014, respectively)
1,467

 
2,388

Deferred financing costs (net of accumulated amortization of $793 and $582 as of March 31, 2015 and December 31, 2014, respectively)
2,967

 
2,426

Total assets
$
696,918

 
$
506,224

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and other liabilities
$
306

 
$
246

Payable for unsettled trades
4,450

 
6,249

Stockholder distributions payable
2,353

 
1,760

Due to affiliates
4,470

 
4,530

Payable for securities purchased
68,859

 
50,512

Notes payable
264,000

 
182,864

Total liabilities
344,438

 
246,161

 
 
 
 
Commitments and Contingencies (Note 11)
 
 
 
 
 
 
 
NET ASSETS
 

 
 

Common stock, $.001 par value; 150,000,000 shares authorized, 41,153,325 and 30,967,120 issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
41

 
31

Additional paid in capital
362,254

 
273,774

Accumulated net investment income, net of stockholder distributions
87

 

Net unrealized appreciation (depreciation)
(9,902
)
 
(13,742
)
Total net assets
352,480

 
260,063

 
 
 
 
Total liabilities and net assets
$
696,918

 
$
506,224

 
 
 
 
Net asset value per share
$
8.57

 
$
8.40


See notes to the condensed consolidated financial statements.

1



HMS Income Fund, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited) 
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
INVESTMENT INCOME:
 

 
 

Interest, fee and dividend income:
 

 
 

Non-Control/Non-Affiliate investments
$
11,358

 
$
1,661

Affiliate investments
199

 

Control investments
236

 

Total interest, fee and dividend income
11,793

 
1,661

EXPENSES:
 

 
 

Interest expense
1,975

 
200

Base management and incentive fees
3,365

 
606

Administrative services expenses
437

 
329

Professional fees
203

 
210

Insurance
49

 
46

Other general and administrative
232

 
78

Expenses before fee and expense waivers
6,261

 
1,469

Waiver of management and incentive fees
(358
)
 
(303
)
Waiver of administrative services expenses
(437
)
 
(329
)
Total expenses, net of fee and expense waivers
5,466

 
837

 
 
 
 
NET INVESTMENT INCOME
6,327

 
824

 
 
 
 
NET REALIZED GAIN FROM INVESTMENTS
 

 
 

Non-Control/Non-Affiliate investments
20

 
69

Affiliate investments

 

Control investments

 

Total realized gain from investments
20

 
69

 
 
 
 
NET REALIZED INCOME
6,347

 
893

 
 
 
 
NET UNREALIZED APPRECIATION (DEPRECIATION)
 

 
 

Non-Control/Non-Affiliate investments
2,912

 
228

Affiliate investments
928

 

Control investments

 

Total net unrealized appreciation (depreciation)
3,840

 
228

 
 
 
 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
10,187

 
$
1,121

NET INVESTMENT INCOME PER SHARE – BASIC AND DILUTED
$
0.17

 
$
0.11

NET REALIZED INCOME PER SHARE
$
0.18

 
$
0.12

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE – BASIC AND DILUTED
$
0.28

 
$
0.15

DISTRIBUTIONS DECLARED PER SHARE
$
0.17

 
$
0.17

WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
36,265,941

 
7,388,639


See notes to the condensed consolidated financial statements.

2



HMS Income Fund, Inc.
Condensed Consolidated Statements of Change in Net Assets
For the Three Months Ended March 31, 2015 and March 31, 2014
(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, 2014
30,967,120

 
$
31

 
$
273,774

 
$

 
$

 
$

 
$
(13,742
)
 
$
260,063

Issuance of common stock
10,220,047

 
10

 
98,902

 

 

 

 

 
98,912

Redemption of common stock
(33,842
)
 

 
(289
)
 

 

 

 

 
(289
)
Selling commissions and dealer manager fees

 

 
(8,657
)
 

 

 

 

 
(8,657
)
Offering costs

 

 
(1,476
)
 

 

 

 

 
(1,476
)
Stockholder distributions declared

 

 

 
(6,240
)
 
(20
)
 

 

 
(6,260
)
Net increase in net assets resulting from operations

 

 

 
6,327

 
20

 

 
3,840

 
10,187

Balance at March 31, 2015
41,153,325

 
$
41

 
$
362,254

 
$
87

 
$

 
$

 
$
(9,902
)
 
$
352,480



 
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, 2013
5,396,967

 
$
5

 
$
47,600

 
$

 
$

 
$

 
$
472

 
$
48,077

Issuance of common stock
3,977,411

 
4

 
39,318

 

 

 

 

 
39,322

Redemption of common stock
(395
)
 

 
(15
)
 

 

 

 

 
(15
)
Selling commissions and dealer manager fees

 

 
(3,559
)
 

 

 

 

 
(3,559
)
Offering costs

 

 
(590
)
 

 

 

 

 
(590
)
Stockholder distributions declared

 

 

 
(824
)
 
(69
)
 
(383
)
 

 
(1,276
)
Net increase in net assets resulting from operations

 

 

 
824

 
69

 

 
228

 
1,121

Balance at March 31, 2014
9,373,983

 
$
9

 
$
82,754

 
$

 
$

 
$
(383
)
 
$
700

 
$
83,080


See notes to the condensed consolidated financial statements.

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

3



HMS Income Fund, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
Three Months Ended 
 March 31, 2015
 
Three Months Ended 
 March 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net increase in net assets resulting from operations
$
10,187

 
$
1,121

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
24,588

 
12,942

Investments in portfolio companies
(187,231
)
 
(49,359
)
Net unrealized depreciation (appreciation) of portfolio investments
(3,840
)
 
(228
)
Net realized (gain) on sale of portfolio investments
(20
)
 
(69
)
Amortization of deferred financing costs
211

 
41

Accretion of unearned income
(489
)
 
(215
)
Net payment-in-kind interest accrual
(194
)
 

Changes in other assets and liabilities:
 
 
 

Interest receivable
(1,678
)
 
(440
)
Prepaid and other assets
178

 
23

Due to affiliates
2,355

 
917

Accounts payable and other liabilities
60

 
19

Payable for unsettled trades
(1,799
)
 
(203
)
Net cash used in operating activities
(157,672
)
 
(35,451
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of common stock
94,552

 
38,313

Redemption of common shares
(289
)
 
(15
)
Payment of selling commissions and dealer manager fees
(8,675
)
 
(3,412
)
Payment of offering costs
(1,476
)
 
(591
)
Payment of stockholder distributions
(2,783
)
 
(631
)
Repayments on notes payable
(36,864
)
 
(40,000
)
Proceeds from notes payable
118,000

 
53,500

Payment of deferred financing costs
(752
)
 
(520
)
Net cash provided by financing activities
161,713

 
46,644

 
 
 
 
Net increase in cash and cash equivalents
4,041

 
11,193

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
19,868

 
6,356

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
$
23,909

 
$
17,549

 
See notes to the condensed consolidated financial statements.


4



HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of March 31, 2015
(dollars in thousands)
(Unaudited)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Principal (7)

Cost (7)

Fair Value

 
 
 
 
 
 
Control Investments (6)
GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - December 19, 2019)
$
8,250

$
8,092

$
8,092

 
 
Member Units (2,896 shares)
 
6,435

6,435

 
 
 
 
14,527

14,527

 
 
 
 
 
 
Subtotal Control Investments (6) (2% of total investments at fair value)
 
 
$
14,527

$
14,527

 
Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
11.00% Secured Debt (Maturity Date -November 7, 2019)
$
2,940

$
2,810

$
2,810

 
 
Member Units (46 shares)
 
300

300

 
 
Warrants (10 equivalent shares)
 
65

65

 
 
 
 
3,175

3,175

Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity Date -August 15, 2019)
2,500

2,427

2,500

 
 
Member Units (1,468 shares)
 
680

1,540

 
 
 
 
3,107

4,040

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity Date - October 30, 2019)
1,500

1,472

1,472

 
 
Member Units (798 shares)
 
885

885

 
 
 
 
2,357

2,357

 
 
 
 
 
 
Subtotal Affiliate Investments (4) (2% of total investments at fair value)
 
 
$
8,639

$
9,572

 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
Ability Network Inc. (8)
Health Care Information Technology
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 14, 2021)
$
4,963

$
4,913

$
4,978

Allflex Holdings III Inc. (8) (12)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
12,422

12,514

12,468

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
10.00% Secured Debt, (Maturity - January 31, 2020)
610

609

609

AMF Bowling Centers, Inc. (8) (12)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - September 18, 2021)
10,945

10,851

10,899

Aptean, Inc. (8)
Enterprise Application Software Provider
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
4,449

4,448

4,371

Arcus Hunting, LLC (8) (11)
Deer Lures, Attractants and Scent Elimination Products

LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - November 13, 2019)
4,547

4,425

4,425

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)
4,438

4,315

4,260

Berry Aviation, Inc. (11)
Charter Airline Services
12.00% Current / 1.75% PIK Secured Debt (Maturity Date - January 30, 2020) (14)
1,500

1,475

1,475

 
 
Common Stock (138 shares)
 
100

100

 
 
 
 
1,575

1,575

Bioventus, LLC (8) (11)
Production of Orthopedic Healing Products
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - April, 10, 2020) (14)
7,000

6,872

7,000

Blackbrush Oil and Gas LP (8)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - July 30, 2021) (14)
12,085

11,614

9,819

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)
1,405

1,405

1,366

Blue Bird Body Company (8)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - June 26, 2020)
5,925

5,846

5,932

Bluestem Brands, Inc. (8)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 6, 2020)
7,500

7,216

7,523

Brasa Holdings, Inc. (8)
Upscale Full Service Restaurants
LIBOR Plus 9.50% (Floor 1.5%), Current Coupon 11.00%, Secured Debt (Maturity - January 20, 2020) (14)
10,000

10,099

10,025

Brightwood Capital Fund III, LP (9) (15)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted .57%) (16)
1,500

1,575

1,575

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

4,046

4,140

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity Date - October10, 2019)
1,350

1,313

1,313

 
 
Member Units (16,339 shares)
 
163

163

 
 
 
 
1,476

1,476

CJ Holding Company (8) (12)
Oil and Gas Equipment and Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 24, 2020)
6,000

5,160

5,383

California Healthcare Medical Billing, Inc. (10) (13)
Outsourced Billing & Revenue Cycle Management
9.00% Secured Debt, (Maturity - October 17, 2016)
742

737

742

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)
1,374

1,374

1,380

Cengage Learning Acquisitions, Inc. (8)
Provider of Educational Print and Digital Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - March 31, 2020)
9,950

9,925

10,004

Charlotte Russe, Inc. (8) (12)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019)
10,700

10,611

10,471

Clarius BIGS, LLC (11)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
3,297

3,039

1,385

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
1,093

1,001

459

 
 
 
 
4,040

1,844

Compuware Corporation (8) (12)
Provider of Software and Supporting Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - December 15, 2019)
14,813

14,393

14,498

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
9,500

9,500

9,548

CRGT, Inc. (8)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2020)
11,925

11,677

11,716

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
2,280

2,270

2,258

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
10.50% Secured Debt (Maturity - May 30, 2019)
1,245

1,223

1,223

 
 
Member Units (717 units)
 
670

670

 
 
 
 
1,893

1,893

Digital River, Inc. (8)
Provider of Outsourced e-Commerce
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - February 12, 2021)
13,000

12,810

12,903

ECP-PF Holdings Group, Inc. (8) (11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 26, 2019)
1,875

1,858

1,858

East West Copolymer & Rubber, LLC (10) (13)
Manufacuterer of Synthetic Rubbers
12.00% Secured Debt (Maturity Date - October 17, 2019)
2,400

2,339

2,339

 
 
Warrants (455,820 equivalent shares)
 
10

10

 
 
 
 
2,349

2,349

Energy & Exploration Partners, LLC (8) (12)
Oil & Gas Exploration and Production
LIBOR plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - January 22, 2019)
9,950

8,458

8,273

Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft) (8) (9) (12)
Technology-Based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - April 28, 2022) (14)
10,902

10,342

10,308

Flavors Holdings, Inc. (8)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - April 3, 2020)
8,775

8,420

8,523

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)
3,370

3,360

3,368

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - July 10, 2020)
9,950

9,860

9,851

Guerdon Modular Holdings, Inc. (10) (13)
Mutli-Family and Commercial Modular Construction Company
11.00% Secured Debt (Maturity - August 13, 2019)
2,800

2,748

2,754

 
 
Common Stock (42,644 shares)
 
600

600

 
 
 
 
3,348

3,354

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Bond (Maturity - April 15, 2019)
12,000

11,013

10,470

Halcon Resources Corporation (9)
Oil & Gas Exploration & Production
9.75% Unsecured Bond (Maturity - July 15, 2020) (17)
3,000

2,588

2,115

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - August 5, 2019)
5,850

5,744

5,865

ICON Health and Fitness, Inc.
Producer of Fitness Products
11.88% Secured Bond (Maturity - October 15, 2016)
12,337

12,190

12,183

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)
5,179

5,160

4,791

Indivior Finance, LLC (8)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
9,875

9,279

9,381

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Bond (Maturity - November 30, 2020)
10,749

10,528

10,024

iPayment, Inc. (8) (12)
Provider of Merchant Acquisition
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity - May 8, 2017)
9,115

8,945

8,922

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
5,891

5,748

5,611

IronGate Energy Services, LLC
Oil and Gas Services
11.00% Secured Bond (Maturity - July 1, 2018)
5,825

5,829

3,845

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)
7,287

7,294

7,287

Joerns Healthcare, LLC (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
4,445

4,423

4,410

John Deere Landscapes, LLC (8) (11)
Distributor of Landscaping Supplies
LIBOR Plus 4.00% (Floor 1.00%), Current Coupon 5.00%, Secured Debt (Maturity - December 23, 2019)
7,940

7,602

7,602

Kadmon Pharmaceuticals, LLC (11)
Biopharmaceutical Company with a Hepatology Focus
9.75% Secured Debt (Maturity - December 17, 2016)
5,000

5,000

5,000

Kellermeyer Bergensons Services, LLC (8) (12)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - April 29, 2022) (14)
11,700

11,566

11,700

Keypoint Government Solutions, Inc. (8)
Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - November 13, 2017)
2,237

2,226

2,226

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - August 7, 2019)
11,709

10,559

10,694

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)
5,349

5,332

5,296

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

498

495

 
 
 
 
5,830

5,791

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)
1,384

1,384

1,388

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)
9,404

9,322

9,334

Milk Specialties Company (8)
Processor of Nutrition Products
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - November 9, 2018)
6,996

6,943

7,048

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
10.00% Current / 2.00% PIK Secured Debt (Maturity Date - September 19, 2019) (14)
1,206

1,194

1,194

Mood Media Corporation (8) (9) (12)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
12,409

12,385

12,331

New Media Holdings II LLC (8) (9) (12)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 4, 2020)
12,469

12,309

12,391

Nice-Pak Products, Inc. (8)
Pre-Moistened Wipes Manufacturer
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.50%, Secured Debt (Maturity - June 18, 2015)
7,307

7,292

7,197

North American Lifting Holdings, Inc. (8)
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - November 27, 2020)
997

916

968

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)
12,423

12,411

12,291

Novitex Acquisition, LLC (8)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.5%, Secured Debt (Maturity - July 7, 2020)
8,955

8,807

8,530

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)
7,733

7,693

7,695

Paris Presents, Inc. (8)
Branded Cosmetic and Bath Accessories
Prime Plus 7.25% (Floor 3.25%), Current Coupon 10.50%, Secured Debt (Maturity - December 31, 2021) (14)
7,500

7,352

7,500

Parq Holdings, LP (8) (9)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 17, 2020)
6,226

6,084

6,289

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
6,885

5,573

3,787

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 1.00%), Current Coupon 7.5%, Secured Debt (Maturity - February 28, 2020)
9,916

9,888

9,953

Pike Corporation (8)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 22, 2022) (14)
10,000

9,754

9,950

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)
5,890

5,880

5,875

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - November 1, 2018)
4,950

4,973

4,554

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
2,316

2,329

1,876

Ravago Holdings America, Inc. (8)
Polymers Distributor
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
5,940

5,978

5,970

RCHP, Inc. (8)
Region Non-Urban Hospital Owner/Operator
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - October 23, 2019) (14)
6,500

6,455

6,589

Recorded Books, Inc. (8)
Audiobook and Digital Content Publisher
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - January 31, 2020)
4,275

4,259

4,232

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)
5,083

5,083

5,109

 
 
 
 
8,776

8,812

Renaissance Learning, Inc. (8) (12)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
12,950

12,455

12,626

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
3,980

3,869

3,017

RLJ Entertainment, Inc. (8) (11)
Movie and TV Programming Licensee and Distributor
LIBOR Plus 8.75% (Floor .25%), Current Coupon 9.00%, Secured Debt (Maturity - September 11, 2019)
9,825

9,563

9,563

Sage Automotive Interiors, Inc (8)
Automotive Textiles Manufacturer
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 8, 2021) (14)
5,000

4,952

5,000

SCE Partners, LLC (8) (11)
Hotel & Casino Operator
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
995

987

1,000

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Bond (Maturity - October 31, 2020) (14)
9,710

9,244

9,030

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)
3,735

3,560

3,324

Stardust Finance Holdings, Inc. (8)
Manufacturer of Diversified Building Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - March 13, 2022)
2,500

2,438

2,500

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - March 13, 2023) (14)
5,000

4,751

4,769

 
 
 
 
7,189

7,269

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)
5,925

5,873

5,895

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
2,704

2,693

2,623

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

3,020

3,000

Templar Energy, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 25, 2020) (14)
3,000

2,980

2,054

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)
1,028

1,034

947

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)
988

980

976

Therakos, Inc. (8)
Immune System Disease Treatment
LIBOR Plus 5.75% (Floor 1.25%), Current Coupon 7.00%, Secured Debt (Maturity - December 27, 2017)
1,450

1,431

1,443

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 30, 2020)
5,000

4,532

4,644

Travel Leaders Group, LLC (8)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
8,320

8,291

8,340

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
7,927

7,906

7,907

Vantage Oncology, LLC
Outpatient Radiation Oncology Treatment Centers
9.50% Secured Bond (Maturity - June 15, 2017)
12,507

12,092

12,069

Vision Solutions, Inc. (8)
Provider of Information Availability Software
LIBOR Plus 4.50% (Floor 1.50%), Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
1,358

1,361

1,355

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

870

871

 
 
 
 
2,231

2,226

Volusion, LLC (10) (13)
Provider of Online Software-as-a-Service eCommerce Solutions
10.50% Secured Debt (Maturity Date - January 24, 2020)
7,500

6,784

6,784

 
 
Member Units (2,090,001 shares)
 
6,000

6,000

 
 
Warrants (407,408 equivalent shares)
 
600

600

 
 
 
 
13,384

13,384

Worley Claims Services, LLC (8) (11)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 31, 2020)
6,484

6,423

6,516

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)
2,735

2,746

2,778

 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (96% of total portfolio investments at fair value)
 
$
646,600

$
635,767

 
 
 
 
 
 
Total Investments
 
 
 
$
669,766

$
659,866

(1) All investments are Middle Market 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.
(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. As of March 31, 2015, approximately 8.7% of the Company's investments were considered non-qualifying.
(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 March 31, 2015. Settlement occurred or is scheduled to occur after March 31, 2015. 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.
(15) Investment is classified as an Other Portfolio investment.
(16) Income producing through dividends or distributions.
(17) Unsecured debt investment.
(18) Investment is on non-accrual status as of March 31, 2015.

See notes to the condensed consolidated financial statements.


5



HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of December 31, 2014
(dollars in thousands)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Principal (7)
Cost (7)
Fair Value
 
 
 
 
 
 
Control Investments (6)
GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - December 19, 2019)
$
8,250

$
8,086

$
8,086

 
 
Member Units (2,896 shares)
 
6,435

6,435

 
 
 
 
14,521

14,521

 
 
 
 
 
 
Subtotal Control Investments (6) (3% of total investments at fair value)
 
 
$
14,521

$
14,521

 
Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
11.00% Secured Debt (Maturity Date -November 7, 2019)
$
1,700

$
1,596

$
1,596

 
 
Member Units (46 shares)
 
300

300

 
 
Warrants (10 equivalent shares)
 
65

65

 
 
 
 
1,961

1,961

Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity Date -August 15, 2019)
2,500

2,423

2,427

 
 
Common Stock (1,468 shares)
 
680

680

 
 
 
 
3,103

3,107

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity Date - October 30, 2019)
1,500

1,471

1,471

 
 
Member Units (798 shares)
 
885

885

 
 
 
 
2,356

2,356

 
 
 
 
 
 
Subtotal Affiliate Investments (4) (2% of total investments at fair value)
 
 
$
7,420

$
7,424

 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
Ability Network Inc. (8)
Health Care Information Technology
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 14, 2021)
$
4,975

$
4,923

$
4,888

Accuvant Finance LLC (8)
Cyber Security Value Added Reseller
Prime Plus 3.75% (Floor 3.25%), Current Coupon 7%, Secured Debt (Maturity - October 22, 2020)
2,861

2,834

2,853

Allflex Holdings III Inc. (8)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
8,422

8,529

8,264

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
10.00% Secured Debt, (Maturity - January 31, 2020)
871

870

870

AMF Bowling Centers, Inc. (8)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - September 18, 2021)
7,980

7,915

7,860

Aptean, Inc. (8)
Enterprise Application Software Provider
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - February 26, 2020)
4,460

4,460

4,334

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)
919

899

910

Bioventus, LLC (8) (11)
Production of Orthopedic Healing Products
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - April, 10, 2020) (14)
7,000

6,866

6,983

Blackbrush Oil and Gas LP (8) (12)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - July 30, 2021) (14)
10,085

9,966

8,370

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)
1,424

1,424

1,403

Blue Bird Body Company (8)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - June 26, 2020)
6,000

5,917

5,970

Bluestem Brands, Inc. (8)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 6, 2020)
7,500

7,206

7,237

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

9,900

Brightwood Capital Fund III, LP (9) (15) (16)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted .57%) (16)
 
1,575

1,575

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

4,047

4,090

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity Date - October10, 2019)
1,350

1,311

1,311

 
 
Member Units (16,339 shares)
 
163

163

 
 
 
 
1,474

1,474

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

745

750

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)
1,446

1,446

1,435

Cengage Learning Acquisitions, Inc. (8) (12)
Provider of Educational Print and Digital Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - March 31, 2020)
9,975

9,975

9,896

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)
5,472

5,472

5,345

Clarius BIGS, LLC (11)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
3,297

3,039

1,385

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
1,093

1,001

459

 
 
 
 
4,040

1,844

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
5,000

5,000

5,050

CRGT, Inc. (8) (12)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2020)
10,000

9,800

9,850

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
2,331

2,318

2,308

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
10.50% Secured Debt (Maturity - May 30, 2019)
1,245

1,222

1,222

 
 
Member Units (717 units)
 
670

670

 
 
 
 
1,892

1,892

ECP-PF: CT Operations, Inc. (11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 26, 2019)
1,875

1,857

1,857

East West Copolymer & Rubber, LLC (10) (13)
Manufacuterer of Synthetic Rubbers
12.00% Secured Debt (Maturity Date - October 17, 2019)
2,400

2,336

2,336

 
 
Warrants (455,820 equivalent shares)
 
10

10

 
 
 
 
2,346

2,346

Energy & Exploration Partners, LLC (8) (12)
Oil & Gas Exploration and Production
LIBOR plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - January 22, 2019)
7,975

7,033

5,722

e-Rewards, Inc. (8)
Provider of Digital Data Collection
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - October 29, 2018)
5,869

5,855

5,810

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)
2,769

2,762

2,769

Flavors Holdings, Inc. (8) (12)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - April 3, 2020)
8,888

8,520

8,510

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)
3,481

3,470

3,465

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - July 10, 2020)
9,975

9,882

9,825

Guerdon Modular Holdings, Inc. (10) (13)
Mutli-Family and Commercial Modular Construction Company
11.00% Secured Debt (Maturity - August 13, 2019)
2,800

2,745

2,752

 
 
Common Stock (42,644 shares)
 
600

600

 
 
 
 
3,345

3,352

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

6,723

6,020

Halcon Resources Corporation (9)
Oil & Gas Exploration & Production
9.75% Unsecured Bond (Maturity - July 15, 2020) (17)
3,000

2,574

2,250

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity Date - August 5, 2019)
5,925

5,813

5,851

ICON Health and Fitness, Inc.
Producer of Fitness Products
11.88% Secured Bond (Maturity - October 15, 2016)
6,885

6,866

6,472

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)
5,336

5,314

4,936

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

7,926

7,661

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
5,906

5,760

5,492

IronGate Energy Services, LLC
Oil and Gas Services
11.00% Secured Bond (Maturity - July 1, 2018)
5,825

5,829

3,903

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)
8,000

8,007

8,000

John Deere Landscapes, LLC (8) (11)
Distributor of Landscaping Supplies
LIBOR Plus 4.00% (Floor 1.00%), Current Coupon 5.00%, Secured Debt (Maturity - December 23, 2019)
7,960

7,607

7,607

Kellermeyer Bergensons Services, LLC (8)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - April 29, 2022) (14)
7,200

7,059

7,164

Keypoint Government Solutions, Inc. (8)
Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - November 13, 2017)
2,305

2,293

2,294

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - August 7, 2019)
739

742

718

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)
5,384

5,366

5,330

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

498

495

 
 
 
 
5,864

5,825

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)
1,481

1,481

1,485

MediMedia USA, Inc. (8)
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

7,062

6,991

Milk Specialties Company (8)
Processor of Nutrition Products
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - November 9, 2018)
7,645

7,628

7,473

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
10.00% Current / 2.00% PIK Secured Debt (Maturity Date - September 19, 2019) (14)
1,000

987

987

Mood Media Corporation (8) (9) (12)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
9,940

9,928

9,753

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 3, 2020)
6,468

6,345

6,403

Nice-Pak Products, Inc. (8)
Pre-Moistened Wipes Manufacturer
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.50%, Secured Debt (Maturity - June 18, 2015)
7,401

7,379

7,364

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)
8,454

8,483

8,316

Novitex Acquisition, LLC (8) (12)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.5%, Secured Debt (Maturity - July 7, 2020)
8,978

8,824

8,618

Panolam Industries International, Inc. (8)
Decorative Laminate Manufacturer
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity - August 23, 2017)
7,844

7,800

7,726

Parq Holdings, LP (8) (9)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 17, 2020)
6,226

6,077

6,133

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Bond (Maturity - January 15, 2018)
3,885

3,872

2,914

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) (12)
Chemical Manufacturer
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.5%, Secured Debt (Maturity - February 28, 2020)
6,461

6,433

6,397

Pike Corporation (8)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 22, 2022) (14)
10,000

9,751

9,883

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)
5,905

5,894

5,883

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - November 1, 2018)
4,963

4,987

4,739

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
2,322

2,335

2,148

Quad-C JH Holdings (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
4,457

4,433

4,406

Ravago Holdings America, Inc. (8)
Polymers Distributor
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - December 20, 2020)
5,955

5,995

5,985

RCHP, Inc. (8)
Region Non-Urban Hospital Owner/Operator
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - October 23, 2019) (14)
6,500

6,455

6,484

Recorded Books, Inc. (8)
Audiobook and Digital Content Publisher
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25%, Secured Debt (Maturity - January 31, 2020)
4,331

4,314

4,266

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)
4,895

4,895

4,993

 
 
 
 
8,588

8,696

Renaissance Learning, Inc. (8)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
2,000

1,981

1,920

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
3,990

3,875

3,219

RLJ Entertainment, Inc. (8) (11)
Movie and TV Programming Licensee and Distributor
LIBOR Plus 8.75% (Floor .25%), Current Coupon 9.00%, Secured Debt (Maturity - September 11, 2019)
9,913

9,633

9,633

Sage Automotive Interiors, Inc (8)
Automotive Textiles Manufacturer
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 8, 2021) (14)
5,000

4,951

4,975

SCE Partners, LLC (8) (11)
Hotel & Casino Operator
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - August 14, 2019)
998

989

1,002

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Bond (Maturity - October 31, 2020) (14)
5,000

4,756

4,650

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)
3,748

3,555

3,467

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

5,945

5,970

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
3,965

3,948

3,913

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

3,021

3,015

Templar Energy, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 25, 2020) (14)
3,000

2,979

2,169

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)
2,475

2,486

2,302

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)
990

982

965

Therakos, Inc. (8)
Immune System Disease Treatment
LIBOR Plus 5.75% (Floor 1.25%), Current Coupon 7.00%, Secured Debt (Maturity - December 27, 2017)
1,450

1,430

1,445

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 30, 2020)
5,000

4,511

4,625

Travel Leaders Group, LLC (8) (12)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 5, 2018)
8,431

8,401

8,431

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
7,947

7,925

7,828

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)
Provider of Information Availability Software
LIBOR Plus 4.50% (Floor 1.50%), Current Coupon 6.00%, Secured Debt (Maturity - July 23, 2016)
1,461

1,465

1,454

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

869

849

 
 
 
 
2,334

2,303

Worley Claims Services, LLC (8) (11)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 31, 2020)
6,500

6,437

6,533

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)
2,822

2,833

2,832

 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (95% of total portfolio investments at fair value)
 
$
465,663

$
451,917

 
 
 
 
 
 
Total Investments
 
 
 
$
487,604

$
473,862


(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.
(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 December 31, 2014. Settlement occurred or is scheduled to occur after December 31, 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.
(15)
Investment is classified as an Other portfolio investment.
(16)
Income producing through dividends or distributions.
(17)
Unsecured debt investment.
(18)
Investment is on non-accrual status as of December 31, 2014.


See notes to the condensed consolidated financial statements.


6



HMS Income Fund, Inc.
Notes to the Condensed 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. The Company’s portfolio strategy calls for it to invest primarily in illiquid debt and equity securities issued by lower middle market ("LMM") companies, which generally have annual revenues between $10 million and $150 million, and debt securities issued by middle market ("Middle Market") companies that are generally larger in size than the LMM companies. The Company categorizes some of its investments in LMM companies and Middle Market companies as private loan ("Private Loan") portfolio investments, which are primarily debt securities issued by companies that are consistent in size with either the LMM companies or Middle Market companies, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. The structure, terms and conditions for these Private Loan investments are typically consistent with the structure, terms and conditions for the investments made in its LMM portfolio or Middle Market portfolio. The Company’s portfolio also includes other portfolio ("Other Portfolio") investments which primarily consist of investments that are not consistent with the typical profiles for its LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. The Company’s portfolio investments may be subject to restrictions on resale.

As of March 31, 2015, the Company had raised approximately $394.1 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $7.9 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”). The Company and the Adviser have retained MSC Adviser I, LLC, a wholly owned subsidiary of Main Street, a New York Stock Exchange listed BDC, as the Company’s investment sub-adviser (the "Sub-Adviser") 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. The Adviser and Sub-Adviser are collectively referred to herein as the “Advisers,” and each is registered under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). 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 of the Company are prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the Company's audited consolidated financial statements as of that date. Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 4, 2015. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

7



 
Interest, Fee and Dividend Income
 
Interest and dividend 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. Dividend income is recorded when dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Accrued interest and dividend income is evaluated quarterly 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. Additionally, if a debt security has deferred interest payment terms and the Company becomes aware of a deterioration in credit quality, the Company will evaluate the collectability of the deferred interest payment. If it is determined that the deferred interest is unlikely to be collected, the Company will place the security on non-accrual status and cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay the 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 March 31, 2015 and December 31, 2014, the Company did not have any investments that were more than 90 days past due. The Company's two investments in one portfolio company, Clarius BIGS, LLC, were on non-accrual status as of March 31, 2015 and December 31, 2014. Given the credit deterioration, no interest income has been recognized on these investments during the three months ended March 31, 2015. Aside from the two investments on non-accrual status as of March 31, 2015, 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, recorded as interest income and periodically added to the principal balance of the investment. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. As of March 31, 2015 and December 31, 2014, the Company held five and four investments, respectively, which contained a PIK provision. As discussed above, two of the five investments with PIK provisions, as of March 31, 2015, were on non-accrual status and no PIK income was recorded on these investments during the three months ended March 31, 2015. For the three months ended March 31, 2015 and 2014, the Company capitalized $194,000 and $0, respectively, of PIK interest income.

The Company may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. The income from such services is non-recurring. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into interest income over the life of the financing.

A presentation of the investment income the Company received from its Investment Portfolio in each of the periods presented (in thousands) is as follows:
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
 
(Unaudited)
Interest, Fee and Dividend Income
 
 
 
     Interest Income
$
11,608

 
$
1,661

     Fee Income
46

 

     Dividend Income
139

 

Total Interest, Fee and Dividend Income
$
11,793

 
$
1,661


Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-9 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the

8



contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. The FASB tentatively decided to defer the effective date of the new revenue standard for public entities under US GAAP for one year. If finalized, the new guidance will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this new accounting standard will have on the Company's consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis which amends the consolidation requirements under ASC 810. This guidance amends the criteria for determining which entities are considered variable interest entities (“VIEs”) and amends the criteria for determining if a service provider possesses a variable interest in a VIE. ASU No. 2015-02 also eliminates the deferral under ASU 2010-10 for application of the VIE consolidation model that was granted for investments in certain investment companies. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact that ASU 2015-02 will have on its consolidated financial statements and disclosures.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs which amends the required presentation of debt issuance costs on the balance sheet. The guidance now requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the ASU No. 2015-03. For public business entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company will make the required changes to the debt presentation on the balance sheet as of the effective date of this new guidance.

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

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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.

As of March 31, 2015 and December 31, 2014, the Company’s investment portfolio was comprised of debt securities, equity investments, and other portfolio investments. The fair value determination for these investments primarily consisted of unobservable (Level 3) inputs.

As of March 31, 2015 and December 31, 2014, all of the Company’s lower middle market ("LMM") portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for the LMM portfolio investments primarily consisted of unobservable inputs. As a result, all of the Company’s LMM portfolio investments were categorized as Level 3 as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, the Company's Middle Market portfolio investments consisted primarily of private placement investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination for these investments consisted of a combination of (1) observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, (2) observable inputs in the non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and (3) unobservable inputs. As a result, all of the Company's Middle Market portfolio investments were categorized as Level 3 as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, the Company’s Private Loan portfolio investments primarily consisted of investments in interest-bearing debt securities in companies that are consistent with the size of companies in our LMM portfolio or our Middle Market portfolio, but are investments which have been originated through strategic relationships with other investment funds on a collaborative basis. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of the Company’s Private Loan portfolio investments were categorized as Level 3 as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, the Company’s Other Portfolio investment consisted of an illiquid security issued by a private company. The fair value determination for this investment primarily consisted of unobservable inputs. As a result, the Company’s Other Portfolio equity investment was categorized as Level 3 as of March 31, 2015 and December 31, 2014.

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


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The following table presents fair value measurements of the Company’s investments, by major class, as of March 31, 2015 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$

 
$

 
$
503,686

 
$
503,686

Second lien secured debt investments

 

 
135,122

 
135,122

Equity investments

 

 
18,943

 
18,943

Unsecured debt investments

 

 
2,115

 
2,115

Total
$

 
$

 
$
659,866

 
$
659,866

 
The following table presents fair value measurements of the Company’s investments, by major class, as of December 31, 2014 according to the fair value hierarchy (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$

 
$

 
$
375,038

 
$
375,038

Second lien secured debt investments

 

 
85,191

 
85,191

Equity investments

 

 
11,383

 
11,383

Unsecured debt investments

 

 
2,250

 
2,250

Total
$

 
$

 
$
473,862

 
$
473,862

 
The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of March 31, 2015 (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$

 
$

 
$
49,100

 
$
49,100

Private Loan investments

 

 
58,695

 
58,695

Middle Market investments

 

 
550,496

 
550,496

Other Portfolio investments

 

 
1,575

 
1,575

Total
$

 
$

 
$
659,866

 
$
659,866

 
The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of December 31, 2014 (in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$

 
$

 
$
33,616

 
$
33,616

Private Loan investments

 

 
47,655

 
47,655

Middle Market investments

 

 
391,016

 
391,016

Other Portfolio investments

 

 
1,575

 
1,575

Total
$

 
$

 
$
473,862

 
$
473,862


The significant unobservable inputs used in the fair value measurement of the Company’s LMM equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is not applicable), are (i) EBITDA multiples and (ii) the weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Conversely, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company’s LMM, Middle Market and Private Loan debt investments are (i) risk adjusted discount rates used in the yield-to-maturity valuation technique (described in Note 2-Basis of Presentation and Summary of Significant Accounting Policies-Valuation of Portfolio Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 4, 2015) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the table below.

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The following table, which is not intended to be all inclusive, presents the significant unobservable input of the Company’s Level 3 investments as of March 31, 2015 (in thousands):

 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Input
 
Range
 
Weighted
Average (2)
LMM equity portfolio investments
$
17,268

 
Discounted Cash Flows
 
Weighted Average Cost of Capital
 
12% - 14%
 
13.4%
 
 
 
Market Approach/Enterprise Value
 
EBITDA Multiples (1)
 
4.6x - 16.1x
 
10.1x
 
 
 
 
 
Net Book Value Multiple
 
N/A