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TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data
PART IV

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)    

þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 
 
For the fiscal year ended December 31, 2009

OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 
 
For the transition period from             to             

Commission File Number: 001-33723

Main Street Capital Corporation
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction
of incorporation or organization)		   41-2230745
(I.R.S. Employer
Identification No.)



1300 Post Oak Boulevard, Suite 800
Houston, TX
(Address of principal executive offices)
 
77056
(Zip Code)

(713) 350-6000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

       Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o    No þ

       Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o    No þ

       Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No o

       Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o    No o

       Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

       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.

Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)                  

       Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ

       The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2009, was approximately $106.9 million based upon the last sale price for the registrant's common stock on that date.

       The number of outstanding common shares of the registrant as of March 9, 2010 was 15,036,975.

DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the registrants' definitive Proxy Statement for its 2010 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in this Annual Report on Form 10-K in response to Part III.

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TABLE OF CONTENTS

 
    
   Page
PART I
Item 1.   Business   1
Item 1A.   Risk Factors   20
Item 1B.   Unresolved Staff Comments   35
Item 2.   Properties   35
Item 3.   Legal Proceedings   35
Item 4.   Reserved   35

PART II
Item 5.   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   36
Item 6.   Selected Financial Data   41
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   43
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   62
Item 8.   Financial Statements and Supplementary Data   63
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   112
Item 9A.   Controls and Procedures   112
Item 9B.   Other Information   112

PART III
Item 10.   Directors, Executive Officers and Corporate Governance   112
Item 11.   Executive Compensation   113
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   113
Item 13.   Certain Relationships and Related Transactions, and Director Independence   113
Item 14.   Principal Accountant Fees and Services   113

PART IV
Item 15.   Exhibits and Financial Statement Schedules   114
Signatures   117

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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS

       This Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives of management for future operations. Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including the factors discussed in Item 1A entitled "Risk Factors" in Part I of this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K. Other factors that could cause actual results to differ materially include changes in the economy and future changes in laws or regulations and conditions in our operating areas.

       We have based the forward-looking statements included in this Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K, and we assume no obligation to update any such forward-looking statements, unless we are required to do so by applicable law. However, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.


 PART I

Item 1.    Business

ORGANIZATION

       Main Street Capital Corporation ("MSCC") was formed on March 9, 2007, for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP ("MSMF") and its general partner, Main Street Mezzanine Management, LLC ("MSMF GP"), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the "Investment Manager"), (iii) raising capital in an initial public offering, which was completed in October 2007 (the "IPO"), and (iv) thereafter operating as an internally managed business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). MSMF is licensed as a Small Business Investment Company ("SBIC") by the United States Small Business Administration ("SBA") and the Investment Manager acts as MSMF's manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by us, we do not pay any external investment advisory fees, but instead we incur the net operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The transactions discussed above were consummated in October 2007 and are collectively termed the "Formation Transactions."

       On January 7, 2010, MSCC consummated transactions (the "Exchange Offer") to exchange 1,239,695 shares (the "Exchange Shares") of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP ("MSC II" and, together with MSMF, the "Funds"). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC ("MSC II GP"), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests, are collectively termed the "Exchange Offer Transactions."

       Immediately following the completion of the Formation Transactions, Main Street Equity Interests, Inc. ("MSEI") was created as a wholly owned consolidated subsidiary of MSCC to hold certain of our portfolio

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investments. MSEI has elected for tax purposes to be treated as a taxable entity and is taxed at normal corporate tax rates based on its taxable income. The taxable income of MSEI may differ from its book income due to deferred tax timing differences as well as permanent differences. Similarly, MSC II has a wholly owned taxable subsidiary with the primary purpose of holding certain of its portfolio investments.

       We co-invested with MSC II in several existing portfolio investments prior to the IPO, but did not co-invest with MSC II subsequent to the IPO and prior to June 2008. On June 4, 2008, we received exemptive relief from the SEC to allow us to resume co-investing with MSC II in accordance with the terms of such exemptive relief. Most of the investments held by MSC II represent co-investments made with MSCC and/or MSMF.

       Unless otherwise noted or the context otherwise indicates, the terms "we," "us," "our" and "Main Street" refer to MSCC and its subsidiaries, including MSMF and MSMF GP, prior to the Exchange Offer Transactions and MSCC and its subsidiaries, including MSMF, MSMF GP, MSC II and MSC II GP, subsequent to the Exchange Offer Transactions.

       As part of the Formation Transactions, the Investment Manager, which employs all of the executive officers and other employees of MSCC, became a wholly owned subsidiary of MSCC. However, the Investment Manager is accounted for as a portfolio investment of Main Street, since the Investment Manager is not a registered investment company and since it conducts a significant portion of its investment management activities for parties outside of MSCC and its consolidated subsidiaries. The portfolio investment in the Investment Manager is accounted for using fair value accounting, with the fair value determined by MSCC and approved, in good faith, by MSCC's Board of Directors. MSCC's valuation of the Investment Manager is based upon the discounted net cash flows from third party recurring management, consulting and advisory fees. For more information on the Investment Manager, see "Note D — Wholly Owned Investment Manager" to our consolidated financial statements.

       In connection with the Formation Transactions, MSCC entered into a support services agreement with the Investment Manager. The agreement requires the Investment Manager to manage the day-to-day operational and investment activities of Main Street. The Investment Manager generally incurs all normal operating and administrative expenses, except those specifically required to be borne by MSCC, which principally include costs that are specific to MSCC's status as a publicly traded entity. The expenses paid by the Investment Manager include the cost of salaries and related benefits, rent, equipment and other administrative costs required for Main Street's day-to-day operations.

       The Investment Manager is reimbursed for its expenses associated with providing operational and investment management services to MSCC and its subsidiaries. Each quarter, as part of the support services agreement, MSCC makes payments to cover all expenses incurred by the Investment Manager, less amounts the Investment Manager receives for third party management, consulting and advisory fees.

RECENT DEVELOPMENTS

       As discussed above, on January 7, 2010, MSCC consummated the Exchange Offer Transactions. As of the closing date of the Exchange Offer, MSC II had $70 million of SBIC debentures outstanding, which are guaranteed by the SBA and carry an average fixed interest rate of approximately 6%. The first principal maturity related to MSC II's SBIC debentures does not occur until 2016.

       Consummation of the Exchange Offer Transactions provides Main Street with access to additional long-term, low-cost leverage capacity through the SBIC program. The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds from the previous SBIC leverage cap of approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between MSMF and MSC II. Subsequent to the Exchange Offer, Main Street will have access to an incremental $90 million in

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SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of SBIC leverage at MSMF. At the closing of the Exchange Offer, Main Street funded approximately $24 million in unfunded limited partner commitments for the limited partner interests it acquired in connection with the Exchange Offer in order to comply with SBA regulatory requirements, which was funded by Main Street in part with approximately $12 million drawn down under its $30 million investment credit facility. We currently project that consummation of the Exchange Offer Transactions will be accretive to our calendar year 2010 distributable net investment income per share.

       Subsequent to the Exchange Offer in January 2010, we completed a public stock offering consisting of the public offering and sale of 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share, resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs. Based upon the net proceeds from this offering and existing cash, marketable securities, and idle funds investments, we estimate that we have the required capitalization to access all of the $90 million in incremental SBIC leverage available through the SBIC Funds. We used approximately $12 million of the net proceeds from this offering to repay outstanding debt borrowed under our $30 million investment credit facility to fund MSC II capital commitments assumed in the Exchange Offer. We intend to use the remaining net proceeds from this offering to make investments in lower middle market companies in accordance with our investment objective and strategies, pay operating expenses and other cash obligations and for general corporate purposes. Pending such uses, we may invest the net proceeds of this offering primarily in marketable securities and idle funds investments, which may include investments in secured intermediate term bank debt and other independently rated debt investments.

       During January 2010, we sold our investment in Quest Design and Production, LLC ("Quest"), which was on non-accrual status as of December 31, 2009. We had recorded unrealized depreciation as of December 31, 2009 on our investment in Quest equal to the $4.0 million loss we will realize in the first quarter of 2010 related to the exit of this investment.

CORPORATE INFORMATION

       Our principal executive offices are located at 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056. We maintain a Web site on the Internet at www.mainstcapital.com. We make available free of charge on our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information contained on our Web site is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report on Form 10-K.

OVERVIEW OF OUR BUSINESS

       We are a principal investment firm focused on providing customized financing solutions to lower middle market companies, which we generally define as companies with annual revenues between $10 million and $100 million, that operate in diverse industries. We invest primarily in secured debt instruments, equity investments, warrants and other securities of lower middle market companies based in the United States. Our principal investment objective is to maximize our portfolio's total return by generating current income from our debt investments and realizing capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company.

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Our investments generally range in size from $2 million to $20 million. Our ability to invest across a company's capital structure, from senior secured loans to subordinated debt to equity securities, allows us to offer portfolio companies a comprehensive suite of financing solutions, or "one-stop" financing.

       We seek to fill the current financing gap for lower middle market businesses, which, historically, have had more limited access to financing from commercial banks and other traditional sources. Given the current credit environment, we believe the limited access to financing for lower middle market companies is even more pronounced. The underserved nature of the lower middle market creates the opportunity for us to meet the financing needs of lower middle market companies while also negotiating favorable transaction terms and equity participations. Providing customized, "one stop" financing solutions has become even more relevant to our portfolio companies in the current credit environment. We generally seek to partner directly with entrepreneurs, management teams and business owners in making our investments. Main Street believes that its core investment strategy has a lower correlation to the broader debt and equity markets.

       The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact the timing of future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact the timing of future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.

       Our investments are made through both MSCC and the Funds. Since the IPO, MSCC and MSMF have co-invested in substantially every investment we have made. In addition, approximately 88% of the MSC II portfolio investments as of the date of the Exchange Offer represented co-investments with MSCC and/or MSMF. MSCC and the Funds share the same investment strategies and criteria in the lower middle market, although they are subject to different regulatory regimes. See "— Regulation." An investor's return in MSCC will depend, in part, on the Funds' investment returns as MSMF is a wholly owned subsidiary of MSCC and as MSC II is a majority owned subsidiary of MSCC subsequent to the Exchange Offer.

       We typically seek to work with entrepreneurs, business owners and management teams to provide customized financing for strategic acquisitions, business expansion and other growth initiatives, ownership transitions and recapitalizations. In structuring transactions, we seek to protect our rights, manage our risk and create value by: (i) providing financing at lower leverage ratios; (ii) generally taking first priority liens on assets; and (iii) providing significant equity incentives for management teams of our portfolio companies. We prefer negotiated deals to widely conducted auctions because we believe widely conducted auction transactions often have higher execution risk and can result in potential conflicts among creditors and lower returns due to more aggressive valuation multiples and leverage ratios.

       As of December 31, 2009, Main Street had debt and equity investments in 35 core portfolio companies. Approximately 80% of our total core portfolio investments at cost, excluding our 100% equity interest in the Investment Manager, were in the form of debt investments and 87% of such debt investments at cost were secured by first priority liens on the assets of our portfolio companies. As of December 31, 2009, Main Street had a weighted average effective yield on its debt investments of 14.3%. Weighted average yields are computed using the effective interest rates for all debt investments at December 31, 2009, including amortization of deferred debt origination fees and accretion of original issue discount. At December 31, 2009, we had equity ownership in approximately 91% of our core portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 24%. For a discussion of the effect of the

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Exchange Offer Transactions on Main Street's financial position and results of operations, including a pro forma schedule of investments, see the current report on Form 8-K filed by Main Street with the SEC on January 8, 2010.

BUSINESS STRATEGIES

       Our principal investment objective is to maximize our portfolio's total return by generating current income from our debt investments and realizing capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. We have adopted the following business strategies to achieve our investment objective:

INVESTMENT CRITERIA

       Our investment team has identified the following investment criteria that it believes are important in evaluating prospective portfolio companies. Our investment team uses these criteria in evaluating investment

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opportunities. However, not all of these criteria have been, or will be, met in connection with each of our investments.

CORE PORTFOLIO INVESTMENTS

       To allow for more relevant disclosure, Main Street's "core" portfolio investments, as used herein, refers to all of Main Street's portfolio investments excluding the Investment Manager and all "Marketable securities and idle funds investments." Main Street's core portfolio investments principally consist of secured debt, equity warrants and direct equity investments in privately held companies discussed below in further detail.

       Historically, we have made core debt investments principally in the form of single tranche debt. Single tranche debt financing involves issuing one debt security that blends the risk and return profiles of both secured and subordinated debt. We believe that single tranche debt is more appropriate for many lower middle market companies given their size in order to reduce structural complexity and potential conflicts among creditors.

       Our core debt investments generally have terms of three to seven years, with limited required amortization prior to maturity, and provide for monthly or quarterly payment of interest at fixed interest rates generally between 12% and 14% per annum, payable currently in cash. In some instances, we have provided floating interest rates for a portion of a single tranche debt security. In addition, certain core debt investments may have a form of interest that is not paid currently but is accrued and added to the loan balance and paid at maturity. We refer to this as payment-in-kind or PIK interest. We typically structure our core debt investments with the maximum seniority and collateral that we can reasonably obtain while seeking to achieve our total return target. In most cases, our core debt investment will be collateralized by a first priority lien on substantially all the assets of the portfolio company. As of December 31, 2009, 87% of our core debt investments at cost were secured by first priority liens on the assets of core portfolio companies.

       In addition to seeking a senior lien position in the capital structure of our core portfolio companies, we seek to limit the downside potential of our core investments by negotiating covenants that are designed to protect our core investments while affording our portfolio companies as much flexibility in managing their businesses as reasonable. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control or change of management provisions, key-man life insurance, guarantees,

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equity pledges, personal guaranties, where appropriate, and put rights. In addition, we typically seek board representation or observation rights in all of our core portfolio companies.

       While we will continue to focus on single tranche core debt investments, we also anticipate structuring some of our debt investments as mezzanine loans. We anticipate that these mezzanine loans will be primarily junior secured or unsecured, subordinated loans that provide for relatively high fixed interest rates that will provide us with significant current interest income. These loans typically will have interest-only payments in the early years, with amortization of principal deferred to the later years of the mezzanine loan term. Typically, our mezzanine loans will have maturities of three to five years. We will generally target fixed interest rates of 12% to 14%, payable currently in cash for our mezzanine loan investments with higher targeted total returns from equity warrants, direct equity investments or PIK interest.

       In connection with our core debt investments, we have historically received equity warrants to establish or increase our equity interest in the core portfolio company. Warrants we receive in connection with a core debt investment typically require only a nominal cost to exercise, and thus, as a core portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We typically structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as secured or unsecured put rights, or rights to sell such securities back to the core portfolio company, upon the occurrence of specified events. In certain cases, we also may obtain registration rights in connection with these equity interests, which may include demand and "piggyback" registration rights.

       We also will seek to make direct equity investments in situations where it is appropriate to align our interests with key management and stockholders, and to allow for some participation in the appreciation in enterprise values of our core portfolio companies. We usually make our direct equity investments in connection with debt investments. In addition, we may have both equity warrants and direct equity positions in some of our core portfolio companies. We seek to maintain fully diluted equity positions in our core portfolio companies of 5% to 50%, and may have controlling equity interests in some instances. We have a value orientation toward our direct equity investments and have traditionally been able to purchase our equity investments at reasonable valuations.

INVESTMENT PROCESS

       Our investment committee is responsible for all aspects of our investment process. The current members of our investment committee are Vincent D. Foster, our Chairman and Chief Executive Officer, Todd A. Reppert, our President and Chief Financial Officer, and Curtis Hartman, Senior Vice President. Mr. Hartman replaced Dwayne L. Hyzak, Senior Vice President, in this revolving seat on the investment committee effective January 1, 2010 and will serve through 2010. Our investment strategy involves a "team" approach, whereby potential transactions are screened by several members of our investment team before being presented to the investment committee. Our investment committee meets on an as needed basis depending on transaction volume. Our investment committee generally categorizes our investment process into seven distinct stages:

       Deal generation and origination is maximized through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers, financial advisors, and accountants, as well as current and former portfolio companies and investors. Our investment team has focused its deal generation and origination efforts on lower middle market companies. We have developed a reputation as a knowledgeable, reliable and active source of capital and assistance in this market.

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       During the screening process, if a transaction initially meets our investment criteria, we will perform preliminary due diligence, taking into consideration some or all of the following information:

       Upon successful screening of the proposed transaction, the investment team makes a recommendation to our investment committee. If our investment committee concurs with moving forward on the proposed transaction, we issue a non-binding term sheet to the company.

       The non-binding term sheet will include the key economic terms based upon our analysis performed during the screening process as well as a proposed timeline and our qualitative expectation for the transaction. While the term sheet is non-binding, we typically receive an expense deposit in order to move the transaction to the due diligence phase. Upon execution of a term sheet and payment of the expense deposit, we begin our formal due diligence process.

       Due diligence on a proposed investment is performed by a minimum of two members of our investment team, whom we refer to collectively as the deal team, and certain external resources, who together conduct due diligence to understand the relationships among the prospective portfolio company's business plan, operations and financial performance. Our due diligence review includes some or all of the following:

       During the due diligence process, significant attention is given to sensitivity analyses and how the company might be expected to perform given downside, "base-case" and upside scenarios. In certain cases, we may decide not to make an investment based on the results of the diligence process.

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       Upon completion of a satisfactory due diligence review, the deal team presents the findings and a recommendation to our investment committee. The presentation contains information including, but not limited to, the following:

       If any adjustments to the transaction terms or structures are proposed by the investment committee, such changes are made and applicable analyses updated. Approval for the transaction must be made by the affirmative vote from a majority of the members of the investment committee. Upon receipt of transaction approval, we will re-confirm regulatory compliance, process and finalize all required legal documents, and fund the investment.

       We continuously monitor the status and progress of the portfolio companies. We offer managerial assistance to our portfolio companies, giving them access to our investment experience, direct industry expertise and contacts. The same deal team that was involved in the investment process will continue its involvement in the portfolio company post-investment. This provides for continuity of knowledge and allows the deal team to maintain a strong business relationship with key management of our portfolio companies for post-investment assistance and monitoring purposes. As part of the monitoring process, the deal team will analyze monthly/quarterly financial statements versus the previous periods and year, review financial projections, meet and discuss issues or opportunities with management, attend board meetings and review all compliance certificates and covenants. While we maintain limited involvement in the ordinary course operations of our portfolio companies, we maintain a higher level of involvement in non-ordinary course financing or strategic activities and any non-performing scenarios.

       We also use an internally developed investment rating system to characterize and monitor our expected level of returns on each of our investments.

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       All new core portfolio investments receive an initial 3 rating.

       The following table shows the distribution of our core portfolio investments (excluding the investment in our affiliated Investment Manager) on the 1 to 5 investment rating scale at fair value as of December 31, 2009 and 2008:

 
   December 31, 2009   December 31, 2008  
Investment Rating
  Investments at
Fair Value 		  Percentage of
Total Portfolio 		  Investments at
Fair Value 		  Percentage of
Total Portfolio 		 
 
   (dollars in thousands)
  
 

1

   $ 14,509     11.5 % $ 27,523     24.9 %
 

2

     51,160     40.7 %   23,150     21.0 %
 

3

     50,716     40.3 %   53,123     48.1 %
 

4

     9,000     7.1 %   6,035     5.5 %
 

5

     500     0.4 %   500     0.5 %
                   

Totals

   $ 125,885     100.0 % $ 110,331     100.0 %
                   

       Based upon our investment rating system, the weighted average rating of our portfolio as of December 31, 2009 and 2008 was approximately 2.4. As of December 31, 2009 and 2008, we had three investments and one investment, respectively, on non-accrual status comprising approximately 1.4% and 0.5%, respectively, of the total core portfolio investments at fair value for each year then ended (excluding Main Street's investment in the Investment Manager).

       While we generally exit most investments through the refinancing or repayment of our debt and redemption of our equity positions, we typically assist our portfolio companies in developing and planning exit opportunities, including any sale or merger of our portfolio companies. We may also assist in the structure, timing, execution and transition of the exit strategy.

DETERMINATION OF NET ASSET VALUE AND PORTFOLIO VALUATION PROCESS

       We determine the net asset value per share of our common stock on a quarterly basis. The net asset value per share is equal to our total assets minus liabilities and any noncontrolling interests outstanding divided by the total number of shares of common stock outstanding.

       Our core business plan calls for us to invest primarily in illiquid securities issued by private companies and/or thinly traded public companies. These core portfolio investments may be subject to restrictions on resale and will generally have no established trading market. As a result, we determine in good faith the fair value of our core portfolio investments pursuant to a valuation policy in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("Codification" or "ASC") 820, Fair Value Measurements and Disclosures ("ASC 820") and a valuation process approved by our Board of Directors and in accordance with the 1940 Act. We review external events, including private mergers, sales and acquisitions involving comparable companies, and include these events in the valuation process. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

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       For valuation purposes, control investments are composed of equity and debt securities for which we have a controlling interest in the portfolio company or have the ability to nominate a majority of the portfolio company's board of directors. Market quotations are generally not readily available for our control investments. As a result, we determine the fair value of control investments using a combination of market and income approaches. Under the market approach, we will typically use the enterprise value methodology to determine the fair value of these investments. 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, or 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, we analyze various factors, including the portfolio company's historical and projected financial results. We allocate the enterprise value to investments in order of the legal priority of the investments. We will also use the income approach to determine the fair value of these securities, based on projections of the discounted future free cash flows that the portfolio company or the debt security will likely generate. The valuation approaches for our control investments estimate the value of the investment if we were to sell, or exit, the investment, assuming the highest and best use of the investment by market participants. In addition, these valuation approaches consider the value associated with our ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.

       For valuation purposes, non-control investments are composed of debt and equity securities for which we do not have a controlling interest in the portfolio company, or the ability to nominate a majority of the portfolio company's board of directors. Market quotations for our non-control investments are generally not readily available. For our non-control investments, we use a combination of the market and income approaches to value our equity investments and the income approach to value our debt instruments. For non-control debt investments, we determine the fair value primarily using a yield 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. Our estimate of the expected repayment date of a debt security is generally the legal maturity date of the instrument, as we generally intend to hold our loans to maturity. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. We will use the value determined by the yield analysis as the fair value for that security; however, because of our general intent to hold our loans to maturity, the fair value will not exceed the face amount of the debt security. A change in the assumptions that we use to estimate the fair value of our debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a debt security is in workout status, we may consider other factors in determining the fair value of a debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

       Due to the inherent uncertainty in the valuation process, our estimate of fair value may differ materially from the values that would have been used had a ready 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 gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.

       As described below, we undertake a multi-step valuation process each quarter in connection with determining the fair value of our investments, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, our estimate of the fair value of each individual investment.

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       As part of the internal valuation process, in arriving at estimates of fair value for portfolio companies, Main Street, among other things, consults with a nationally recognized independent advisor. The nationally recognized independent advisor is generally consulted relative to each portfolio investment at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders' best interest, to consult with the nationally recognized independent advisor on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street's investment in a portfolio company is determined to be insignificant relative to the total investment portfolio. Main Street consulted with its independent advisor in arriving at Main Street's determination of fair value on a total of 26 portfolio companies for the year ended December 31, 2009, representing approximately 82% of the total core portfolio investments at fair value as of December 31, 2009. Main Street consulted with its independent advisor relative to Main Street's determination of fair value on 4, 9, 6, and 7 core portfolio investments for the quarters ended March 31, 2009, June 30, 2009, September 30, 2009, and December 31, 2009, respectively. The Board of Directors of Main Street has the final responsibility for reviewing and approving, in good faith, Main Street's estimate of the fair value for the investments.

       Determination of fair value involves subjective judgments and estimates. The notes to our financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

COMPETITION

       We compete for investments with a number of investment funds (including private equity funds, mezzanine funds, BDCs, and other SBICs), as well as traditional financial services companies such as commercial banks and other sources of financing. Many of the entities that compete with us have greater financial and managerial resources. We believe we are able to be competitive with these entities primarily on the basis of our focus toward the underserved lower middle market, the experience and contacts of our management team, our responsive and efficient investment analysis and decision-making processes, our comprehensive suite of customized financing solutions and the investment terms we offer.

       We believe that some of our competitors make senior secured loans, junior secured loans and subordinated debt investments with interest rates and returns that are comparable to or lower than the rates and returns that we target. Therefore, we do not seek to compete primarily on the interest rates and returns that we offer to potential portfolio companies. For additional information concerning the competitive risks we face, see "Risk Factors — We may face increasing competition for investment opportunities."

EMPLOYEES

       As of December 31, 2009, we had 16 employees, each of whom was employed by the Investment Manager. These employees include investment and portfolio management professionals, operations professionals and administrative staff. As necessary, we will hire additional investment professionals and administrative personnel. All of our employees are located in our Houston office.

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REGULATION

       We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of the members of the board of directors of a BDC be persons other than "interested persons," as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities.

       The 1940 Act defines "a majority of the outstanding voting securities" as the lesser of (i) 67% or more of the voting securities present at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (ii) more than 50% of our voting securities.

       Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. The principal categories of qualifying assets relevant to our business are any of the following:

       In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.

       An eligible portfolio company is defined in the 1940 Act as any issuer which:

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       In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

       Pending investment in "qualifying assets," as described above, our investments may consist of cash, cash equivalents, U.S. government securities, short-term investments in secured debt investments, independently rated debt investments, and diversified bond funds, which we refer to, collectively, as marketable securities and idle funds investments, so that 70% of our assets are qualifying assets.

       We are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% of all debt and/or senior stock immediately after each such issuance. In addition, while any senior securities remain outstanding (other than senior securities representing indebtedness issued in consideration of a privately arranged loan which is not intended to be publicly distributed), we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see "Risk Factors — Risks Relating to Our Business and Structure," including, without limitation, "— Because we borrow money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us."

       In January 2008, we received an exemptive order from the SEC to exclude debt securities issued by MSMF from the asset coverage requirements of the 1940 Act as applicable to Main Street. The exemptive order provides for the exclusion of all debt securities issued by MSMF, including the $65 million of currently outstanding debt related to its participation in the SBIC program. This exemptive order provides us with expanded capacity and flexibility in obtaining future sources of capital for our investment and operational objectives. We expect to have similar relief from the SEC with respect to SBIC debt securities issued by MSC II, including the $70 million of currently outstanding debt related to its participation in the SBIC program.

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       We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). On June 11, 2009, our stockholders approved a proposal that authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for a period of one year ending on the earlier of June 11, 2010 or the date of our 2010 annual meeting of stockholders. On June 17, 2008, our stockholders approved another proposal that authorizes us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. See "Risk Factors — Risks Relating to Our Business and Structure — Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock."

       We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code's requirements.

       We vote proxies relating to our portfolio securities in a manner in which we believe is consistent with the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that we expect would have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so.

       Our proxy voting decisions are made by the deal team which is responsible for monitoring each of our investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision-making process to disclose to our chief compliance officer any potential conflict of which he or she is aware and any contact that he or she has had with any interested party regarding a proxy vote and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

       Stockholders may obtain information, without charge, regarding how we voted proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056.

       We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. In June 2008, we received an exemptive order from the SEC to permit co-investments in portfolio companies among Main Street and certain of its affiliates, including MSC II, subject to certain conditions of the order.

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       We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office.

       We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and to designate a chief compliance officer to be responsible for administering the policies and procedures.

       We may be periodically examined by the SEC for compliance with the 1940 Act.

       Each of the Funds is licensed by the SBA to operate as a SBIC under Section 301(c) of the Small Business Investment Act of 1958. As a part of the Formation Transactions, MSMF became a wholly owned subsidiary of MSCC, and continues to hold its SBIC license. MSMF initially obtained its SBIC license in September 2002. As part of the Exchange Offer Transactions, MSC II became a majority owned subsidiary of MSCC and continues to hold its license. MSC II initially obtained its SBIC license in January 2006.

       SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBIC regulations, SBICs may make loans to eligible small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Each of the Funds has typically invested in secured debt, acquired warrants and/or made equity investments in qualifying small businesses.

       Under present SBIC regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $18 million and have average annual net income after federal income taxes not exceeding $6 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote 20% of its investment activity to "smaller" concerns as defined by the SBA. A smaller concern generally includes businesses that have a tangible net worth not exceeding $6 million and have average annual net income after federal income taxes not exceeding $2 million (average net income to be computed without benefit of any net carryover loss) for the two most recent fiscal years. SBIC regulations also provide alternative size standard criteria to determine eligibility for designation as an eligible small business or smaller concern, which criteria depend on the primary industry in which the business is engaged and are based on such factors as the number of employees and gross revenue. However, once an SBIC has invested in a company, it may continue to make follow on investments in the company, regardless of the size of the portfolio company at the time of the follow on investment, up to the time of the portfolio company's initial public offering.

       The SBA prohibits an SBIC from providing funds to small businesses for certain purposes, such as relending and investment outside the United States, to businesses engaged in a few prohibited industries, and to certain "passive" (non-operating) companies. In addition, without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC's regulatory capital in any one portfolio company and its affiliates.

       The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible interest rate on debt securities held by an SBIC in a portfolio company). Although prior regulations prohibited an SBIC from controlling a small business concern except in limited circumstances, regulations adopted by the SBA in 2002 now allow an SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its control position. This control period may be extended for an additional period of time with the SBA's prior written approval.

       The SBA restricts the ability of an SBIC to lend money to any of its officers, directors and employees or to invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or

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more of a class of equity for a licensed SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise.

       An SBIC (or group of SBICs under common control) may generally have outstanding debentures guaranteed by the SBA in amounts up to twice the amount of the privately-raised funds of the SBIC(s). Debentures guaranteed by the SBA have a maturity of ten years, require semi-annual payments of interest, do not require any principal payments prior to maturity, and, historically, were subject to certain prepayment penalties. Those prepayment penalties no longer apply as of September 2006. As of December 31, 2009, we, through MSMF, had issued $65 million of SBA-guaranteed debentures, which had an annual weighted average interest rate of approximately 5.0%. As of the date of the Exchange Offer, MSC II had issued $70 million of SBA-guaranteed debentures, which had an annual weighted average interest rate of approximately 6.0%.

       The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") contains several provisions applicable to SBIC funds, including the Funds. One of the key SBIC-related provisions included in the Stimulus Bill increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds. The prior maximum amount of SBIC leverage available to affiliated SBIC funds was approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between the Funds. Subsequent to the Exchange Offer, Main Street now has access to a combined incremental $90 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of MSMF SBIC leverage.

       SBICs must invest idle funds that are not being used to make loans in investments permitted under SBIC regulations in the following limited types of securities: (i) direct obligations of, or obligations guaranteed as to principal and interest by, the United States government, which mature within 15 months from the date of the investment; (ii) repurchase agreements with federally insured institutions with a maturity of seven days or less (and the securities underlying the repurchase obligations must be direct obligations of or guaranteed by the federal government); (iii) certificates of deposit with a maturity of one year or less, issued by a federally insured institution; (iv) a deposit account in a federally insured institution that is subject to a withdrawal restriction of one year or less; (v) a checking account in a federally insured institution; or (vi) a reasonable petty cash fund.

       SBICs are periodically examined and audited by the SBA's staff to determine their compliance with SBIC regulations and are periodically required to file certain financial information and other documents with the SBA.

       Neither the SBA nor the U.S. government or any of its agencies or officers has approved any ownership interest to be issued by us or any obligation that we or any of our subsidiaries may incur.

       We are subject to the reporting and disclosure requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), including the filing of quarterly, annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act of 2002, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. For example:

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       The NASDAQ Global Select Market has adopted corporate governance regulations that listed companies must comply with. We believe we are in compliance with such corporate governance listing standards. We intend to monitor our compliance with all future listing standards and to take all necessary actions to ensure that we stay in compliance.

       MSCC has elected to be treated for federal income tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code") commencing October 2, 2007. As a RIC, we generally do not have to pay corporate-level federal income taxes on any income that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our "investment company taxable income," which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the "Annual Distribution Requirement").

       For any taxable year in which we qualify as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.

       We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the "Excise Tax Avoidance Requirement"). Dividends declared and paid by us in a year will generally differ from taxable income for that year as such dividends may include the distribution of current year taxable income, less amounts carried over into the following year, and the distribution of prior year taxable income carried over into and distributed in the current year. For amounts we carry over into the following year, we will be required to pay the 4% excise tax based on 98% of our annual taxable income in excess of distributions for the year.

       In order to qualify as a RIC for federal income tax purposes, we must, among other things:

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       In order to comply with the 90% Income Test, we formed MSEI, a wholly owned taxable subsidiary of MSCC, for the primary purpose of permitting us to own equity interests in portfolio companies which are "pass through" entities for tax purposes. Absent the taxable status of MSEI, a portion of the gross income from such portfolio companies would flow directly to us for purposes of the 90% Income Test. To the extent such income did not consist of income derived from securities, such as dividends and interest, it could jeopardize our ability to qualify as a RIC and, therefore cause us to incur significant federal income taxes. MSEI is consolidated with Main Street for GAAP purposes, and the portfolio investments held by MSEI are included in our consolidated financial statements. MSEI is not consolidated with Main Street for income tax purposes and may generate income tax expense as a result of its ownership of the portfolio investments. This income tax expense, if any, is reflected in our Consolidated Statement of Operations. Similarly, MSC II has a wholly owned taxable subsidiary with the primary purpose of permitting MSC II to own equity interests in portfolio companies which are "pass-through" entities for tax purposes.

       We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.

       Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders in certain circumstances while our debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. See "— Regulation — Regulation as a Business Development Company — Senior Securities." Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

       Pursuant to a revenue procedure issued by the Internal Revenue Service, or the IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including business development companies) that are paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements. In order to qualify for such treatment, the revenue procedure requires that at least 10% of the total distribution be paid in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This revenue procedure applies to distributions declared on or before December 31, 2012, with respect to taxable years ended on or before December 31, 2011.

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Item 1A.    Risk Factors

       Investing in our common stock involves a number of significant risks. In addition to the other information contained in this Annual Report on Form 10-K, investors should consider carefully the following information before making an investment in our common stock. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected.

RISKS RELATING TO ECONOMIC CONDITIONS

       The broader economic fundamentals of the United States economy remain at depressed levels. Unemployment levels remain elevated and consumer fundamentals remain depressed, which has led to significant reductions in spending by both consumers and businesses. In the event that the United States economy remains depressed, it is likely that the financial results of small- to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults. In addition, the end markets for certain of our portfolio companies' products and services have experienced negative economic trends. We are seeing reduced operating results at several portfolio companies due to the general economic difficulties. We expect the trend of reduced operating results to continue into 2010. Consequently, we can provide no assurance that the performance of certain of our portfolio companies will not be negatively impacted by these economic or other conditions, which could also have a negative impact on our future results.

       Although we have been able to secure access to additional liquidity, including our $30 million investment credit facility and the increase in available leverage through the SBIC program as part of the 2009 Stimulus Bill, the current turmoil in the debt markets and uncertainty in the equity capital markets provides no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

       Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Typically, there is not a public market for the securities of the privately held companies in which we have invested and will generally continue to invest. As a result, we value these securities quarterly at fair value based on inputs from management, a third party independent valuation firm and our audit committee and with the oversight, review and approval of our Board of Directors.

       The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of our investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair

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value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling shares during a period in which the net asset value understates the value of our investments will receive a lower price for their shares than the value of our investments might warrant.

       Our ability to achieve our investment objective of maximizing our portfolio's total return by generating current income from our debt investments and capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company, depends on our ability to effectively manage and deploy capital, which depends, in turn, on our investment team's ability to identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.

       Accomplishing our investment objective on a cost-effective basis is largely a function of our investment team's handling of the investment process, its ability to provide competent, attentive and efficient services and our access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments, members of our investment team are also called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.

       Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. The results of our operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Furthermore, if we cannot successfully operate our business or implement our investment policies and strategies as described herein, it could negatively impact our ability to pay dividends.

       We compete for investments with other investment funds (including private equity funds, mezzanine funds, BDCs, and other SBICs), as well as traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us, including from federal government agencies. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we are forced to match our competitors' pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in lower middle market companies is underserved by traditional commercial banks and other financing sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC.

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       We depend on the members of our investment team, particularly Vincent D. Foster, Todd A. Reppert, Rodger A. Stout, Curtis L. Hartman, Dwayne L. Hyzak and David L. Magdol, for the identification, review, final selection, structuring, closing and monitoring of our investments. These employees have significant investment expertise and relationships that we rely on to implement our business plan. Employment agreements with Messrs, Reppert, Stout, Hartman, Hyzak and Magdol expired on December 31, 2009. While all of these employees remain employed in their current positions, we have no current intention to enter into new employment agreements with such employees. Although we have entered into a non-compete agreement with Mr. Foster, we have no guarantee that he or any other employees will remain employed with us. If we lose the services of these individuals, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer.

       Our growth will require that we retain new investment and administrative personnel in a competitive market. Our ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which we compete for experienced personnel have greater resources than we have.

       The competitive environment for qualified personnel may require us to take certain measures to ensure that we are able to attract and retain experienced personnel. Such measures may include increasing the attractiveness of our overall compensation packages, altering the structure of our compensation packages through the use of additional forms of compensation, or other steps. The inability to attract and retain experienced personnel would have a material adverse effect on our business.

       We expect that members of our management team will maintain their relationships with intermediaries, financial institutions, investment bankers, commercial bankers, financial advisors, attorneys, accountants, consultants and other individuals within our network, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If our management team fails to maintain its existing relationships or develop new relationships with sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom members of our management team have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.

       The 1940 Act imposes numerous constraints on the operations of BDCs. Prior to the completion of the IPO, we did not operate, and our management team had no experience operating, as a BDC under the 1940 Act or as a RIC under Subchapter M of the Code. As a result, we have limited operating results under these regulatory frameworks that can demonstrate either their effect on our business or our ability to manage our business under these frameworks. Our management team's limited experience in managing a portfolio of assets under such constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us. If we do not remain a BDC, we might be regulated as a registered closed-end investment company under the 1940 Act, which would further decrease our operating flexibility.

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       Our business will require capital to operate and grow. We may acquire such additional capital from the following sources:

       Senior Securities.    We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities. As a result of issuing senior securities, we will be exposed to additional risks, including the following:

       Additional Common Stock.    We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors determines that such sale is in the best interests of our stockholders, and our stockholders approve such sale. See "— Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock" for a discussion of proposals approved by our stockholders that permit us to issue shares of our common stock below net asset value. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

       MSMF, our wholly owned subsidiary, and MSC II, our majority-owned subsidiary, are licensed to act as small business investment companies and are regulated by the SBA. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the Funds to forego attractive investment opportunities that are not permitted under SBA regulations.

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       Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a "change of control" of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC. If the Funds fail to comply with applicable SBIC regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder. Such actions by the SBA would, in turn, negatively affect us.

       Borrowings, also known as leverage, magnify the potential for gain or loss on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our common stock. We, through the Funds, issue debt securities guaranteed by the SBA and sold in the capital markets. As a result of its guarantee of the debt securities, the SBA has fixed dollar claims on the assets of the Funds that are superior to the claims of our common stockholders. We may also borrow from banks and other lenders, including under the $30 million investment credit facility we entered into in October 2008. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources" for a discussion regarding our investment credit facility. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends. Leverage is generally considered a speculative investment technique.

       As of December 31, 2009, we, through MSMF, had $65 million of outstanding indebtedness guaranteed by the SBA, which had a weighted average annualized interest cost of approximately 5.04% (exclusive of deferred financing costs). The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. We will need to generate sufficient cash flow to make required interest payments on the debentures. If we are unable to meet the financial obligations under the debentures, the SBA, as a creditor, will have a superior claim to the assets of MSMF over our stockholders in the event we liquidate or the SBA exercises its remedies under such debentures as the result of a default by us.

       Illustration.    The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.


Assumed Return on Our Portfolio(1)
(net of expenses)

 
   (10.0)%   (5.0)%   0.0%   5.0%   10.0%  

Corresponding net return to common stockholder

     (17.7 )%   (10.1 )%   (2.5 )%   5.0 %   12.6 %
(1)
Assumes $196.2 million in total assets, $65.0 million in debt outstanding, $129.7 million in net assets, and an average cost of funds of 5.04%. Actual interest payments may be different.

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       Our ability to achieve our investment objective may depend in part on our ability to achieve additional leverage on favorable terms by issuing debentures guaranteed by the SBA, through the Funds, or by borrowing from banks or insurance companies, and there can be no assurance that such additional leverage can in fact be achieved.

       The SBIC regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC or group of SBICs under common control to $225 million. Moreover, an SBIC may not generally borrow an amount in excess of two times its regulatory capital. Because the Investment Manager provides investment management and advisory services to both Funds, MSMF and MSC II are a group of affiliated SBICs under common control. Thus, the dollar amount of SBA-guaranteed debentures that can be issued collectively by the Funds may be limited to $225 million, absent relief from the SBA. While we cannot presently predict whether or not we, through the Funds, will borrow the maximum permitted amount, if we reach the maximum dollar amount of SBA guaranteed debentures permitted, and thereafter require additional capital, our cost of capital may increase, and there is no assurance that we will be able to obtain additional financing on acceptable terms.

       Each of the Funds' current status as an SBIC does not automatically assure that it will continue to receive SBA-guaranteed debenture funding. Receipt of SBIC leverage funding is dependent upon the Funds continuing to be in compliance with SBIC regulations and policies. Moreover, the amount of SBIC leverage funding available to SBICs is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by the Funds.

       We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of portfolio dividend and fee income, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

       Our Board of Directors has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you dividends and cause you to lose all or part of your investment.

       To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements:

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       Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses. Moreover, if we fail to maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.

       We intend to pay monthly dividends to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to pay a specified level of cash dividends, previously projected dividends for future periods, or year-to-year increases in cash dividends. Our ability to pay dividends might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay dividends. All dividends will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations, each of the Funds' compliance with applicable SBIC regulations and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will pay dividends to our stockholders in the future.

       When we make monthly distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings, recognized capital gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for federal tax purposes. In the future, our distributions may include a return of capital.

       For federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the origination of a loan or possibly in other circumstances, or contractual payment-in-kind, or PIK, interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such

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original issue discounts or increases in loan balances as a result of contractual PIK arrangements will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash. Approximately 4.2% of our total investment income for the year ended December 31, 2009 was attributable to paid in kind interest.

       Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. Accordingly, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, please see "Business — Regulation — Taxation as a Regulated Investment Company."

       We may distribute taxable dividends that are payable in part in our stock. Under an IRS revenue procedure, up to 90% of any such taxable dividend declared on or before December 31, 2012 with respect to taxable years ended on or before December 31, 2011 could be payable in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

       In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from the Funds. We will be partially dependent on the Funds for cash distributions to enable us to meet the RIC distribution requirements. The Funds may be limited by the Small Business Investment Act of 1958, and SBIC regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA's restrictions for the Funds to make certain distributions to maintain our eligibility for RIC status. We cannot assure you that the SBA will grant such waiver and if the Funds are unable to obtain a waiver, compliance with the SBIC regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us.

       In order to satisfy the requirements applicable to a RIC and to minimize corporate-level taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and net capital gain income. We may carry forward excess undistributed taxable income into the next year, net of the 4% excise tax. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return

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related to the year which generated such taxable income. As a BDC, we generally are required to meet an asset coverage ratio, as defined in the 1940 Act, of at least 200% immediately after each issuance of senior securities. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.

       While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. In addition, as a BDC, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value could decline.

       The 1940 Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below net asset value provided that our Board of Directors makes certain determinations. At our 2009 annual meeting of stockholders, our stockholders approved a proposal that authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for a period of one year ending on the earlier of June 11, 2010 or the date of our 2010 annual meeting of stockholders. Continued access to this exception will require approval of similar proposals at future stockholder meetings. At our 2008 annual meeting of stockholders, our stockholders also approved a proposal to authorize us to issue securities to subscribe to, convert to, or purchase shares of our common stock in one or more offerings. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock or securities to subscribe to, convert to, or purchase shares of our common stock would be subject to the determination by our Board of Directors that such issuance is in our and our stockholders' best interests.

       If we were to sell shares of our common stock below net asset value per share, such sales would result in an immediate dilution to the net asset value per share. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in a stockholder's interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding shares of our common stock. Any such exercise would be dilutive on the voting power of existing stockholders, and could be dilutive with regard to dividends and our net asset value, and other economic aspects of the common stock.

       Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted; however, the example below illustrates the effect of dilution to existing stockholders resulting from the sale of common stock at prices below the net asset value of such shares.

       Illustration: Example of Dilutive Effect of the Issuance of Shares Below Net Asset Value.    Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The net asset value per share of the common stock of Company XYZ is $10.00. The following table illustrates the reduction to net asset value, or NAV, and the dilution experienced by Stockholder A

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following the sale of 40,000 shares of the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.

   
   Prior to Sale
Below NAV 		  Following Sale
Below NAV 		  Percentage
Change 		 
 

Reduction to NAV

                    
 

Total Shares Outstanding

     1,000,000     1,040,000     4.0 %
 

NAV per share

   $ 10.00   $ 9.98     (0.2 )%
 

Dilution to Existing Stockholder

                    
 

Shares Held by Stockholder A

     10,000     0,000 (1)   0.0 %
 

Percentage Held by Stockholder A

     1.00 %   0.96 %   (3.8 )%
 

Total Interest of Stockholder A in NAV

   $ 100,000   $ 99,808     (0.2 )%
(1)
Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV.

       We, the Funds, and our portfolio companies are subject to applicable local, state and federal laws and regulations, including, without limitation, federal immigration laws and regulations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. In addition, any change to the SBA's current debenture SBIC program could have a significant impact on our ability to obtain lower-cost leverage, through the Funds, and therefore, our ability to compete with other finance companies.

       Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise of our investment team to other types of investments in which our investment team may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

       Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.

RISKS RELATED TO OUR INVESTMENTS

       Investing in lower middle market companies involves a number of significant risks. Among other things, these companies:

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       In addition, in the course of providing significant managerial assistance to certain of our portfolio companies, certain of our officers and directors may serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, our officers and directors may be named as defendants in such litigation, which could result in an expenditure of funds (through our indemnification of such officers and directors) and the diversion of management time and resources.

       We invest, and will continue to invest in companies whose securities are not publicly traded, and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

       We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected yield on the investment.

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       We invest primarily in secured term debt as well as equity issued by lower middle market companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

       Even though we may have structured certain of our investments as secured loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securing such subordinated claim to the bankruptcy estate. The principles of equitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior loan is re-characterized as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to a borrower's business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender's liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business.

       Certain loans that we make are secured by a second priority security interest in the same collateral pledged by a portfolio company to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders. Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secured debt without the senior lender's consent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it will control the disposition of any collateral in the event of bankruptcy or other default. In many such cases, the senior lender will require us to enter into an "intercreditor agreement" prior to permitting the portfolio company to borrow from us. Typically the intercreditor agreements we are requested to execute expressly subordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings; (3) the amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans.

       Finally, the value of the collateral securing our debt investment will ultimately depend on market and economic conditions, the availability of buyers and other factors. Therefore, there can be no assurance that

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the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by our first or second priority liens. There is also a risk that such collateral securing our investments will decrease in value over time, will be difficult to sell in a timely manner, will be difficult to appraise and will fluctuate in value based upon the success of the portfolio company and market conditions. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by our second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company's remaining assets, if any.

       We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market's assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

       We do not, and do not expect to, control the decision making in many of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest will make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, will take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that would decrease the value of our portfolio holdings.

       A portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders could lead to non-payment of interest and other defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company's ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.

       As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our Board of Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized losses in our loan portfolio could be an indication of a portfolio company's inability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.

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       We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

       Some of our debt investments will bear interest at variable rates and the interest income from these investments could be negatively affected by decreases in market interest rates. In addition, an increase in interest rates would make it more expensive to use debt to finance our investments. As a result, a significant increase in market interest rates could increase our cost of capital, which would reduce our net investment income. Also, an increase in interest rates available to investors could make an investment in our common stock less attractive if we are not able to increase our dividend rate, a situation which could reduce the value of our common stock. Conversely, a decrease in interest rates may have an adverse impact on our returns by requiring us to seek lower yields on our debt investments and by increasing the risk that our portfolio companies will prepay our debt investments, resulting in the need to redeploy capital at potentially lower rates. A decrease in market interest rates may also adversely impact our returns on idle funds, which would reduce our net investment income.

       Certain investments that we have made in the past and may make in the future include warrants or other equity securities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We often seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these puts rights for the consideration provided in our investment documents if the issuer is in financial distress.

RISKS RELATING TO OUR COMMON STOCK

       Shares of closed-end investment companies, including BDCs, may trade at a discount from net asset value. This characteristic of closed-end investment companies and BDCs is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade at, above or below net asset value. In addition, if our common stock trades below net asset value, we will generally not be able to issue additional common stock at the market price unless our stockholders approve

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such a sale and our Board of Directors makes certain determinations. See "— Risks Relating to Our Business and Structure — Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock" for a discussion of a proposal approved by our stockholders that permits us to issue shares of our common stock below net asset value.

       Delays in investing the net proceeds raised in an offering or from exiting an investment or other capital may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of any offering or from exiting an investment or other capital on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

       We anticipate that, depending on market conditions and the amount of the capital, it may take us a substantial period of time to invest substantially all the capital in securities meeting our investment objective. During this period, we will invest the capital primarily in marketable securities and idle funds investments, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. As a result, any distributions that we pay during such period may be substantially lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective. In addition, until such time as the net proceeds of any offering or from exiting an investment or other capital are invested in securities meeting our investment objective, the market price for our common stock may decline. Thus, the initial return on your investment may be lower than when, if ever, our portfolio is fully invested in securities meeting our investment objective.

       Marketable securities and idle funds investments can include, among other things, secured debt investments, independently rated debt investments and diversified bond funds. Many of these investments in debt obligations are, or would be if rated, below investment grade quality. Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, similar to our portfolio investments in the lower middle market. See "— Risks Related to Our Investments — Our investments in portfolio companies involve higher levels of risk, and we could lose all or part of our investment." Many of these marketable securities and idle funds investments are purchased through over the counter or other markets and are therefore liquid at the time of purchase but may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions or investor perceptions. See "— Risks Related to Our Investments — The lack of liquidity in our investments may adversely affect our business" for a description of risks related to holding illiquid investments. In addition, domestic and foreign markets are complex and interrelated, so that events in one sector of the world markets or economy, or in one geographical region, can reverberate and have materially negative consequences for other market, economic or regional sectors in a manner that may not be foreseen and which may materially affect the market price of our marketable securities and idle funds investments. Other risks that our portfolio company investments in the lower middle market are subject to are also applicable to these marketable securities and idle funds investments. See "— Risks Related to Our Investments" for risks affecting our portfolio company investments in the lower middle market.

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       The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies involve higher levels of risk, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.

       Fluctuations in the trading prices of our shares may adversely affect the liquidity of the trading market for our shares and, if we seek to raise capital through future equity financings, our ability to raise such equity capital. The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

       The Maryland General Corporation Law and our articles of incorporation and bylaws contain provisions that may have the effect of discouraging, delaying or making difficult a change in control of our company or the removal of our incumbent directors. The existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third-party bids for ownership of our company. These provisions may prevent any premiums being offered to you for our common stock.

Item 1B.    Unresolved Staff Comments

       None.

Item 2.    Properties

       We do not own any real estate or other physical properties materially important to our operations. Currently, we lease office space in Houston, Texas for our corporate headquarters.

Item 3.    Legal Proceedings

       We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.

Item 4.    Reserved

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK AND HOLDERS

       Our common stock began trading on the NASDAQ Global Select Market under the symbol "MAIN" on October 5, 2007. Prior to that date, there was no established public trading market for our common stock.

       The following table sets forth, for each fiscal quarter since our common stock began trading, the range of high and low closing prices of our common stock as reported on the NASDAQ Global Select Market.

 
   High   Low  

Fiscal year 2009

              
 

Fourth quarter

   $ 16.35   $ 13.29  
 

Third quarter

   $ 14.25   $ 13.03  
 

Second quarter

   $ 14.74   $ 9.66  
 

First quarter

   $ 10.43   $ 9.07  

Fiscal year 2008

              
 

Fourth quarter

   $ 11.95   $ 8.82  
 

Third quarter

   $ 14.40   $ 11.38  
 

Second quarter

   $ 14.40   $ 10.90  
 

First quarter

   $ 14.10   $ 12.75  

Fiscal year 2007

              
 

Fourth quarter (from October 5, 2007)

   $ 15.02   $ 13.60  

       On March 4, 2010, the last sale price of our common stock on the NASDAQ Global Market was $14.59 per share, and there were approximately 209 holders of record of the common stock which did not include shareholders for whom shares are held in "nominee" or "street name."

DIVIDENDS

       From our IPO through the third quarter of 2008, we have paid quarterly dividends, but in the fourth quarter of 2008 we began paying, and we intend to continue paying, monthly dividends to our stockholders. Our monthly dividends, if any, will be determined by our Board of Directors on a quarterly basis.

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       The following table summarizes our dividends declared to date:

Date Declared
 
Record Date
 
Payment Date
 
Amount(1)
 

Fiscal year 2010

                
 

March 9, 2010

   March 25, 2010   April 15, 2010   $ 0.125  
 

March 9, 2010

   April 21, 2010   May 14, 2010   $ 0.125  
 

March 9, 2010

   May 20, 2010   June 15, 2010   $ 0.125  
 

December 8, 2009

   February 22, 2010   March 15, 2010   $ 0.125  
 

December 8, 2009

   January 21, 2010   February 16, 2010   $ 0.125  
 

December 8, 2009

   January 6, 2010   January 15, 2010   $ 0.125  
               
   

Total

           $ 0.750  
               

Fiscal year 2009

                
 

September 3, 2009

   November 20, 2009   December 15, 2009   $ 0.125 (2)
 

September 3, 2009

   October 21, 2009   November 16, 2009   $ 0.125 (2)
 

September 3, 2009

   September 21, 2009   October 15, 2009   $ 0.125 (2)
 

June 3, 2009

   August 20, 2009   September 15, 2009   $ 0.125 (2)
 

June 3, 2009

   July 21, 2009   August 14, 2009   $ 0.125 (2)
 

June 3, 2009

   June 19, 2009   July 15, 2009   $ 0.125 (2)
 

March 4, 2009

   May 21, 2009   June 15, 2009   $ 0.125 (2)
 

March 4, 2009

   April 21, 2009   May 15, 2009   $ 0.125 (2)
 

March 4, 2009

   March 20, 2009   April 15, 2009   $ 0.125 (2)
 

December 3, 2008

   February 20, 2009   March 16, 2009   $ 0.125 (2)
 

December 3, 2008

   January 22, 2009   February 16, 2009   $ 0.125 (2)
 

December 3, 2008

   December 19, 2008   January 15, 2009   $ 0.125 (3)
               
   

Total

           $ 1.500  
               

Fiscal year 2008

                
 

September 3, 2008

   November 19, 2008   December 15, 2008   $ 0.125  
 

September 3, 2008

   October 17, 2008   November 14, 2008   $ 0.125  
 

September 3, 2008

   September 18, 2008   October 15, 2008   $ 0.125  
 

July 31, 2008

   August 14, 2008   September 12, 2008   $ 0.360  
 

May 1, 2008

   May 12, 2008   June 12, 2008   $ 0.350  
 

February 6, 2008

   February 15, 2008   March 21, 2008   $ 0.340  
               
   

Total

           $ 1.425 (3)
               

Fiscal year 2007

                
 

November 5, 2007

   November 16, 2007   November 30, 2007   $ 0.330 (4)
               

Cumulative dividends declared or paid

           $ 4.005  
               
(1)
The determination of the tax attributes of Main Street's distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Ordinary dividend distributions from a RIC do not qualify for the 15% maximum tax rate on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations.

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(2)
These dividends attributable to fiscal year 2009 were comprised of ordinary income of $1.22 per share and long term capital gain of $0.16 per share.

(3)
These dividends attributable to fiscal year 2008 were comprised of ordinary income of $0.95 per share and long term capital gain of $0.60 per share and included dividends declared during fiscal year 2008 and the dividend declared and accrued as of December 31, 2008 and paid on January 15, 2009, pursuant to the Code.

(4)
This quarterly dividend attributable to fiscal year 2007 was comprised of ordinary income of $0.105 per share and long term capital gain of $0.225 per share.

       To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We will be subject to a 4% nondeductible federal excise tax on certain undistributed taxable income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the "Excise Tax Avoidance Requirement"). Dividends declared and paid by us in a year will generally differ from taxable income for that year, as such dividends may include the distribution of current year taxable income, less amounts carried over into the following year, and the distribution of prior year taxable income carried over into and distributed in the current year. For amounts we carry over into the following year, we will be required to pay a 4% excise tax for the excess over 98% of our annual taxable income in excess of distributions for the year. We may retain for investment some or all of our net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they had received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. In general, our stockholders also would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to their allocable shares of the tax we paid on the capital gains deemed distributed to them. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

       Pursuant to a revenue procedure issued by the Internal Revenue Service, or the IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including business development companies) that are paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements. In order to qualify for such treatment, the revenue procedure requires that at least 10% of the total distribution be paid in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This revenue procedure applies to distributions declared on or before December 31, 2012, with respect to taxable years ended on or before December 31, 2011.

       We have adopted a dividend reinvestment plan ("DRIP") that provides for the reinvestment of dividends on behalf of our stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if we declare a cash dividend, our stockholders who have not "opted out" of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly-issued shares will be valued based upon the final closing price of MSCC's common stock on a valuation date determined by our Board of Directors. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs.

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SALES OF UNREGISTERED SECURITIES

       During 2009, we issued a total of 271,906 shares of our common stock under our dividend reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933. The aggregate offering price for the shares of our common stock issued under the dividend reinvestment plan during 2009 was approximately $3.7 million.

PURCHASES OF EQUITY SECURITIES

       On November 13, 2008, we announced that our Board of Directors authorized our officers, in their discretion and subject to compliance with the 1940 Act and other applicable laws, to purchase on the open market or in privately negotiated transactions, an amount up to $5 million of the outstanding shares of our common stock at prices per share not to exceed our last reported net asset value per share. The program terminated in accordance with its terms on December 31, 2009. As of December 31, 2009, we had cumulatively purchased 199,244 shares of our common stock for $1.9 million in the open market pursuant to the program. The following chart summarizes repurchases of our common stock under the stock repurchase program during the 2009 year.

Period
  Total Number of
Shares Purchased 		  Average Price Paid
per Share 		  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs 		  Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs 		 

January 2009

     22,600   $ 10.06     22,600        

February 2009

     30,700   $ 9.96     30,700        

March 2009

     111,244   $ 9.74     111,244        

April 2009

     —     —     —        

May 2009

     —     —     —        

June 2009

     —     —     —        

July 2009

     —     —     —        

August 2009

     —     —     —        

September 2009

     —     —     —        

October 2009

     —     —     —        

November 2009

     —     —     —        

December 2009

     —     —     —        
                       

Total

     164,544   $ 9.82     164,544   $ —  
                     

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STOCK PERFORMANCE GRAPH

       The following graph compares the stockholder return on our common stock from October 5, 2007 to December 31, 2009 with the Russell 2000 Index and the Main Street Peer Group index. This comparison assumes $100.00 was invested on October 5, 2007 (the date our common stock began to trade on the NASDAQ Global Select Market in connection with our initial public offering) in our common stock and in the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.


COMPARISON OF STOCKHOLDER RETURN(1)
Among Main Street Capital Corporation, the Russell 2000 Index and Main Street Peer Group
(For the Period October 5, 2007 to December 31, 2009)

GRAPHIC

(1)
Total return includes reinvestment of dividends through December 31, 2009.

(2)
The Main Street Peer Group index is composed of Triangle Capital Corporation, Prospect Capital Corporation, TICC Capital Corp., and Kohlberg Capital Corporation.

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Item 6.    Selected Financial Data

       The selected financial and other data below reflects the combined operations of MSMF and MSMF GP for the years ended December 31, 2005 and 2006 and the consolidated operations of Main Street and its subsidiaries for the years ended December 31, 2007, 2008, and 2009. The selected financial data at December 31, 2005, 2006, 2007, 2008, and 2009 and for the years ended December 31, 2005, 2006, 2007, 2008, and 2009, have been derived from combined/consolidated financial statements that have been audited by Grant Thornton LLP, an independent registered public accounting firm. You should read this selected financial and other data in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included in this Annual Report on Form 10-K.

 
   Years Ended December 31,  
 
   2005   2006   2007   2008   2009  
 
   (dollars in thousands)
  

Statement of operations data:

                                

Investment income:

                                
 

Total interest, fee and dividend income

   $ 7,338   $ 9,013   $ 11,312   $ 16,123   $ 13,830  
 

Interest from idle funds and other

     222     749     1,163     1,172     2,172  
                       
   

Total investment income

     7,560     9,762     12,475     17,295     16,002  
                       

Expenses:

                                
 

Interest

     (2,064 )   (2,717 )   (3,246 )   (3,778 )   (3,791 )
 

General and administrative

     (197 )   (198 )   (512 )   (1,684 )   (1,351 )
 

Expenses reimbursed to Investment Manager

     —     —     —     (1,007 )   (570 )
 

Share-based compensation

     —     —     —     (511 )   (1,068 )
 

Management fees to affiliate

     (1,929 )   (1,942 )   (1,500 )   —     —  
 

Professional costs related to initial public offering

     —     —     (695 )   —     —  
                       
   

Total expenses

     (4,190 )   (4,857 )   (5,953 )   (6,980 )   (6,780 )
                       

Net investment income

     3,370     4,905     6,522     10,315     9,222  
   

Total net realized gain (loss) from investments

     1,488     2,430     4,692     1,398     (7,798 )
                       

Net realized income

     4,858     7,335     11,214     11,713     1,424  
   

Total net change in unrealized appreciation (depreciation) from investments

     3,032     8,488     (5,406 )   (3,961 )   8,242  

Income tax benefit (provision)

     —     —     (3,263 )   3,182     2,290  
                       

Net increase (decrease) in net assets resulting from operations

   $ 7,890   $ 15,823   $ 2,545   $ 10,934   $ 11,956  
                       

Net investment income per share — basic and diluted

     N/A     N/A   $ 0.76   $ 1.13   $ 0.92  

Net realized income per share — basic and diluted

     N/A     N/A   $ 1.31   $ 1.29   $ 0.14  

Net increase (decrease) in net assets resulting from operations per share — basic and diluted

     N/A     N/A   $ 0.30   $ 1.20   $ 1.19  

Weighted average shares outstanding — basic and diluted

     N/A     N/A     8,587,701     9,095,904     10,042,639  

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   As of December 31,  
 
   2005   2006   2007   2008   2009  
 
   (dollars in thousands)
  

Balance sheet data:

                                

Assets:

                                
 

Total portfolio investments at fair value

   $ 51,192   $ 73,711   $ 105,650   $ 127,007   $ 141,922  
 

Marketable securities and idle funds investments

     —     —     24,063     4,390     18,071  
 

Cash and cash equivalents

     26,261     13,769     41,889     35,375     30,620  
 

Deferred tax asset

     —     —     —     1,121     2,716  
 

Other assets

     439     630     1,576     1,101     1,510  
 

Deferred financing costs, net of accumulated amortization

     1,442     1,333     1,670     1,635     1,611  
                       
   

Total assets

   $ 79,334   $ 89,443   $ 174,848   $ 170,629   $ 196,450  
                       

Liabilities and net assets:

                                
 

SBIC debentures

   $ 45,100   $ 45,100   $ 55,000   $ 55,000   $ 65,000  
 

Deferred tax liability

     —     —     3,026     —     —  
 

Interest payable

     771     855     1,063     1,108     1,069  
 

Accounts payable and other liabilities

     194     216     610     2,165     721  
                       
   

Total liabilities

     46,065     46,171     59,699     58,273     66,790  

Total net assets

     33,269     43,272     115,149     112,356     129,660  
                       
   

Total liabilities and net assets

   $ 79,334   $ 89,443   $ 174,848   $ 170,629   $ 196,450  
                       

Other data:

                                
 

Weighted average effective yield on debt investments(1)

     15.3 %   15.0 %   14.3 %   14.0 %   14.3 %
 

Number of portfolio companies(2)

     19     24     27     31     35  
 

Expense ratios (as percentage of average net assets):

                                
   

Operating expenses(3)

     9.0 %   5.5 %   4.8 %   2.8 %   2.5 %
   

Interest expense

     8.8 %   7.0 %   5.7 %   3.3 %   3.1 %
(1)
Weighted-average effective yield is calculated based on our debt investments at the end of each period and includes amortization of deferred debt origination fees and accretion of original issue discount, but excludes debt investments on non-accrual status.

(2)
Excludes the investment in affiliated Investment Manager, as referenced in "Formation Transactions" and in the notes to the financial statements elsewhere in this Annual Report on Form 10-K.

(3)
The ratio for the year ended December 31, 2007 reflects the impact of professional costs related to the IPO. These costs were 25.7% of operating expenses for the year.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

       The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

       Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings "Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors" in Part I of this report.

ORGANIZATION

       Main Street Capital Corporation ("MSCC") was formed on March 9, 2007 for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP ("MSMF") and its general partner, Main Street Mezzanine Management, LLC ("MSMF GP"), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the "Investment Manager"), (iii) raising capital in an initial public offering, which was completed in October 2007 (the "IPO"), and (iv) thereafter operating as an internally managed business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). MSMF is licensed as a Small Business Investment Company ("SBIC") by the United States Small Business Administration ("SBA") and the Investment Manager acts as MSMF's manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by us, we do not pay any external investment advisory fees, but instead we incur the net operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The transactions discussed above were consummated in October 2007 and are collectively termed the "Formation Transactions." Immediately following the Formation Transactions, Main Street Equity Interests, Inc. ("MSEI") was formed as a wholly owned consolidated subsidiary of MSCC. MSEI has elected for tax purposes to be treated as a taxable entity and is taxed at normal corporate tax rates based on its taxable income.

       On January 7, 2010, MSCC consummated transactions (the "Exchange Offer") to exchange 1,239,695 shares of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP ("MSC II" and, together with MSMF, the "Funds"). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC ("MSC II GP"), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests, are collectively termed the "Exchange Offer Transactions."

       Unless otherwise noted or the context otherwise indicates, the terms "we," "us," "our" and "Main Street" refer to MSCC and its subsidiaries, including MSMF and MSMF GP, prior to the Exchange Offer Transactions and MSCC and its subsidiaries, including MSMF, MSMF GP, MSC II and MSC II GP, subsequent to the Exchange Offer Transactions.

OVERVIEW

       We are a principal investment firm focused on providing customized debt and equity financing to lower middle market companies, which we generally define as companies with annual revenues between $10 million and $100 million that operate in diverse industries. We invest primarily in secured debt instruments, equity investments, warrants and other securities of lower middle market companies based in the United States. Our principal investment objective is to maximize our portfolio's total return by generating current income from our debt investments and capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Our core portfolio investments generally range in size from $2 million to $20 million.

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       Our investments are generally made through MSCC and the Funds. Since the IPO, MSCC and MSMF have co-invested in substantially every investment we have made. In addition, approximately 88% of the MSC II portfolio investments as of the date of the Exchange Offer represented co-investments with MSCC and/or MSMF. MSCC and the Funds share the same investment strategies and criteria in the lower middle market, although they are subject to different regulatory regimes. An investor's return in MSCC will depend, in part, on the Funds' investment returns as MSMF is a wholly owned subsidiary of MSCC and MSC II is a majority owned subsidiary of MSCC subsequent to the Exchange Offer.

       We seek to fill the current financing gap for lower middle market businesses, which, historically, have had more limited access to financing from commercial banks and other traditional sources. Given the current credit environment, we believe the limited access to financing for lower middle market companies is even more pronounced. The underserved nature of the lower middle market creates the opportunity for us to meet the financing needs of lower middle market companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a company's capital structure, from senior secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing solutions, or "one stop" financing. Providing customized, "one stop" financing solutions has become even more relevant to our portfolio companies in the current credit environment. We generally seek to partner directly with entrepreneurs, management teams and business owners in making our investments. Main Street believes that its core investment strategy has a lower correlation to the broader debt and equity markets.

       The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.

       During 2009, we paid monthly dividends of $0.125 per share, or $1.50 per share for the entire year. For tax purposes, the monthly dividend paid in January 2009 was applied against the 2008 taxable income distribution requirements since it was declared and accrued prior to December 31, 2008. We generated undistributed taxable income (or "spillover income") of approximately $0.8 million, or $0.08 per share, during 2009 that was carried forward toward distributions paid in 2010. For the 2009 calendar year, the dividends paid of $1.50 per share represented an increase of 5.3% over the total dividends of $1.425 per share paid during calendar year 2008. In December 2009, we declared monthly dividends for the first quarter of 2010 totaling $0.375 per share. In March 2010, we declared monthly dividends for the second quarter of 2010 totaling $0.375 per share. Including the dividends declared for the first and second quarters of 2010, we will have paid approximately $4.01 per share in cumulative dividends since our October 2007 initial public offering.

       At December 31, 2009, we had $48.7 million in cash and cash equivalents, marketable securities, and idle funds investments. In January 2010, we completed a follow-on public stock offering in which we sold 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share, resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs. Due to our existing cash, cash equivalents, marketable securities and idle funds investments, and available leverage, we expect to have sufficient cash resources to support our investment and operational activities through all of calendar year 2010. However, this projection will be impacted by, among other things, the pace of new and follow-on investments, debt repayments and investment redemptions, the level of cash flow from operations and cash flow from realized gains, and the level of dividends we pay in cash.

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       The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") contains several provisions applicable to SBIC funds, including the Funds. One of the key SBIC-related provisions included in the Stimulus Bill increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds. The prior maximum amount of SBIC leverage available to affiliated SBIC funds was approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between the Funds. Subsequent to the Exchange Offer, Main Street now has access to an incremental $90 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of MSMF SBIC leverage.

       A recently proposed bill, the Small Business Financing and Investment Act of 2009, or HR 3854, would increase the total SBIC leverage capacity for the Funds from $225 million to $350 million. If enacted, this bill would increase Main Street's SBIC leverage capacity through the Funds by an additional $125 million.

       In our view, the SBIC leverage, including the increased capacity, remains a strategic advantage due to its long-term, flexible structure and a low fixed cost. The SBIC leverage also provides proper matching of duration and cost compared with our core portfolio investments. As of December 31, 2009, the weighted average duration of our core portfolio debt investments was approximately 3.1 years compared to a weighted average duration of 6.1 years for our SBIC leverage. As of December 31, 2009, approximately 87% of core portfolio debt investments bear interest at fixed rates which is also appropriately matched by the long-term, low cost fixed rates available through our SBIC leverage. In addition, we believe the embedded value of our SBIC leverage would be significant if we adopted the fair value option provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("Codification" or "ASC") 825, Financial Instruments, relating to accounting for debt obligations at their fair value.

CRITICAL ACCOUNTING POLICIES

       Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). For the years ended December 31, 2009 and 2008, the consolidated financial statements of Main Street include the accounts of MSCC, MSMF, MSEI and MSMF GP. The Investment Manager is accounted for as a portfolio investment. "Marketable securities and idle funds investments" are classified as financial instruments and are reported separately on our Consolidated Balance Sheets and Consolidated Schedule of Investments due to the nature of such investments. To allow for more relevant disclosure of our "core" investment portfolio, "core" portfolio investments, as used herein, refers to all of our portfolio investments excluding the Investment Manager and "Marketable securities and idle funds investments." Main Street's results of operations and cash flows for the years ended December 31, 2009, 2008, and 2007, and financial positions as of December 31, 2009 and 2008, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its subsidiaries have been eliminated in consolidation.

       Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Audit and Accounting Guide for Investment Companies issued by the American Institute of Certified Public Accountants (the "AICPA Guide"), we are precluded from consolidating portfolio company investments, including those in which we have a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in the AICPA Guide occurs if we own a controlled operating company that provides all or substantially all of its services directly to us, or to an investment company of ours. None of the investments made by us qualify for this exception. Therefore, our portfolio investments are carried on the balance sheet at fair value, as discussed further in Note B to our consolidated financial statements, with any adjustments to fair value recognized as "Net Change in Unrealized Appreciation (Depreciation) from Investments" on our Statement of Operations until the investment is disposed of, resulting in any gain or loss on exit being recognized as a "Net Realized Gain (Loss) from Investments."

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       The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of our portfolio investments and the related amounts of unrealized appreciation and depreciation. As of December 31, 2009 and 2008, approximately 72% and 74%, respectively, of our total assets represented investments in portfolio companies valued at fair value (including the investment in the Investment Manager). We are required to report our investments at fair value. We adopted the provisions of ASC 820, Fair Value Measurements and Disclosures in the first quarter of 2008. 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.

       Our core business plan calls for us to invest primarily in illiquid securities issued by private companies. These core portfolio investments may be subject to restrictions on resale and will generally have no established trading market. As a result, we determine in good faith the fair value of our portfolio investments pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors and in accordance with the 1940 Act. We review external events, including private mergers, sales and acquisitions involving comparable companies, and include these events in the valuation process. Our valuation policy and process are intended to provide a consistent basis for determining the fair value of the portfolio.

       For valuation purposes, control investments are composed of equity and debt securities for which we have a controlling interest in the portfolio company or have the ability to nominate a majority of the portfolio company's board of directors. Market quotations are generally not readily available for our control investments. As a result, we determine the fair value of control investments using a combination of market and income approaches. Under the market approach, we will typically use the enterprise value methodology to determine the fair value of these investments. 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, or 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, we analyze various factors, including the portfolio company's historical and projected financial results. We allocate the enterprise value to investments in order of the legal priority of the investments. We will also use the income approach to determine the fair value of these securities, based on projections of the discounted future free cash flows that the portfolio company or the debt security will likely generate. The valuation approaches for our control investments estimate the value of the investment if we were to sell, or exit, the investment, assuming the highest and best use of the investment by market participants. In addition, these valuation approaches consider the value associated with our ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.

       For valuation purposes, non-control investments are composed of debt and equity securities for which we do not have a controlling interest in the portfolio company, or the ability to nominate a majority of the portfolio company's board of directors. Market quotations for our non-control investments are generally not readily available. For our non-control investments, we use a combination of the market and income approaches to value our equity investments and the income approach to value our debt instruments. For non-control debt investments, we determine the fair value primarily using a yield 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. Our estimate of the expected repayment date of a debt security is generally the legal maturity date of the instrument, as we generally intend to hold our loans to maturity. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. We will use the value determined by the yield analysis as the fair value for that security; however, because of our general intent to hold our loans to maturity, the fair value will not exceed the face amount of the debt security. A change in the assumptions that we use to estimate the fair value of our debt securities using the yield analysis could

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have a material impact on the determination of fair value. If there is deterioration in credit quality or a debt security is in workout status, we may consider other factors in determining the fair value of a debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

       Due to the inherent uncertainty in the valuation process, our estimate of fair value may differ materially from the values that would have been used had a ready 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 gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.

       We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policy, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security's status significantly improves regarding ability to service the debt or other obligations, or if a loan or debt security is fully impaired, sold or written off, we will remove it from non-accrual status.

       We may periodically provide services, including structuring and advisory services, to our portfolio companies. 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 accreted into interest income over the life of the financing.

       While not significant to our total core debt investment portfolio, we currently hold several loans in our core portfolio that contain PIK interest provisions. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain regulated investment company ("RIC") tax treatment (as discussed below), this non-cash source of income will need to be paid out to stockholders in the form of distributions, even though we may not have collected the PIK interest in cash. We will stop accruing PIK interest and write off any accrued and uncollected interest when it is determined that PIK interest is no longer collectible.

       We account for our share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation — Stock Compensation. Accordingly, for restricted stock awards, we measured the grant date fair value based upon the market price of our common stock on the date of the grant and will amortize this fair value to share-based compensation expense over the requisite service period or vesting term.

       MSCC has elected and intends to qualify for the tax treatment applicable to a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and, among other things, intends to make

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the required distributions to our stockholders as specified therein. As a RIC, we generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income.

       MSCC's wholly owned subsidiary, MSEI, is a taxable entity which holds certain of our core portfolio investments. MSEI is consolidated for U.S. GAAP reporting purposes, and the core portfolio investments held by MSEI are included in our consolidated financial statements. The principal purpose of MSEI is to permit us to hold equity investments in portfolio companies which are "pass through" entities for tax purposes in order to comply with the "source income" requirements contained in the RIC tax provisions. MSEI is not consolidated with Main Street for income tax purposes and may generate income tax expense or income tax benefit as a result of MSEI's ownership of certain core portfolio investments. This income tax expense or benefit, if any, is reflected in our consolidated statement of operations.

       MSEI uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

CORE PORTFOLIO COMPOSITION

       Core portfolio investments principally consist of secured debt, equity warrants and direct equity investments in privately held companies. The core debt investments are secured by either a first or second lien on the assets of the portfolio company, generally bear interest at fixed rates, and generally mature between five and seven years from the original investment. In most portfolio companies, we also receive nominally priced equity warrants and/or make direct equity investments, usually in connection with a debt investment.

       The Investment Manager is a wholly owned subsidiary of MSCC. However, the Investment Manager is accounted for as a portfolio investment of Main Street, since it conducts a significant portion of its investment management activities outside of MSCC and its subsidiaries. To allow for more relevant disclosure of our core investment portfolio, our investment in the Investment Manager has been excluded from the tables and amounts set forth below.

       Summaries of the composition of our core investment portfolio at cost and fair value as a percentage of total core portfolio investments are shown in the following table:

Cost:
  December 31, 2009   December 31, 2008  

First lien debt

     69.3 %   76.2 %

Equity

     13.4 %   11.0 %

Second lien debt

     10.7 %   7.4 %

Equity warrants

     6.6 %   5.4 %
           

    100.0 %   100.0 %
           

 

Fair Value:
  December 31, 2009   December 31, 2008  

First lien debt

     57.4 %   67.0 %

Equity

     19.5 %   15.7 %

Equity warrants

     13.5 %   10.2 %

Second lien debt

     9.6 %   7.1 %
           

    100.0 %   100.0 %
           

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       The following table shows the core portfolio composition by geographic region of the United States at cost and fair value as a percentage of total core portfolio investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company:

Cost:
  December 31, 2009   December 31, 2008  

Southwest

     50.1 %   50.2 %

West

     28.6 %   36.3 %

Southeast

     9.0 %   5.1 %

Midwest

     6.9 %   4.7 %

Northeast

     5.4 %   3.7 %
           

    100.0 %   100.0 %
           

 

Fair Value:
  December 31, 2009   December 31, 2008  

Southwest

     51.1 %   56.0 %

West

     28.4 %   31.1 %

Southeast

     8.4 %   4.1 %

Midwest

     6.3 %   5.1 %

Northeast

     5.8 %   3.7 %
           

    100.0 %   100.0 %
           

       Main Street's core portfolio investments are generally in lower middle market companies conducting business in a variety of industries. Set forth below are tables showing the composition of Main Street's core portfolio by industry at cost and fair value as of December 31, 2009 and 2008:

Cost:
  December 31, 2009   December 31, 2008  

Professional services

     10.1 %   4.1 %

Precast concrete manufacturing

     9.7 %   11.3 %

Custom wood products

     9.1 %   9.3 %

Retail

     7.5 %   6.5 %

Electronics manufacturing

     7.1 %   7.6 %

Agricultural services

     6.6 %   8.3 %

Industrial equipment

     6.4 %   12.0 %

Transportation/Logistics

     6.1 %   6.6 %

Restaurant

     5.6 %   6.1 %

Information services

     5.1 %   0.9 %

Industrial services

     5.0 %   0.5 %

Health care services

     4.7 %   4.2 %

Manufacturing

     4.1 %   4.7 %

Equipment rental

     3.6 %   2.1 %

Health care products

     3.0 %   5.8 %

Metal fabrication

     2.5 %   3.4 %

Governmental services

     2.0 %   0.0 %

Infrastructure products

     1.6 %   1.7 %

Distribution

     0.2 %   0.1 %

Mining and minerals

     0.0 %   4.8 %
           

    100.0 %   100.0 %
           

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Fair Value:
  December 31, 2009   December 31, 2008  

Precast concrete manufacturing

     11.5 %   13.7 %

Professional services

     10.1 %   5.4 %

Health care services

     9.1 %   6.1 %

Agricultural services

     7.9 %   8.1 %

Industrial services

     7.0 %   2.8 %

Retail

     6.6 %   7.0 %

Transportation/Logistics

     6.3 %   6.5 %

Electronics manufacturing

     6.2 %   7.7 %

Restaurant

     6.2 %   6.7 %

Industrial equipment

     5.2 %   10.2 %

Metal fabrication

     4.5 %   4.3 %

Information services

     4.4 %   0.9 %

Manufacturing

     3.9 %   5.1 %

Custom wood products

     3.2 %   6.8 %

Health care products

     2.9 %   5.8 %

Equipment rental

     2.3 %   2.0 %

Governmental services

     2.1 %   0.0 %

Distribution

     0.4 %   0.4 %

Infrastructure products

     0.2 %   0.5 %
           

    100.0 %   100.0 %
           

       Our core portfolio investments carry a number of risks including, but not limited to: (1) investing in lower middle market companies which may have a limited operating history and financial resources; (2) holding investments that are not publicly traded and which may be subject to legal and other restrictions on resale; and (3) other risks common to investing in below investment grade debt and equity investments in private, lower middle market companies.

CORE PORTFOLIO ASSET QUALITY

       We utilize an internally developed investment rating system to rate the performance of each core portfolio company. Investment Rating 1 represents a portfolio company that is performing in a manner which significantly exceeds expectations and projections. Investment Rating 2 represents a portfolio company that, in general, is performing above expectations. Investment Rating 3 represents a portfolio company that is generally performing in accordance with expectations. Investment Rating 4 represents a portfolio company that is underperforming expectations. Investments with such a rating require increased Main Street monitoring and scrutiny. Investment Rating 5 represents a portfolio company that is significantly underperforming. Investments with such a rating require heightened levels of Main Street monitoring and scrutiny and involve the recognition of significant unrealized depreciation on such investment. All new core portfolio investments receive an initial 3 rating.

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       The following table shows the distribution of our core investments on our 1 to 5 investment rating scale at fair value as of December 31, 2009 and 2008:

 
   December 31, 2009   December 31, 2008  
Investment Rating
  Investments at
Fair Value 		  Percentage of
Total Portfolio 		  Investments at
Fair Value 		  Percentage of
Total Portfolio 		 
 
   (dollars in thousands)
  
 

1

   $ 14,509     11.5 % $ 27,523     24.9 %
 

2

     51,160     40.7 %   23,150     21.0 %
 

3

     50,716     40.3 %   53,123     48.1 %
 

4

     9,000     7.1 %   6,035     5.5 %
 

5

     500     0.4 %   500     0.5 %
                   

Totals

   $ 125,885     100.0 % $ 110,331     100.0 %
                   

       Based upon our investment rating system, the weighted average rating of our portfolio as of December 31, 2009 and 2008 was approximately 2.4. As of December 31, 2009 and 2008, we had three investments and one investment, respectively, on non-accrual status comprising approximately 1.4% and 0.5%, respectively, of the total portfolio investments at fair value for each year then ended (excluding Main Street's investment in the Investment Manager).

       The broader fundamentals of the United States economy remain at depressed levels. Unemployment levels remain elevated and consumer fundamentals remain depressed, which has led to reductions in spending by both consumers and businesses. In the event that the United States economy remains depressed, it is likely that the financial results of small- to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults. In addition, the end markets for certain of our portfolio companies' products and services have experienced negative economic trends. We are seeing reduced operating results at several portfolio companies due to the general economic difficulties. Consequently, we can provide no assurance that the performance of certain of our portfolio companies will not be negatively impacted by these economic or other conditions, which could also have a negative impact on our future results.

DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

 
   Years Ended
December 31, 		  Net Change  
 
   2009   2008   Amount   %  
 
   (dollars in millions)
  

Total investment income

   $ 16.0   $ 17.3   $ (1.3 )   (7 )%

Total expenses

     (6.8 )   (7.0 )   0.2     (3 )%
                     

Net investment income

     9.2     10.3     (1.1 )   (11 )%

Total net realized gain (loss) from investments

     (7.8 )   1.4     (9.2 )   NM  
                     

Net realized income

     1.4     11.7     (10.3 )   (88 )%

Net change in unrealized appreciation (depreciation) from investments

     8.2     (4.0 )   12.2     NM  

Income tax benefit

     2.3     3.2     (0.9 )   (28 )%
                     

Net increase in net assets resulting from operations

   $ 11.9   $ 10.9   $ 1.0     9 %
                     

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   Years Ended
December 31, 		  Net Change  
 
   2009   2008   Amount   %  
 
   (dollars in millions)
  

Net investment income

   $ 9.2   $ 10.3   $ (1.1 )   (11 )%

Share-based compensation expense

     1.1     0.5     0.6     109 %
                     

Distributable net investment income(a)

     10.3     10.8     (0.5 )   (5 )%

Total net realized gain (loss) from investments

     (7.8 )   1.4     (9.2 )   NM  
                     

Distributable net realized income(a)

   $ 2.5   $ 12.2   $ (9.7 )   (80 )%
                     

Distributable net investment income per share —

                          
 

Basic and diluted(a)

   $ 1.02   $ 1.19   $ (0.17 )   (14 )%
                     

Distributable net realized income per share —

                          
 

Basic and diluted(a)

   $ 0.25   $ 1.34   $ (1.09 )   (82 )%
                     
(a)
Distributable net investment income and distributable net realized income are net investment income and net realized income, respectively, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding the impact of share-based compensation expense which is non-cash in nature. Main Street believes presenting distributable net investment income and distributable net realized income, and related per share amounts, are useful and appropriate supplemental disclosures for analyzing its financial performance since share-based compensation does not require settlement in cash. However, distributable net investment income and distributable net realized income are non-GAAP measures and should not be considered as a replacement to net investment income, net realized income, and other earnings measures presented in accordance with GAAP. Instead, distributable net investment income and distributable net realized income should be reviewed only in connection with such GAAP measures in analyzing Main Street's financial performance. A reconciliation of net investment income and net realized income in accordance with GAAP to distributable net investment income and distributable net realized income is presented in the table above.

       For the year ended December 31, 2009, total investment income was $16.0 million, a $1.3 million, or 7%, decrease over the $17.3 million of total investment income for the year ended December 31, 2008. This comparable period decrease was principally attributable to (i) lower dividend income of $1.4 million due to certain portfolio companies retaining their excess cash flow as additional cushion given reduced economic visibility and lower near-term earnings expectations and (ii) reduced levels of fee income of $1.3 million due to lower new investment originations; partially offset by higher interest income of $1.4 million from core portfolio debt investments and from marketable securities and idle funds investments on higher average levels of such investments.

       For the year ended December 31, 2009, total expenses decreased by approximately $0.2 million, or 3%, to $6.8 million from $7.0 million for the year ended December 31, 2008. The decrease in total expenses was primarily attributable to a $0.8 million reduction in general, administrative and other overhead expenses. The reduction in general, administrative and overhead costs primarily related to (i) lower accrued compensation expense given lower investment income levels, (ii) consulting fees received by the affiliated Investment Manager during 2009 and (iii) reduced costs for certain legal and administrative activities based upon developing internal resources to perform such activities. The decrease in general, administrative and other overhead expenses was partially offset by a $0.6 million increase in share-based compensation expense related to non-cash amortization for restricted share grants.

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       Distributable net investment income for the year ended December 31, 2009 was $10.3 million, or a 5% decrease, compared to distributable net investment income of $10.8 million during the year ended December 31, 2008. The decrease in distributable net investment income was primarily attributable to reduced levels of total investment income, partially offset by lower general, administrative and overhead expenses as discussed above.

       Net investment income for the year ended December 31, 2009 was $9.2 million, or an 11% decrease, compared to net investment income of $10.3 million during the year ended December 31, 2008. The decrease in net investment income was principally attributable to the decrease in total investment income, partially offset by lower general, administrative and overhead expenses as discussed above.

       For the year ended December 31, 2009, distributable net realized income was $2.5 million, or a $9.7 million decrease compared to distributable net realized income of $12.2 million for the year ended December 31, 2008. The decrease in distributable net realized income was primarily attributable to the level of net realized loss during 2009 and the decrease in distributable net investment income. The net realized loss of $7.8 million during 2009 principally related to realized losses recognized on the exit of our investments in two portfolio companies, partially offset by realized gains related to the partial exit of our equity investments in one portfolio company and realized gains related to marketable securities investments. The net realized gain of $1.4 million during 2008 principally related to realized gains recognized on equity investments in four portfolio companies, offset by realized losses on debt and equity investments in two portfolio companies.

       The lower distributable net investment income for the year ended December 31, 2009 coupled with the higher level of net realized loss during that period resulted in a $10.3 million decrease in the net realized income for the year ended December 31, 2009 compared with 2008.

       For the year ended December 31, 2009, we recorded a net change in unrealized appreciation in the amount of $8.2 million, or a $12.2 million increase, compared to the $4.0 million net change in unrealized depreciation for the year ended December 31, 2008. The $8.2 million net change in unrealized appreciation for the 2009 year was principally attributable to (i) $8.3 million in accounting reversals of net unrealized depreciation attributable to the total net realized loss on the exit of the portfolio investments and marketable securities investments discussed above, (ii) unrealized appreciation on fourteen investments in portfolio companies totaling $11.6 million, partially offset by unrealized depreciation on fifteen investments in portfolio companies totaling $11.7 million, (iii) $0.6 million in unrealized appreciation related to marketable securities investments and (iv) $0.6 million in unrealized depreciation attributable to our investment in the affiliated Investment Manager. For the 2009 year, we also recognized a net income tax benefit of $2.3 million principally related to deferred taxes on unrealized depreciation for certain portfolio investments held in our taxable subsidiary.

       As a result of these events, our net increase in net assets resulting from operations during the year ended December 31, 2009 was $11.9 million compared to a net increase in net assets resulting from operations of $10.9 million for the year ended December 31, 2008.

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   Years Ended
December 31, 		  Net Change  
 
   2008   2007   Amount   %  
 
   (dollars in millions)
  

Total investment income

   $ 17.3   $ 12.5   $ 4.8     39 %

Total expenses

     (7.0 )   (6.0 )   (1.0 )   17 %
                     

Net investment income

     10.3     6.5     3.8     58 %

Total net realized gain from investments

     1.4     4.7     (3.3 )   (70 )%
                     

Net realized income

     11.7     11.2     0.5     4 %

Net change in unrealized depreciation from investments

     (4.0 )   (5.4 )   1.4     NM  

Income tax benefit (provision)

     3.2     (3.3 )   6.5     NM  
                     

Net increase in net assets resulting from operations

   $ 10.9   $ 2.5   $ 8.4     330 %
                     

 

 
   Years Ended
December 31, 		  Net Change  
 
   2008   2007   Amount   %  
 
   (dollars in millions)
  

Net investment income

   $ 10.3   $ 6.5   $ 3.8     58 %

Share-based compensation expense

     0.5     —     0.5     0 %
                     

Distributable net investment income(a)

     10.8     6.5     4.3     66 %

Total net realized gain from investments

     1.4     4.7     (3.3 )   (70 )%
                     

Distributable net realized income(a)

   $ 12.2   $ 11.2   $ 1.0     9 %
                     

Distributable net investment income per share —

                          
 

Basic and diluted(a)

   $ 1.19   $ 0.76   $ 0.43     57 %
                     

Distributable net realized income per share —

                          
 

Basic and diluted(a)

   $ 1.34   $ 1.31   $ 0.03     3 %
                     
(a)
Distributable net investment income and distributable net realized income are net investment income and net realized income, respectively, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding the impact of share-based compensation expense which is non-cash in nature. Main Street believes presenting distributable net investment income and distributable net realized income, and related per share amounts, are useful and appropriate supplemental disclosures for analyzing its financial performance since share-based compensation does not require settlement in cash. However, distributable net investment income and distributable net realized income are non-GAAP measures and should not be considered as a replacement to net investment income, net realized income, and other earnings measures presented in accordance with GAAP. Instead, distributable net investment income and distributable net realized income should be reviewed only in connection with such GAAP measures in analyzing Main Street's financial performance. A reconciliation of net investment income and net realized income in accordance with GAAP to distributable net investment income and distributable net realized income is presented in the table above.

       For the year ended December 31, 2008, total investment income was $17.3 million, a $4.8 million, or 39%, increase over the $12.5 million of total investment income for the year ended December 31, 2007. The increase was attributable to a $4.6 million increase in interest, fee and dividend income from investments and a $0.2 million increase in interest income from idle funds, which was principally earned on the remaining proceeds from our IPO. The increase in interest, fee and dividend income was primarily attributable to

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(i) higher average levels of outstanding debt investments, which was principally due to the closing of eight new debt investments since December 31, 2007, partially offset by debt repayments received during the same period and certain investments that were on non-accrual status or written off in 2008, (ii) significantly higher levels of cash dividend income from portfolio equity investments, and (iii) higher levels of fee income. For the year ended December 31, 2008, Main Street received approximately $3.2 million in cash dividend payments from portfolio company equity investments. These dividend payments were paid to Main Street based upon the accumulated earnings and available cash of certain portfolio companies for the year ended December 31, 2008.

       For the year ended December 31, 2008, total expenses increased by approximately $1.0 million, or 17%, to approximately $7.0 million from $6.0 million for the year ended December 31, 2007. Share-based compensation expense recognized during 2008 related to non-cash amortization expense for restricted share grants made in July 2008 totaled $0.5 million. There were no similar expenses incurred during 2007. In addition, 2007 operating expenses included $0.7 million of costs related to Main Street's IPO which was completed in October 2007. There were no similar expenses incurred during 2008. Operating expenses, excluding the non-cash, share-based compensation expense and the 2007 IPO-related expenses discussed above, increased $1.2 million in 2008 compared with 2007 due to a $0.7 million increase in general and administrative expense associated with higher costs to operate as a public company and a $0.5 million increase in interest expense as a result of an additional $9.9 million of SBIC Debentures borrowed through MSMF during 2007, and unused commitment fees on two credit facilities totaling $80 million, one entered into in December 2007 and the other in October 2008, by MSCC.

       Distributable net investment income for the year ended December 31, 2008 was $10.8 million, or a 66% increase, compared to distributable net investment income of $6.5 million during the year ended December 31, 2007. The increase in distributable net investment income was attributable to the increase in total investment income partially offset by the increase in total expenses discussed above.

       Net investment income for the year ended December 31, 2008 was $10.3 million, or a 58% increase, compared to net investment income of $6.5 million during the year ended December 31, 2007. The increase in net investment income was attributable to the increase in total investment income partially offset by the increase in total expenses discussed above.

       For the year ended December 31, 2008, the net realized gains from investments was $1.4 million, representing a $3.3 million, or 70%, decrease over the net realized gains of $4.7 million during the year ended December 31, 2007. The net realized gains during the year ended December 31, 2008 principally related to the realized gains recognized on equity investments in four portfolio companies, offset by realized losses on debt and equity investments in two portfolio companies, compared to higher net realized gains recognized on equity investments in four portfolio companies during the year ended December 31, 2007.

       The higher distributable net investment income in the year ended December 31, 2008 offset by the lower net realized gains during that period resulted in a $1.0 million, or 9%, increase in the distributable net realized income for the year ended December 31, 2008 compared with the year ended December 31, 2007.

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       The higher net investment income for the year ended December 31, 2008 offset by the lower net realized gains during that period resulted in a $0.5 million, or 4%, increase in the net realized income for the year ended December 31, 2008 compared with the corresponding period in 2007.

       For the year ended December 31, 2008, the net increase in net assets resulting from operations was $10.9 million in 2008 compared with $2.5 million for the year ended December 31, 2007. The $4.0 million net change in unrealized depreciation from investments for 2008 was attributable to (i) $2.9 million from the accounting reversal of net unrealized appreciation attributable to the total net realized gain on the exit of six portfolio investments, (ii) unrealized depreciation on nine investments in portfolio companies totaling $8.9 million, offset by unrealized appreciation on thirteen investments in portfolio companies totaling $8.7 million, and (iii) $0.9 million in unrealized depreciation attributable to Main Street's investment in its affiliated investment manager. During 2008, Main Street also recognized a cumulative income tax benefit of $3.2 million primarily consisting of deferred tax benefits related to net unrealized losses and the difference between taxable income and book income from equity investments which are flow through entities on certain portfolio investments owned by MSEI, our wholly owned taxable subsidiary.

       For the year ended December 31, 2009, we experienced a net decrease in cash and cash equivalents in the amount of $4.8 million. During that period, we generated $8.0 million of cash from our operating activities, primarily from distributable net investment income partially offset by (i) the semi-annual interest payments on our SBIC debentures, (ii) decreases in accounts payable, and (iii) non-cash interest and dividends. We used $26.0 million in net cash from investing activities, principally including the funding of $85.9 million for marketable securities and idle funds investments and the funding of $24.7 million for new core portfolio company investments, partially offset by $73.5 million of cash proceeds from the sale of marketable securities and idle funds investments and $11.1 million in cash proceeds from the repayment of core portfolio debt investments. During 2009, $13.2 million in cash was provided by financing activities, which principally consisted of $16.2 million in net cash proceeds from a June 2009 public stock offering and $9.6 million in net proceeds from the issuance of SBIC debentures, partially offset by $11.2 million in cash dividends and $1.6 million in purchases of shares of our common stock as part of our share repurchase program.

       For the year ended December 31, 2008, we experienced a net decrease in cash and cash equivalents of $6.5 million. During that period, we generated $10.9 million of cash from our operating activities, primarily from distributable net investment income partially offset by the semi-annual interest payments on our SBIC debentures. We used $3.5 million in net cash for investing activities, principally due to the funding of new investments and several smaller follow-on investments for a total of $47.7 million. We also made a $4.2 million investment in idle funds investments, and received proceeds from the maturity of a $24.1 million investment in idle funds investments. We received $16.3 million in cash proceeds from repayment of debt investments and $8.0 million of cash proceeds from the redemption and sale of equity investments. For the year ended December 31, 2008, we used $13.9 million in cash for financing activities, which principally consisted of $13.2 million in cash dividends to stockholders, $0.4 million in deferred loan origination costs and $0.3 million used in the purchase of share of our common stock pursuant to our share repurchase program.

       For the year ended December 31, 2007, we experienced a net increase in cash and equivalents in the amount of $28.1 million. During 2007, we generated $5.4 million of cash from our operating activities, primarily from net investment income. We used $38.0 million in net cash for investing activities, principally due to the funding of new investments and several smaller follow-on investments for a total of $29.5 million

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of invested capital and the purchase of $24.1 million of investments in idle funds investments, partially offset by $9.6 million in cash proceeds from repayment of debt investments and $5.9 million of cash proceeds from the redemption or sale of several equity investments. We generated $60.7 million in cash from financing activities, which principally consisted of the net proceeds of $60.2 million from the IPO and $9.9 million in additional SBIC debenture borrowings, partially offset by $7.5 million of cash distributions to partners and stockholders and $1.6 million of payments related to IPO costs.

       As of December 31, 2009, we had $48.7 million in cash and cash equivalents, marketable securities, and idle funds investments, and our net assets totaled $129.7 million, or $11.96 per share. In January 2010, we completed a follow-on public stock offering in which we sold 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share, resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs.

       On October 24, 2008, Main Street entered into a $30 million investment credit facility (the "Investment Facility") with Branch Banking and Trust Company ("BB&T") and Compass Bank, as lenders, and BB&T, as administrative agent for the lenders. The purpose of the Investment Facility is to provide additional liquidity in support of future investment and operational activities. The Investment Facility allows for an increase in the total size of the facility up to $75 million, subject to certain conditions, and has a maturity date of October 24, 2011. Borrowings under the Investment Facility bear interest, subject to Main Street's election, on a per annum basis equal to (i) the applicable LIBOR rate plus 2.75% or (ii) the applicable base rate plus 0.75%. Main Street pays unused commitment fees of 0.375% per annum on the average unused lender commitments under the Investment Facility. The Investment Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum liquidity of not less than 10% of the aggregate principal amount outstanding, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, and (iii) maintaining a minimum tangible net worth. At December 31, 2009, Main Street had no borrowings outstanding under the Investment Facility, and Main Street was in compliance with the required financial covenants of the Investment Facility.

       Due to each of the Funds' status as a licensed SBIC, we have the ability to issue, through the Funds, debentures guaranteed by the SBA at favorable interest rates. Under the regulations applicable to SBIC funds, an SBIC can have outstanding debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which effectively approximates the amount of its equity capital. Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the debentures is not required to be paid before maturity but may be pre-paid at any time. Debentures issued prior to September 2006 were subject to pre-payment penalties during their first five years. Those pre-payment penalties no longer apply to debentures issued after September 1, 2006. On December 31, 2009, we, through MSMF, had $65 million of outstanding indebtedness guaranteed by the SBA, which carried an average fixed interest rate of approximately 5.0%. The first maturity related to the SBIC debentures does not occur until 2013, and the weighted average duration is 6.1 years as of December 31, 2009.

       The Stimulus Bill contains several provisions applicable to SBIC funds, including the Funds. One of the key SBIC-related provisions included in the Stimulus Bill increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds. The prior maximum amount of SBIC leverage available to affiliated SBIC funds was approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between the Funds. Subsequent to the Exchange Offer, Main Street now has access to an incremental $90 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of MSMF SBIC leverage.

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       A recently proposed bill, the Small Business Financing and Investment Act of 2009, or HR 3854, would increase the total SBIC leverage capacity for the Funds from $225 million to $350 million. If enacted, this bill would increase Main Street's SBIC leverage capacity through the Funds by an additional $125 million.

       Due to our existing cash and cash equivalents, marketable securities, and idle funds investments and the available borrowing capacity through both the SBIC program and the Investment Facility, we project that we will have sufficient liquidity to fund our investment and operational activities through all of calendar year 2010. However, this projection will be impacted by, among other things, the pace of new and follow-on investments, debt repayments and investment redemptions, the level of cash flow from operations and cash flow from realized gains, and the level of dividends we pay in cash. We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, the liquidation of marketable securities and idle funds investments, and a combination of future debt and equity capital. Our primary uses of funds will be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.

       We periodically invest excess cash balances into marketable securities and idle funds investments. The investment objective of marketable securities and idle funds investments is to generate incremental cash returns on excess cash balances prior to utilizing those funds for investment in our core portfolio investment strategy. Marketable securities and idle funds investments generally consist of secured debt investments, independently rated debt investments, certificates of deposit with financial institutions, and diversified bond funds. The composition of marketable securities and idle funds investments will vary in a given period based upon, among other things, changes in market conditions, the underlying fundamentals in our marketable securities and idle funds investments, our outlook regarding future core portfolio investment needs, and any regulatory requirements applicable to Main Street.

       If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price unless our stockholders approve such a sale and our Board of Directors makes certain determinations. A proposal, approved by our stockholders at our June 2009 annual meeting of stockholders, authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for a period of one year ending on the earlier of June 11, 2010 or the date of our 2010 annual meeting of stockholders. We would need approval of a similar proposal by our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval.

       In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. In January 2008, we received exemptive relief from the SEC that permits us to exclude SBA-guaranteed debt issued by our wholly owned SBIC subsidiary, MSMF, from our asset coverage ratio, which, in turn, enables us to fund more investments with debt capital. We expect to have similar relief from the SEC with respect to SBIC debt securities issued by MSC II, including the $70 million of currently outstanding debt related to its participation in the SBIC program.

       On December 31, 2007, we entered into a treasury-based credit facility (the "Treasury Facility") with Wachovia Bank, National Association and BB&T, as administrative agent for the lenders. The purpose of the Treasury Facility was to provide flexibility in the sizing of core portfolio investments and to facilitate the growth of our core investment portfolio. However, due to the maturation of our core investment portfolio and the additional flexibility provided by the Investment Facility, we unilaterally terminated the Treasury Facility on July 10, 2009 in order to eliminate the unused commitment fees that would have been paid under this facility over its remaining term.

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       The broader fundamentals of the United States economy remain at depressed levels. Unemployment levels remain elevated and consumer fundamentals remain depressed, which has led to significant reductions in spending by both consumers and businesses.

       Although we have been able to secure access to additional liquidity, including our recent public stock offering, the $30 million Investment Facility, and the increase in available leverage through the SBIC program as part of the Stimulus Bill, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.

       The deterioration in consumer confidence and a general reduction in spending by both consumers and businesses has had an adverse effect on a number of the industries in which some of our portfolio companies operate. The results of some of the lower middle market companies like those in which we invest, may continue to experience deterioration, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in their defaults. In addition, the end markets for certain of our portfolio companies' products and services have experienced negative economic trends. We can provide no assurance that the performance of our portfolio companies will not be negatively impacted by economic or other conditions, which could have a negative impact on our future results.

       In December 2007, the FASB issued ASC 805, Business Combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, replacing the previous cost-allocation process. ASC 805 also includes a substantial number of new disclosure requirements. ASC 805 is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We adopted ASC 805 on January 1, 2009. We are accounting for the Exchange Offer under ASC 805 with the impact on the financial statements discussed in Note R to the consolidated financial statements.

       In June 2008, the FASB amended ASC 260, Earnings Per Share with ASC 260-10-45-61A which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS"). ASC 260-10-45-61A is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented is required to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the amended provisions of ASC 260. Early application is not permitted. We have determined that shares of restricted stock granted to our employees and directors are participating securities prior to vesting. For the years ended December 31, 2009 and 2008, 291,739 and 255,645 shares, respectively, of non-vested restricted stock have been included in Main Street's basic and diluted EPS computations.

       In October 2008, the FASB amended ASC 820 with ASC 820-10-35-15A, Financial Assets in a Market That Is Not Active, to provide an illustrative example of how to determine the fair value of a financial asset in an inactive market. ASC 820-10-35-15A does not change the fair value measurement principles previously set forth. Since adopting ASC 820 in January 2008, our practices for determining the fair value of our investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in ASC 820-10-35-15A. Therefore, our adoption of the update did not affect our practices for determining the fair value of our investment portfolio and financial instruments, and our adoption did not have a material effect on our financial position or results of operations.

       In April 2009, the FASB amended ASC 820 and ASC 825 with ASC 820-10-35, Subsequent Measurement, and ASC 825-10-65, Transition and Open Effective Date Information. Both amendments are effective for reporting periods ending on or after June 15, 2009. Since adopting ASC 820 and ASC 825 in

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January 2008, our practices for determining fair value and for disclosures about the fair value of our investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in the amended pronouncements. Therefore, our adoption of these updates did not affect our practices for determining the fair value of our investment portfolio and financial instruments, and our adoption did not have a material effect on our financial position or results of operations.

       In May 2009, the FASB amended ASC 855, Subsequent Events with ASC 855-10-50, Disclosure, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10-50 includes a new required disclosure of the date through which an entity has evaluated subsequent events and is effective for interim periods or fiscal years ending after June 15, 2009. Our adoption of ASC 855-10-50 did not have a material effect on our financial position or results of operations.

       In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles, which became the single official source of authoritative, nongovernmental U.S. GAAP, other than rules and interpretive releases issued by the Securities and Exchange Commission. The Codification reorganized the literature and changed the naming mechanism by which topics are referenced. ASC 105 was effective for us during our interim period ended September 30, 2009. As required, references to pre-codification accounting literature have been changed throughout this annual report on Form 10-K to appropriately reference the Codification. Our accounting policies and amounts presented in the financial statements were not impacted by this change.

       Inflation has not had a significant effect on our results of operations in any of the reporting periods presented in this report. However, our portfolio companies have experienced, and may in the future experience, the impacts of inflation on their operating results, including periodic escalations in their costs for raw materials and required energy consumption.

       We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At December 31, 2009, we had three outstanding commitments to fund unused revolving loans for up to $6,315,000 in total.

       As of December 31, 2009, our future fixed commitments for cash payments on contractual obligations for each of the next five years and thereafter are as follows:

 
   Total   2010   2011   2012   2013   2014   2015 and
thereafter 		 
 
   (dollars in thousands)
  

SBIC debentures payable

   $ 65,000   $ —   $ —   $ —   $ 4,000   $ 18,000   $ 43,000  

Interest due on SBIC debentures

     23,713     3,437     3,720     3,730     3,720     3,414     5,692  
                               

Total

   $ 88,713   $ 3,437   $ 3,720   $ 3,730   $ 7,720   $ 21,414   $ 48,692  
                               

       MSCC is obligated to make payments under a support services agreement with the Investment Manager. Subsequent to the completion of the Formation Transactions and the IPO, the Investment Manager is reimbursed for its excess cash expenses associated with providing investment management and other services to MSCC and its subsidiaries, as well as MSC II and third parties. Each quarter, as part of the support services agreement, MSCC makes payments to cover all cash expenses incurred by the Investment Manager, less the recurring management fees that the Investment Manager receives from MSC II pursuant to a

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long-term investment advisory services agreement and any other fees received from third parties for providing external services.

       We co-invested with MSC II in several existing portfolio investments prior to the Formation Transactions, but did not co-invest with MSC II subsequent to the Formation Transactions and prior to June 2008. In June 2008, we received exemptive relief from the SEC to allow us to resume co-investing with MSC II in accordance with the terms of such exemptive relief. The co-investments among us and MSC II have all been made at the same time and on the same terms and conditions. The co-investments were also made in accordance with the Investment Manager's conflicts policy and in accordance with the applicable SBIC conflict of interest regulations. MSC II is managed by the Investment Manager, and the Investment Manager is wholly owned by us. In January 2010, pursuant to the Exchange Offer Transactions, we issued 1,239,695 shares of common stock in exchange for approximately 88% of the total dollar value of the limited partner interests in MSC II.

       As discussed further in Note D to the accompanying consolidated financial statements, subsequent to the completion of the Formation Transactions, the Investment Manager is a wholly owned portfolio company of MSCC. At December 31, 2009 and 2008, the Investment Manager had a receivable of $217,422 and $302,633, respectively, with MSCC related to net cash expenses incurred by the Investment Manager required to support Main Street's business.

RECENT DEVELOPMENTS

       On January 7, 2010, MSCC consummated the Exchange Offer to exchange 1,239,695 shares (the "Exchange Shares") of its common stock for approximately 88% of the total dollar value of the limited partner interests in MSC II. Pursuant to the terms of the Exchange Offer, 100% of the membership interests in MSC II GP were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is managed by the Investment Manager pursuant to a separate investment advisory services agreement. The Exchange Offer was applicable to all MSC II limited partner interests except for any limited partner interests owned by affiliates of MSCC, including any limited partner interests owned by officers or directors of MSCC. The Exchange Offer was formally approved by the SBA prior to closing. The Exchange Shares are subject to a one-year contractual lock-up from the Exchange Offer closing date. An approximately 12% minority ownership in the total dollar value of the MSC II limited partnership interests remains outstanding, including approximately 5% owned by affiliates of MSCC.

       As of the closing date of the Exchange Offer, MSC II had $70 million of SBIC debentures outstanding, which are guaranteed by the SBA and carry an average fixed interest rate of approximately 6%. The first principal maturity related to MSC II's SBIC debentures does not occur until 2016.

       Consummation of the Exchange Offer Transactions provides Main Street with access to additional long-term, low-cost leverage capacity through the SBIC program. The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds from the previous SBIC leverage cap of approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between MSMF and MSC II. Subsequent to the Exchange Offer, Main Street now has access to an incremental $90 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of SBIC leverage at MSMF. At the closing of the Exchange Offer, Main Street funded approximately $24 million in unfunded limited partner commitments for the limited partner interests it acquired in connection with the Exchange Offer in order to comply with SBA regulatory requirements, which was funded by Main Street in part with approximately

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$12 million drawn down under its $30 million investment credit facility. We currently project that consummation of the Exchange Offer Transactions will be accretive to our calendar year 2010 distributable net investment income per share.

       Subsequent to the Exchange Offer in January 2010, we completed a public stock offering consisting of the public offering and sale of 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share, resulting in total net proceeds of approximately $40.1 million, after deducting underwriters' commissions and offering costs. Based upon the net proceeds from this offering and existing cash, marketable securities, and idle funds investments, we estimate that we have the required capitalization to access all of the $90 million in incremental SBIC leverage available through the SBIC Funds. We used approximately $12 million of the net proceeds from this offering to repay outstanding debt borrowed under our $30 million investment credit facility to fund MSC II capital commitments assumed in the Exchange Offer. We intend to use the remaining net proceeds from this offering to make investments in lower middle market companies in accordance with our investment objective and strategies, pay operating expenses and other cash obligations and for general corporate purposes. Pending such uses, we may invest the net proceeds of this offering primarily in marketable securities and idle funds investments, which may include investments in secured intermediate term bank debt and other independently rated debt investments.

       During January 2010, we sold our investment in Quest Design and Production, LLC ("Quest"), which was on non-accrual status as of December 31, 2009. We had recorded unrealized depreciation as of December 31, 2009 on our investment in Quest equal to the $4.0 million loss we will realize in the first quarter of 2010 related to the exit of this investment.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

       We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, marketable securities, and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent of any debt investments that include floating interest rates. The significant majority of our debt investments are made with fixed interest rates for the term of the investment. However, as of December 31, 2009, approximately 13% of our core debt investment portfolio (at cost) bore interest at floating rates with 75% of those floating-rate debt investments (at cost) subject to contractual minimum interest rates. The long term interest rates on our outstanding indebtedness are fixed for the 10-year life of such debt. As of December 31, 2009, we had not entered into any interest rate hedging arrangements. At December 31, 2009, based on our applicable levels of floating-rate debt investments, a 1% change in interest rates would not have a material effect on our level of interest income from debt investments.

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Item 8.    Financial Statements and Supplementary Data


Index to Financial Statements

Reports of Independent Registered Public Accounting Firm

   64  

Consolidated Balance Sheets as of December 31, 2009 and 2008

   66  

Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008, and 2007

   67  

Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2009, 2008, and 2007

   68  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007

   69  

Consolidated Schedules of Investments as of December 31, 2009 and 2008

   70  

Notes to Consolidated Financial Statements

   81  

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders' of
Main Street Capital Corporation

       We have audited the accompanying consolidated balance sheet of Main Street Capital Corporation (a Maryland corporation), and its consolidated subsidiaries, Main Street Mezzanine Management, LLC, Main Street Equity Interests, Inc. and Main Street Mezzanine Fund, LP, including the consolidated schedule of investments, as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in net assets and cash flows and the consolidated financial highlights (see Note H) for the three years then ended. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

       We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

       In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of Main Street Capital Corporation and subsidiaries as of December 31, 2009 and 2008 and the consolidated results of their operations, changes in net assets, cash flows and financial highlights for the three years then ended, in conformity with accounting principles generally accepted in the United States of America.

       As discussed in Note B to the consolidated financial statements, the company changed its method of accounting for the fair value of its portfolio investments on January 1, 2008 due to the adoption of new accounting guidance related to fair value measurements.

       As discussed in Note B to the consolidated financial statements, the company adopted new accounting guidance on January 1, 2009 related to the inclusion of certain instruments granted in share-based payment transactions in the calculation of basic earnings per common share.

       We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Main Street Capital Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2010, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ GRANT THORNTON LLP

Houston, Texas
March 10, 2010

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 Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders' of
Main Street Capital Corporation

       We have audited Main Street Capital Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Main Street Capital Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

       We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

       A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

       Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

       In our opinion, Main Street Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by COSO.

       We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Main Street Capital Corporation and subsidiaries as of December 31, 2009 and 2008, including the consolidated schedule of investments as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in net assets and cash flows, and the financial highlights (see Note H), for the three years then ended, and our report dated March 10, 2010, expressed an unqualified opinion on those consolidated financial statements.

/s/ GRANT THORNTON LLP

Houston, Texas
March 10, 2010

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MAIN STREET CAPITAL CORPORATION

Consolidated Balance Sheets

 
   December 31, 2009   December 31, 2008  

ASSETS

  

Investments at fair value:

              
 

Control investments (cost: $59,544,719 and $60,767,805 as of December 31, 2009 and 2008, respectively)

   $ 66,400,667   $ 65,542,608  
 

Affiliate investments (cost: $39,252,445 and $37,946,800 as of December 31, 2009 and 2008, respectively)

     46,886,202     39,412,695  
 

Non-Control/Non-Affiliate investments (cost: $13,492,373 and $6,245,405 as of December 31, 2009 and 2008, respectively)

     12,598,354     5,375,886  
 

Investment in affiliated Investment Manager (cost: $18,000,000 as of December 31, 2009 and 2008, respectively)

     16,036,838     16,675,626  
           
   

Total investments (cost: $130,289,537 and $122,960,010 as of December 31, 2009 and 2008, respectively)

     141,922,061     127,006,815  

Marketable securities and idle funds investments (cost: $17,243,407 and $4,218,704 as of December 31, 2009 and 2008, respectively)

     18,070,887     4,389,795  

Cash and cash equivalents

     30,619,998     35,374,826  

Deferred tax asset

     2,716,400     1,121,681  

Other assets

     1,509,608     1,100,922  

Deferred financing costs (net of accumulated amortization of $1,071,676 and $956,037 as of December 31, 2009 and 2008, respectively)

     1,611,508     1,635,238  
           
   

Total assets

   $ 196,450,462   $ 170,629,277  
           

LIABILITIES

  
 

SBIC debentures

   $ 65,000,000   $ 55,000,000  
 

Interest payable

     1,069,148     1,108,193  
 

Dividend payable

     —     726,464  
 

Accounts payable and other liabilities

     721,183     1,438,564  
           
   

Total liabilities

     66,790,331     58,273,221  

Commitments and contingencies

              

NET ASSETS

              

Common stock, $0.01 par value per share (150,000,000 shares authorized; 10,842,447 and 9,206,483 issued and outstanding as of December 31, 2009 and 2008, respectively)

     108,425     92,065  

Additional paid-in capital

     123,534,156     104,467,740  

Undistributed net realized income (loss)

     (8,652,154 )   3,658,495  

Net unrealized appreciation from investments, net of income taxes

     14,669,704     4,137,756  
           
   

Total net assets

     129,660,131     112,356,056  
           
   

Total liabilities and net assets

   $ 196,450,462   $ 170,629,277  
           

NET ASSET VALUE PER SHARE

   $ 11.96   $ 12.20  
           

The accompanying notes are an integral part of these financial statements

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MAIN STREET CAPITAL CORPORATION

Consolidated Statements of Operations

 
   Years Ended December 31,  
 
   2009   2008   2007  

INVESTMENT INCOME:

                    
 

Interest, fee and dividend income:

                    
   

Control investments

   $ 8,022,687   $ 9,826,369   $ 5,201,382  
   

Affiliate investments

     4,581,295     4,842,442     5,390,655  
   

Non-Control/Non-Affiliate investments

     1,225,995     1,454,718     720,076  
               
 

Total interest, fee and dividend income

     13,829,977     16,123,529     11,312,113  
 

Interest from marketable securities, idle funds and other

     2,172,270     1,171,897     1,162,865  
               
     

Total investment income

     16,002,247     17,295,426     12,474,978  

EXPENSES:

                    
 

Interest

     (3,790,702 )   (3,777,919 )   (3,245,839 )
 

General and administrative

     (1,351,451 )   (1,684,084 )   (512,253 )
 

Expenses reimbursed to affiliated Investment Manager

     (569,868 )   (1,006,835 )   —  
 

Management fees to affiliate

     —     —     (1,499,937 )
 

Share-based compensation

     (1,068,397 )   (511,452 )   —  
 

Professional costs related to initial public offering

     —     —     (695,250 )
               
     

Total expenses

     (6,780,418 )   (6,980,290 )   (5,953,279 )
               

NET INVESTMENT INCOME

     9,221,829     10,315,136     6,521,699  

NET REALIZED GAIN (LOSS) FROM INVESTMENTS:

                    
 

Control investments

     (3,441,483 )   188,214     1,802,713  
 

Affiliate investments

     (5,055,796 )   1,209,280     3,160,034  
 

Non-Control/Non-Affiliate investments

     70,628     —     (270,538 )
 

Marketable securities and idle funds investments

     629,103     —     —  
               
     

Total net realized gain (loss) from investments

     (7,797,548 )   1,397,494     4,692,209  
               

NET REALIZED INCOME

     1,424,281     11,712,630     11,213,908  

NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM INVESTMENTS:

                    
 

Core portfolio investments, marketable securities and idle funds investments

     8,880,895     (3,011,718 )   (5,031,493 )
 

Investment in affiliated Investment Manager

     (638,788 )   (949,374 )   (375,000 )
               
     

Total net change in unrealized appreciation (depreciation) from investments

     8,242,107     (3,961,092 )   (5,406,493 )
               
 

Income tax (provision) benefit

     2,289,841     3,182,401     (3,262,539 )
               

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 11,956,229   $ 10,933,939   $ 2,544,876  
               

NET INVESTMENT INCOME PER SHARE — BASIC AND DILUTED

   $ 0.92   $ 1.13   $ 0.76  
               

NET REALIZED INCOME PER SHARE — BASIC AND DILUTED

   $ 0.14   $ 1.29   $ 1.31  
               

DIVIDENDS PAID PER SHARE

   $ 1.50   $ 1.43   $ 1.10  
               

NET INCREASE IN NET ASSETS

                    
 

RESULTING FROM OPERATIONS PER SHARE — BASIC AND DILUTED

   $ 1.19   $ 1.20   $ 0.30  
               

WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC AND DILUTED

     10,042,639     9,095,904     8,587,701  
               

The accompanying notes are an integral part of these financial statements

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MAIN STREET CAPITAL CORPORATION

Consolidated Statements of Changes in Net Assets

 
    
    
    
    
    
    
   Net
Unrealized
Appreciation
from
Investments,
Net of Income
Taxes 		   
  
 
    
    
   Common Stock    
    
    
  
 
   Members'
Equity
(General
Partner) 		   
    
    
    
  
 
   Limited
Partners'
Capital 		  Number
of Shares 		  Par
Value 		  Additional
Paid-In
Capital 		  Undistributed
Net Realized
Income (Loss) 		  Total
Net
Assets 		 

Balances at December 31, 2006

   $ 181,770   $ 25,239,239     —   $ —   $ —   $ 4,266,043   $ 13,585,479   $ 43,272,531  

Capital contributions

     —     300,081     —     —     —     —     —     300,081  

Distributions to partners

     —     —     —     —     —     (6,500,000 )   —     (6,500,000 )

Formation Transactions

     (181,770 )   (25,539,320 )   4,525,726     45,257     43,675,833     —     —     18,000,000  

Initial Capitalization

     —     —     1,000     10     990     —     —     1,000  

Public offering of common stock

     —     —     4,300,000     43,000     60,139,997     —     —     60,182,997  

Costs related to offering

     —     —     —     —     (1,642,573 )   —           (1,642,573 )

Dividends paid to stockholders

     —     —     —     —     —     (2,912,820 )   —     (2,912,820 )

Dividend reinvestment

     —     —     132,992     1,330     1,901,786     —     —     1,903,116  

Net increase resulting from operations

     —     —     —     —     —     11,213,908     (8,669,032 )   2,544,876  
                                   

Balances at December 31, 2007

     —     —     8,959,718     89,597     104,076,033     6,067,131     4,916,447     115,149,208  

Dividend reinvestment

     —     —     15,820     158     213,571     —     —     213,729  

Share repurchase program

     —     —     (34,700 )   (347 )   (330,659 )   —     —     (331,006 )

Issuance of restricted stock, net of forfeitures

     —     —     265,645     2,657     (2,657 )   —     —     —  

Share-based compensation

     —     —     —     —     511,452     —     —     511,452  

Dividends to stockholders

     —     —     —     —     —     (14,121,266 )   —     (14,121,266 )

Net increase resulting from operations

     —     —     —     —     —     11,712,630     (778,691 )   10,933,939  
                                   

Balances at December 31, 2008

     —     —     9,206,483     92,065     104,467,740     3,658,495     4,137,756     112,356,056  

Dividend reinvestment

     —     —     271,906     2,719     3,690,001     —     —     3,692,720  

Public offering of common stock, net of offering costs

     —     —     1,437,500     14,375     16,176,533     —     —     16,190,908  

Share repurchase program

     —     —     (164,544 )   (1,645 )   (1,615,461 )   —     —     (1,617,106 )

Issuance of restricted stock, net of forfeitures

     —     —     107,505     1,075     (1,075 )   —     —     —  

Share-based compensation

     —     —     —     —     1,068,397     —     —     1,068,397  

Purchase of vested stock for employee payroll tax withholding

     —     —     (16,403 )   (164 )   (251,979 )   —     —     (252,143 )

Dividends to stockholders

     —     —     —     —     —     (13,734,930 )   —     (13,734,930 )

Net increase resulting from operations

     —     —     —     —     —     1,424,281     10,531,948     11,956,229  
                                   

Balances at December 31, 2009

   $ —   $ —     10,842,447   $ 108,425   $ 123,534,156   $ (8,652,154 ) $ 14,669,704   $ 129,660,131  
                                   

The accompanying notes are an integral part of these financial statements

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MAIN STREET CAPITAL CORPORATION

Consolidated Statements of Cash Flows

 
   Years Ended December 31,  
 
   2009   2008   2007  

CASH FLOWS FROM OPERATING ACTIVITIES

                    
 

Net increase in net assets resulting from operations:

   $ 11,956,229   $ 10,933,939   $ 2,544,876  
 

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

                    
   

Net change in unrealized (appreciation) depreciation from investments

     (8,242,107 )   3,961,092     5,406,493  
   

Net realized (gain) loss from investments

     7,797,548     (1,397,494 )   (4,692,209 )
   

Accretion of unearned income

     (701,956 )   (1,062,452 )   (998,069 )
   

Net payment-in-kind interest accrual

     (655,762 )   (216,505 )   (260,806 )
   

Share-based compensation expense

     1,068,397     511,452     —  
   

Amortization of deferred financing costs

     414,545     426,084     186,106  
   

Deferred taxes

     (1,594,719 )   (4,147,353 )   3,025,672  
   

Other

     (578,404 )   612,143     467,558  
   

Changes in other assets and liabilities:

                    
     

Other assets

     (444,524 )   418,166     (876,945 )
     

Interest payable

     (39,045 )   45,521     207,731  
     

Accounts payable and other liabilities

     (935,595 )   828,098     394,510  
               
       

Net cash provided by operating activities

     8,044,607     10,912,691     5,404,917  

CASH FLOWS FROM INVESTING ACTIVITIES

                    
 

Investments in portfolio companies

     (24,741,598 )   (47,698,567 )   (29,479,023 )
 

Investments in marketable securities and idle funds investments

     (85,855,676 )   (4,218,704 )   (24,063,261 )
 

Proceeds from marketable securities and idle funds investments

     73,513,104     24,063,261     —  
 

Principal payments received on loans and debt securities

     11,121,773     16,300,750     9,614,338  
 

Proceeds from sale of equity securities and related notes

     —     8,029,339     5,934,420  
               
       

Net cash provided by (used in) investing activities

     (25,962,397 )   (3,523,921 )   (37,993,526 )

CASH FLOWS FROM FINANCING ACTIVITIES

                    
 

Share repurchase program

     (1,617,106 )   (331,006 )   —  
 

Proceeds from public offering of common stock, net of offering costs

     16,190,908     —     60,183,997  
 

Proceeds from capital contributions

     —     —     300,081  
 

Distributions to members and partners

     —     —     (6,500,000 )
 

Dividends paid to stockholders

     (11,167,882 )   (12,781,074 )   (1,009,704 )
 

Net change in DRIP deposit

     400,000     (400,000 )   —  
 

Proceeds from issuance of SBIC debentures

     10,000,000     —     9,900,000  
 

Payment of initial public offering costs

     —     —     (1,642,573 )
 

Purchase of vested stock for employee payroll tax withholding

     (252,143 )   —     —  
 

Payment of deferred loan costs and SBIC debenture fees

     (390,815 )   (391,188 )   (522,587 )
               
       

Net cash provided by (used in) financing activities

     13,162,962     (13,903,268 )   60,709,214  
               

Net increase (decrease) in cash and cash equivalents

     (4,754,828 )   (6,514,498 )   28,120,605  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     35,374,826     41,889,324     13,768,719  
               

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 30,619,998   $ 35,374,826   $ 41,889,324  
               

The accompanying notes are an integral part of these financial statements

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2009

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Control Investments(3)

                        
 

Café Brazil, LLC

   Casual Restaurant Group                    
   

12% Secured Debt (Maturity—April 20, 2011)

       $ 2,500,000   $ 2,487,947   $ 2,500,000  
   

Member Units(7) (Fully diluted 42.3%)

               41,837     1,520,000  
                     
 

              2,529,784     4,020,000  
 

CBT Nuggets, LLC

  

Produces and Sells

                    
   

14% Secured Debt (Maturity—December 31, 2013)

   IT Certification     1,680,000     1,656,400     1,680,000  
   

10% Secured Debt (Maturity—March 31, 2012)

   Training Videos     915,000     915,000     915,000  
   

Member Units(7) (Fully diluted 24.5%)

               299,520     1,500,000  
                     
 

              2,870,920     4,095,000  
 

Ceres Management, LLC (Lambs)

  

Aftermarket Automotive

                    
   

14% Secured Debt (Maturity — May 31, 2013)

   Services Chain     2,400,000     2,377,388     2,377,388  
   

Member Units (Fully diluted 42.0%)

               1,200,000     920,000  
   

Class B Member Units (Non-voting)

               218,395     218,395  
                     
 

              3,795,783     3,515,783  
 

Condit Exhibits, LLC

  

Tradeshow Exhibits/

                    
   

13% current / 5% PIK Secured Debt (Maturity — July 1, 2013)

   Custom Displays
    		     2,651,514     2,622,107     2,622,107  
   

Warrants (Fully diluted 28.1%)

               300,000     30,000  
                     
 

              2,922,107     2,652,107  
 

Gulf Manufacturing, LLC

  

Industrial Metal

                    
   

Prime plus 1% Secured Debt (Maturity — August 31, 2012)

   Fabrication     1,200,000     1,193,135     1,200,000  
   

13% Secured Debt (Maturity — August 31, 2012)

         1,000,000     937,602     998,095  
   

Member Units(7) (Fully diluted 18.4%)

               472,000     2,360,000  
   

Warrants (Fully diluted 8.4%)

               160,000     1,080,000  
                     
 

              2,762,737     5,638,095  
 

Hawthorne Customs & Dispatch Services, LLC

  

Transportation/

                    
   

Member Units(7) (Fully diluted 44.4%)

   Logistics           412,500     840,000  
                     
 

Hydratec Holdings, LLC

  

Agricultural Services

                    
   

12.5% Secured Debt (Maturity — October 31, 2012)

         2,995,244     2,956,635     2,956,635  
   

Prime plus 1% Secured Debt (Maturity — October 31, 2012)

         350,000     338,667     338,667  
   

Member Units (Fully diluted 85.1%)

               4,100,000     6,620,000  
                     
 

              7,395,302     9,915,302  
 

Jensen Jewelers of Idaho, LLC

  

Retail Jewelry

                    
   

Prime Plus 2% Secured Debt (Maturity — November 14, 2011)

         1,044,000     1,035,321     1,044,000  
   

13% current / 6% PIK Secured Debt (Maturity — November 14, 2011)

         1,067,437     1,055,154     1,067,437  
   

Member Units(7) (Fully diluted 24.3%)

               376,000     290,000  
                     
 

              2,466,475     2,401,437  

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2009

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  
 

NAPCO Precast, LLC

  

Precast Concrete

                    
   

18% Secured Debt (Maturity — February 1, 2013)

   Manufacturing     5,923,077     5,837,759     5,923,077  
   

Prime Plus 2% Secured Debt (Maturity — February 1, 2013)(8)

         3,384,615     3,361,940     3,384,615  
   

Member Units(7) (Fully diluted 35.3%)

               2,020,000     5,220,000  
                     
 

              11,219,699     14,527,692  
 

OMi Holdings, Inc. 

  

Manufacturer of

                    
   

12% Secured Debt (Maturity — April 1, 2013)

   Overhead Cranes     6,342,000     6,298,395     6,298,395  
   

Common Stock (Fully diluted 28.8%)

               900,000     270,000  
                     
 

              7,198,395     6,568,395  
 

Quest Design & Production, LLC

  

Design and Fabrication

                    
   

Prime plus 2% Secured Debt (Maturity — June 30, 2014)

   of Custom Display     60,000     60,000     —  
   

10% Secured Debt (Maturity — June 30, 2014)

   Systems     600,000     465,060     200,000  
   

0% Secured Debt (Maturity — June 30, 2014)

         2,060,000     2,060,000     —  
   

Warrants (Fully diluted 40.0%)

               1,595,858     —  
   

Warrants (Fully diluted 20.0%)

               40,000     —  
                     
 

              4,220,918     200,000  
 

Thermal & Mechanical Equipment, LLC

  

Heat Exchange / Filtration

                    
   

13% current / 5% PIK Secured Debt (Maturity — September 25, 2014)

   Products and Services
    		     3,345,132     3,301,405     3,301,405  
   

Prime plus 2% Secured Debt (Maturity — September 25, 2014)(8)

         1,050,000     1,043,471     1,043,471  
   

Warrants (Fully diluted 30.0%)

               600,000     600,000  
                     
 

              4,944,876     4,944,876  
 

Uvalco Supply, LLC

  

Farm and Ranch Supply

                    
   

Member Units (Fully diluted 39.6%)(7)

               1,113,243     1,390,000  
                     
 

Ziegler's NYPD, LLC

  

Casual Restaurant Group

                    
   

Prime plus 2% Secured Debt (Maturity — October 1, 2013)(8)

         600,000     595,252     595,252  
   

13% current / 5% PIK Secured Debt (Maturity — October 1, 2013)

         2,808,544     2,775,643     2,775,643  
   

Warrants (Fully diluted 28.6%)

               360,000     360,000  
                     
 

              3,730,895     3,730,895  
 

Other

               1,961,085     1,961,085  
                     
 

Subtotal Control Investments

               59,544,719     66,400,667  
                     

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2009

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Affiliate Investments(4)

                        
 

Advantage Millwork Company, Inc. 

   Manufacturer/Distributor                    
   

12% Secured Debt (Maturity — February 5, 2012)

   of Wood Doors     3,066,667     2,970,656     1,200,000  
   

Warrants (Fully diluted 12.2%)

               97,808     —  
                     
 

              3,068,464     1,200,000  
 

American Sensor Technologies, Inc. 

  

Manufacturer of

                    
   

Prime plus 0.5% Secured Debt (Maturity — May 31, 2010)(8)

   Commercial/
Industrial Sensors		     3,800,000     3,800,000     3,800,000  
   

Warrants (Fully diluted 19.6%)

               49,990     820,000  
                     
 

              3,849,990     4,620,000  
 

California Healthcare Medical Billing, Inc. 

  

Healthcare Billing and

                    
   

12% Secured Debt (Maturity — October 17, 2013)

   Records Management     1,410,000     1,182,803     1,275,400  
   

12% Current / 6% PIK Secured Debt (Maturity — October 17, 2013)

         858,794     842,583     842,583  
   

Common Stock (Fully diluted 6.0%)

               390,000     1,180,000  
   

Warrants (Fully diluted 12.0%)

               240,000     1,280,000  
                     
   

              2,655,386     4,577,983  
 

Compact Power Equipment Centers, LLC

  

Light to Medium Duty

                    
   

12% Secured Debt (Maturity — September 23, 2014)

   Equipment Rental     1,800,000     1,778,702     1,778,702  
   

Member Units (Fully diluted 6.9%)

               688     688  
                     
   

              1,779,390     1,779,390  
 

Houston Plating & Coatings, LLC

  

Plating & Industrial

                    
   

Prime plus 2% Secured Debt (Maturity — July 19, 2011)

   Coating Services     100,000     100,000     100,000  
   

Prime plus 2% Secured Debt (Maturity — July 18, 2013)

         200,000     200,000     200,000  
   

Member Units(7) (Fully diluted 11.1%)

               335,000     3,565,000  
                     
   

              635,000     3,865,000  
 

Indianapolis Aviation Partners, LLC

  

FBO / Aviation Support

                    
   

12% Secured Debt (Maturity — September 15, 2014)

   Services     2,700,000     2,444,759     2,444,759  
   

Warrants (Fully diluted 9.1%)

               450,000     450,000  
   

Warrants (Fully diluted 9.0%)

               227,571     227,571  
                     
 

              3,122,330     3,122,330  
 

KBK Industries, LLC

  

Specialty Manufacturer

                    
   

14% Secured Debt (Maturity — January 23, 2011)

   of Oilfield and     3,937,500     3,853,825     3,853,825  
   

8% Secured Debt (Maturity — March 1, 2010)

   Industrial Products     93,750     93,750     93,750  
   

8% Secured Debt (Maturity — March 31, 2010)

         450,000     450,000     450,000  
   

Member Units(7) (Fully diluted 14.5%)

               187,500     460,000  
                     
   

              4,585,075     4,857,575  
 

Laurus Healthcare, LP

  

Healthcare Facilities /

                    
   

13% Secured Debt (Maturity — May 7, 2012)

   Services     2,275,000     2,275,000     2,275,000  
   

Warrants (Fully diluted 17.5%)

               105,000     4,400,000  
                     
   

              2,380,000     6,675,000  
 

National Trench Safety, LLC

  

Trench & Traffic

                    
   

10% PIK Debt (Maturity — April 16, 2014)

   Safety Equipment     447,203     447,203     447,203  
   

Member Units (Fully diluted 11.7%)

               1,792,308     700,000  
                     
 

              2,239,511     1,147,203  

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2009

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  
 

Olympus Building Services, Inc.

  

Custodial/Facilities

                    
   

12% Secured Debt (Maturity — March 27, 2014)

   Services     1,890,000     1,726,931     1,830,000  
   

12% Current / 3% PIK Secured Debt (Maturity — March 27, 2014)

         342,782     342,782     342,782  
   

Warrants (Fully diluted 13.5%)

               150,000     480,000  
                     
   

              2,219,713     2,652,782  
 

Pulse Systems, LLC

  

Manufacturer of Components

              
   

Warrants (Fully diluted 7.4%)

   for Medical Devices           132,856     340,000  
                     
 

Schneider Sales Management, LLC

  

Sales Consulting and

                    
   

13% Secured Debt (Maturity — October 15, 2013)

   Training     1,980,000     1,927,700     1,927,700  
   

Warrants (Fully diluted 12.0%)

               45,000     —  
                     
   

              1,972,700     1,927,700  
 

Vision Interests, Inc.

  

Manufacturer/

                    
   

13% Secured Debt (Maturity — June 5, 2012)

   Installer of Commercial     3,760,000     3,622,160     3,220,000  
   

Common Stock (Fully diluted 8.9%)

   Signage           372,000     —  
   

Warrants (Fully diluted 11.2%)

               160,000     —  
                     
   

              4,154,160     3,220,000  
 

Walden Smokey Point, Inc.

  

Specialty Transportation/

                    
   

14% current / 4% PIK Secured Debt (Maturity — December 30, 2013)

   Logistics
    		     4,995,200     4,915,014     4,915,014  
   

Common Stock (Fully diluted 7.6%)

               600,000     1,240,000  
                     
   

              5,515,014     6,155,014  
 

WorldCall, Inc.

  

Telecommunication/

                    
   

13% Secured Debt (Maturity — April 22, 2011)

   Information Services     646,225     646,225     646,225  
   

Common Stock (Fully diluted 9.9%)

               296,631     100,000  
                     
 

              942,856     746,225  
                     
 

Subtotal Affiliate Investments

               39,252,445     46,886,202  
                     

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2009

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Non-Control/Non-Affiliate Investments(5):

                        
 

Audio Messaging Solutions, LLC

   Audio Messaging Services                    
   

12% Secured Debt (Maturity — May 8, 2014)

         3,376,800     3,144,392     3,144,392  
   

Warrants (Fully diluted 5.0%)

               215,040     380,000  
                     
 

              3,359,432     3,524,392  
 

DrillingInfo, Inc.

  

Information Services for

                    
   

12% Secured Debt (Maturity — November 19, 2014)

   the Oil and Gas Industry     4,800,000     3,986,221     3,986,221  
   

Warrants (Fully diluted 3.0%)

               750,000     750,000  
                     
 

              4,736,221     4,736,221  
 

East Teak Fine Hardwoods, Inc.

  

Hardwood Products

                    
   

Common Stock (Fully diluted 3.3%)

               178,780     560,000  
                     
 

Hayden Acquisition, LLC

  

Manufacturer of

                    
   

8% Secured Debt (Maturity — August 9, 2010)

   Utility Structures     1,800,000     1,781,303     300,000  
                     
 

Support Systems Homes, Inc.

  

Manages Substance

                    
   

15% Secured Debt (Maturity — August 21, 2018)

   Abuse Treatment Centers     226,461     226,461     226,461  
                     
 

Technical Innovations, LLC

  

Manufacturer of Specialty

                    
   

13.5% Secured Debt (Maturity — January 16, 2015)

   Cutting Tools and Punches     3,250,000     3,210,176     3,251,280  
                     
 

Subtotal Non-Control/Non-Affiliate Investments

               13,492,373     12,598,354  
                     
 

Main Street Capital Partners, LLC (Investment Manager)

   Asset Management                    
   

100% of Membership Interests

               18,000,000     16,036,838  
                     
 

Total Portfolio Investments, September 30, 2009

             $ 130,289,537   $ 141,922,061  
                     
 

Marketable Securities and Idle Funds Investments

  

Investments in Secured and

                    
   

Western Refining Inc. Secured Term Loan

   Rated Debt Investments,                    
     

8.25% (Maturity — May 30, 2014)

   Certificates of Deposit,   $ 1,773,878   $ 1,727,770   $ 1,727,770  
   

Managed Healthcare Associates, Inc. Secured Term Loan 3.52% (Maturity — August 1, 2014)

   and Diversified Bond
Funds		     2,000,000     1,463,202     1,670,000  
   

Pharmanet Development Group, Inc. Secured Term Loan
10.0% (Maturity — May 29, 2014)

         987,500     686,534     686,534  
   

Apria Healthcare Group Inc. Senior Secured Notes
11.25% (Maturity — November 1, 2014)

         7,200,000     7,335,318     7,956,000  
   

Alon Refining Krotz Springs Inc. Senior Secured Notes
13.5% (Maturity — October 15, 2014)

         2,400,000     2,911,128     2,911,128  
   

Fairway Group Acquisition Senior Secured Notes
12.0% (Maturity — October 1, 2014)

         3,000,000     2,280,805     2,280,805  
   

Other Marketable Securities

         339,000     838,650     838,650  
                     
 

            $ 17,243,407   $ 18,070,887  
                     

(1)
Debt investments are generally income producing. Equity and warrants are non-income producing, unless otherwise noted.

(2)
See Note C for summary geographic location of portfolio companies.

(3)
Controlled investments are defined by the Investment Company Act of 1940, as amended ("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.

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CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2009

(4)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.

(5)
Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.

(6)
Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.

(7)
Income producing through payment of dividends or distributions.

(8)
Subject to contractual minimum interest rates.

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2008

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Control Investments(3)

                        
 

Café Brazil, LLC

   Casual Restaurant                    
   

12% Secured Debt (Maturity — April 20, 2011)

   Group   $ 2,750,000   $ 2,728,113   $ 2,750,000  
   

Member Units(7) (Fully diluted 42.3%)

               41,837     1,000,000  
                     

              2,769,950     3,750,000  
 

CBT Nuggets, LLC

  

Produces and Sells

                    
   

14% Secured Debt (Maturity — June 1, 2011)

   IT Certification     1,680,000     1,642,518     1,680,000  
   

10% Secured Debt (Maturity — December 31, 2009)

   Training Videos     150,000     150,000     150,000  
   

Member Units(7) (Fully diluted 29.1%)

               432,000     1,625,000  
   

Warrants (Fully diluted 10.5%)

               72,000     500,000  
                     

              2,296,518     3,955,000  
 

Ceres Management, LLC (Lambs)

  

Aftermarket Automotive

                    
   

14% Secured Debt (Maturity — May 31, 2013)

   Services Chain     2,400,000     2,372,601     2,372,601  
   

Member Units (Fully diluted 42.0%)

               1,200,000     1,300,000  
                     

              3,572,601     3,672,601  
 

Condit Exhibits, LLC

  

Tradeshow Exhibits/

                    
   

13% current / 5% PIK Secured Debt (Maturity — July 1,

   Custom Displays                    
     

2013)

         2,308,073     2,273,194     2,273,194  
   

Warrants (Fully diluted 28.1%)

               300,000     300,000  
                     

              2,573,194     2,573,194  
 

Gulf Manufacturing, LLC

  

Industrial Metal

                    
   

Prime plus 1% Secured Debt (Maturity — August 31,

   Fabrication                    
     

2012)

         1,200,000     1,190,764     1,200,000  
   

13% Secured Debt (Maturity — August 31, 2012)

         1,900,000     1,747,777     1,880,000  
   

Member Units (7) (Fully diluted 18.6%)

               472,000     1,100,000  
   

Warrants (Fully diluted 8.4%)

               160,000     550,000  
                     

              3,570,541     4,730,000  
 

Hawthorne Customs & Dispatch Services, LLC

  

Transportation/

                    
   

13% Secured Debt (Maturity — January 31, 2011)

   Logistics     1,200,000     1,171,988     1,171,988  
   

Member Units (7) (Fully diluted 27.8%)

               375,000     435,000  
   

Warrants (Fully diluted 16.5%)

               37,500     230,000  
                     

              1,584,488     1,836,988  
 

Hydratec Holdings, LLC

  

Agricultural Services

                    
   

12.5% Secured Debt (Maturity — October 31, 2012)

         5,400,000     5,311,329     5,311,329  
   

Prime plus 1% Secured Debt (Maturity — October 31, 2012)

         1,595,244     1,579,911     1,579,911  
   

Member Units (Fully diluted 60%)

               1,800,000     2,050,000  
                     

              8,691,240     8,941,240  
 

Jensen Jewelers of Idaho, LLC

  

Retail Jewelry

                    
   

Prime Plus 2% Secured Debt (Maturity — November 14, 2011)

         1,044,000     1,030,957     1,044,000  
   

13% current / 6% PIK Secured Debt (Maturity — November 14, 2011)

         1,004,591     986,980     1,004,591  
   

Member Units (7) (Fully diluted 24.3%)

               376,000     380,000  
                     

              2,393,937     2,428,591  
 

NAPCO Precast, LLC

  

Precast Concrete

                    
   

18% Secured Debt (Maturity — February 1, 2013)

   Manufacturing     6,461,538     6,348,011     6,461,538  
   

Prime Plus 2% Secured Debt (Maturity — February 1, 2013)(8)

         3,692,308     3,660,945     3,692,308  
   

Member Units (7) (Fully diluted 36.1%)

               2,000,000     5,100,000  
                     

              12,008,956     15,253,846  

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2008

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  
 

OMi Holdings, Inc.

  

Manufacturer of

                    
   

12% Secured Debt (Maturity — April 1, 2013)

   Overhead Cranes     6,660,000     6,603,400     6,603,400  
   

Common Stock (Fully diluted 28.8%)

               900,000     570,000  
                     

              7,503,400     7,173,400  
 

Quest Design & Production, LLC

  

Design and Fabrication

                    
   

10% Secured Debt (Maturity — June 30, 2013)

   of Custom Display     600,000     465,060     600,000  
   

0% Secured Debt (Maturity — June 30, 2013)

   Systems     2,000,000     2,000,000     1,400,000  
   

Warrants (Fully diluted 40.0%)

               1,595,858     —  
   

Warrants (Fully diluted 20.0%)

               40,000     —  
                     

              4,100,918     2,000,000  
 

Universal Scaffolding & Equipment, LLC

  

Manufacturer of Scaffolding

                    
   

Prime plus 1% Secured Debt (Maturity — August 17,

   and Shoring Equipment                    
     

2012)(8)

         881,833     875,072     875,072  
   

13% current / 5% PIK Secured Debt (Maturity — August 17, 2012)

         3,362,698     3,311,508     3,160,000  
   

Member Units (Fully diluted 18.4%)

               992,063     —  
                     

              5,178,643     4,035,072  
 

Uvalco Supply, LLC

  

Farm and Ranch Supply

                    
   

Member Units (Fully diluted 39.6%)

               905,743     1,575,000  
                     
 

Ziegler's NYPD, LLC

  

Restaurant

                    
   

Prime plus 2% Secured Debt (Maturity — October 1, 2013)(8)

         600,000     594,239     594,239  
   

13% current / 5% PIK Secured Debt (Maturity — October 1, 2013)

         2,704,262     2,663,437     2,663,437  
   

Warrants (Fully diluted 28.6%)

               360,000     360,000  
                     

              3,617,676     3,617,676  
                     
 

Subtotal Control Investments

               60,767,805     65,542,608  
                     

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2008

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Affiliate Investments(4)

                        
 

Advantage Millwork Company, Inc.

   Manufacturer/Distributor                    
   

12% Secured Debt (Maturity — February 5, 2012)

   of Wood Doors     3,066,667     2,955,442     2,955,442  
   

Warrants (Fully diluted 12.2%)

               97,808     —  
                     

              3,053,250     2,955,442  
 

American Sensor Technologies, Inc.

  

Manufacturer of Commercial/

                    
   

Prime plus 0.5% Secured Debt (Maturity — May 31, 2010)(8)

   Industrial Sensors     3,800,000     3,800,000     3,800,000  
   

Warrants (Fully diluted 20.0%)

               50,000     250,000  
                     

              3,850,000     4,050,000  
 

Carlton Global Resources, LLC

  

Processor of

                    
   

13% PIK Secured Debt (Maturity — November 15, 2011)

   Industrial Minerals     4,791,944     4,655,836     —  
   

Member Units (Fully diluted 8.5%)

               400,000     —  
                     

              5,055,836     —  
 

California Healthcare Medical Billing, Inc.

  

Healthcare Services

                    
   

12% Secured Debt (Maturity — October 17, 2013)

         1,410,000     1,141,706     1,141,706  
   

Common Stock (Fully diluted 6%)

               390,000     390,000  
   

Warrants (Fully diluted 12%)

               240,000     240,000  
                     

              1,771,706     1,771,706  
 

Houston Plating & Coatings, LLC

  

Plating & Industrial

                    
   

Prime plus 2% Secured Debt (Maturity — July 18, 2013)

   Coating Services     300,000     300,000     300,000  
   

Member Units(7) (Fully diluted 11.1%)

               210,000     2,750,000  
                     

              510,000     3,050,000  
 

KBK Industries, LLC

  

Specialty Manufacturer of

                    
   

14% Secured Debt (Maturity — January 23, 2011)

   Oilfield and Industrial     3,937,500     3,787,758     3,937,500  
   

8% Secured Debt (Maturity — March 1, 2010)

   Products     468,750     468,750     468,750  
   

8% Secured Debt (Maturity — March 31, 2009)

         450,000     450,000     450,000  
   

Member Units(7) (Fully diluted 14.5%)

               187,500     775,000  
                     

              4,894,008     5,631,250  
 

Laurus Healthcare, LP

  

Healthcare Facilities

                    
   

13% Secured Debt (Maturity — May 7, 2009)

         2,275,000     2,259,664     2,275,000  
   

Warrants (Fully diluted 17.5%)

               105,000     2,500,000  
                     

              2,364,664     4,775,000  
 

National Trench Safety, LLC

  

Trench & Traffic

                    
   

10% PIK Debt (Maturity — April 16, 2014)

   Safety Equipment     404,256     404,256     404,256  
   

Member Units (Fully diluted 11.7%)

               1,792,308     1,792,308  
                     

              2,196,564     2,196,564  
 

Pulse Systems, LLC

  

Manufacturer of

                    
   

14% Secured Debt (Maturity — June 1, 2009)

   Components for     1,831,274     1,819,464     1,831,274  
   

Warrants (Fully diluted 7.4%)

   Medical Devices           132,856     450,000  
                     

              1,952,320     2,281,274  
 

Schneider Sales Management, LLC

  

Sales Consulting and

                    
   

13% Secured Debt (Maturity — October 15, 2013)

   Training     1,980,000     1,909,972     1,909,972  
   

Warrants (Fully diluted 12.0%)

               45,000     45,000  
                     

              1,954,972     1,954,972  
 

Vision Interests, Inc.

  

Manufacturer/

                    
   

13% Secured Debt (Maturity — June 5, 2012)

   Installer of Commercial     3,760,000     3,579,117     3,579,117  
   

Common Stock (Fully diluted 8.9%)

   Signage           372,000     420,000  
   

Warrants (Fully diluted 11.2%)

               160,000     420,000  
                     

              4,111,117     4,419,117  

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2008

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Affiliate Investments(4)

                        
 

Walden Smokey Point, Inc.

   Specialty Transportation/                    
   

14% current / 4% PIK Secured Debt (Maturity — December 30, 2013)

   Logistics     4,800,533     4,704,533     4,704,533  
   

Common Stock (Fully diluted 7.6%)

               600,000     600,000  
                     

              5,304,533     5,304,533  
 

WorldCall, Inc. 

  

Telecommunication/

                    
   

13% Secured Debt (Maturity — October 22, 2009)

   Information Services     646,225     631,199     640,000  
   

Common Stock (Fully diluted 9.9%)

               296,631     382,837  
                     

              927,830     1,022,837  
                     
 

Subtotal Affiliate Investments

               37,946,800     39,412,695  
                     

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MAIN STREET CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

December 31, 2008

Portfolio Company/Type of Investment(1)(2)
 
Industry
  Principal(6)   Cost(6)   Fair Value  

Non-Control/Non-Affiliate Investments(5):

                        
 

East Teak Fine Hardwoods, Inc.

   Hardwood Products                    
   

Common Stock (Fully diluted 3.3%)

               130,000     490,000  
                     
 

Hayden Acquisition, LLC

   Manufacturer of                    
   

8% Secured Debt (Maturity — March 9, 2009)

   Utility Structures     1,800,000     1,781,303     500,000  
                     
 

Support Systems Homes, Inc.

   Manages Substance                    
   

15% Secured Debt (Maturity — August 21, 2018)

   Abuse Treatment Centers     226,589     226,589     226,589  
                     
 

Technical Innovations, LLC

   Manufacturer of Specialty                    
   

7% Secured Debt (Maturity — August 31, 2009)

   Cutting Tools and Punches     416,364     409,297     409,297  
   

13.5% Secured Debt (Maturity — January 16, 2015)

         3,750,000     3,698,216     3,750,000  
                     

              4,107,513     4,159,297  
                     
 

Subtotal Non-Control/Non-Affiliate Investments

               6,245,405     5,375,886  
                     
 

Main Street Capital Partners, LLC (Investment Manager)

   Asset Management                    
   

100% of Membership Interests

               18,000,000     16,675,626  
                     
 

Total Portfolio Investments, December 31, 2008

             $ 122,960,010   $ 127,006,815  
                     
 

Idle Funds Investments

   Investments in High-Quality                    
   

8.3% General Electric Capital Corporate Bond

   Debt Investments and                    
     

(Maturity — September 20, 2009)

   Diversified Bond Funds     1,218,704     1,218,704     1,218,704  
   

4.50% National City Bank Bond
(Maturity — March 15, 2010)

         1,000,000     1,000,000     1,000,000  
   

Vanguard High-Yield Corp Fund Admiral Shares

         1,000,000     1,000,000     1,086,514  
   

Vanguard Long-Term Investment-Grade Fund Admiral Shares

         1,000,000     1,000,000     1,084,577  
                     

            $ 4,218,704   $ 4,389,795  
                     

(1)
Debt investments are generally income producing. Equity and warrants are non-income producing, unless otherwise noted.

(2)
See Note C for summary geographic location of portfolio companies.

(3)
Controlled investments are defined by the Investment Company Act of 1940, as amended ("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.

(4)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.

(5)
Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.

(6)
Principal is net of prepayments. Cost is net of prepayments and accumulated unearned income.

(7)
Income producing through payment of dividends or distributions.

(8)
Subject to contractual minimum rates.

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — ORGANIZATION AND BASIS OF PRESENTATION

1.    Organization

       Main Street Capital Corporation ("MSCC") was formed on March 9, 2007 for the purpose of (i) acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP ("MSMF") and its general partner, Main Street Mezzanine Management, LLC ("MSMF GP"), (ii) acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the "Investment Manager"), (iii) raising capital in an initial public offering, which was completed in October 2007 (the "IPO"), and (iv) thereafter operating as an internally managed business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). MSMF is licensed as a Small Business Investment Company ("SBIC") by the United States Small Business Administration ("SBA") and the Investment Manager acts as MSMF's manager and investment adviser. Because the Investment Manager, which employs all of the executive officers and other employees of MSCC, is wholly owned by MSCC, MSCC does not pay any external investment advisory fees but instead incurs the net operating costs associated with employing investment and portfolio management professionals through the Investment Manager. The transactions discussed above were consummated in October 2007 and are collectively termed the "Formation Transactions." Immediately following the Formation Transactions, Main Street Equity Interests, Inc. ("MSEI") was formed as a wholly owned consolidated subsidiary of MSCC. MSEI has elected for tax purposes to be treated as a taxable entity and is taxed at normal corporate tax rates based on its taxable income.

       On January 7, 2010, MSCC consummated transactions (the "Exchange Offer") to exchange 1,239,695 shares of its common stock for approximately 88% of the total dollar value of the limited partner interests in Main Street Capital II, LP ("MSC II" and, together with MSMF, the "Funds"). Pursuant to the terms of the Exchange Offer, 100% of the membership interests in the general partner of MSC II, Main Street Capital II GP, LLC ("MSC II GP"), were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is also managed by the Investment Manager. The Exchange Offer and related transactions, including the transfer of the MSC II GP interests, are collectively termed the "Exchange Offer Transactions."

       Unless otherwise noted or the context otherwise indicates, the terms "we," "us," "our" and "Main Street" refer to MSCC and its subsidiaries, including MSMF and MSMF GP, prior to the Exchange Offer Transactions and MSCC and its subsidiaries, including MSMF, MSMF GP, MSC II and MSC II GP, subsequent to the Exchange Offer.

2.    Basis of Presentation

       Main Street's financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). For the years ended December 31, 2009 and 2008, the consolidated financial statements of Main Street include the accounts of MSCC, MSMF, MSEI, and MSMF GP. The Investment Manager is accounted for as a portfolio investment (see Note D). "Marketable securities and idle funds investments" are classified as financial instruments and are reported separately on Main Street's Consolidated Balance Sheets and Consolidated Schedule of Investments due to the nature of such investments (See Note B.9). To allow for more relevant disclosure of Main Street's "core" investment portfolio, "core" portfolio investments, as used herein, refers to all of Main Street's portfolio investments excluding the Investment Manager and all "Marketable securities and idle funds investments." Main Street's results of operations and cash flows for the years ended December 31, 2009, 2008, and 2007, and financial position as of December 31, 2009 and 2008, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to prior period balances to conform with the current financial statement

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


presentation, including the reclassification of MSCC shares of common stock repurchased under Main Street's share repurchase plan, which were formerly classified as treasury stock and are now reflected as a reduction of common stock and additional paid in capital in accordance with Maryland law.

       Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Audit and Accounting Guide for Investment Companies issued by the American Institute of Certified Public Accountants (the "AICPA Guide"), Main Street is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in the AICPA Guide occurs if Main Street owns a controlled operating company that provides all or substantially all of its services directly to Main Street or to an investment company of Main Street. None of the investments made by Main Street qualify for this exception. Therefore, Main Street's portfolio investments are carried on the balance sheet at fair value, as discussed further in Note B, with any adjustments to fair value recognized as "Net Change in Unrealized Appreciation (Depreciation) from Investments" on the Statement of Operations until the investment is disposed of, resulting in any gain or loss on exit being recognized as a "Net Realized Gain (Loss) from Investments."

       Main Street classifies its portfolio investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, "Control Investments" are defined as investments in which Main Street owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, "Affiliate Investments" are defined as investments in which Main Street owns between 5% and 25% of the voting securities. Under the 1940 Act, "Non-Control/Non-Affiliate Investments" are defined as investments that are neither Control investments nor Affiliate investments. The "Investment in affiliated Investment Manager" represents Main Street's investment in a wholly owned investment manager subsidiary that is accounted for as a portfolio investment.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.    Valuation of Portfolio Investments

       Main Street accounts for its core portfolio investments and the Investment Manager at fair value. As a result, Main Street adopted the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("Codification" or "ASC") 820, Fair Value Measurements and Disclosures, in the first quarter of 2008. 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 Main Street to assume that the portfolio investment is to be sold in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. With the adoption of this statement, Main Street incorporated the income approach to estimate the fair value of its core portfolio debt investments principally using a yield-to-maturity model. Prior to the adoption of ASC 820, Main Street reported unearned income as a single line item on the consolidated balance sheets and consolidated schedule of investments. Unearned income is no longer reported as a separate line item and is now part of the investment portfolio cost and fair value on the consolidated balance sheets and the consolidated schedule of investments. This change in presentation had no impact on the overall net cost or fair value of Main Street's investment portfolio and had no impact on Main Street's financial position or results of operations.

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

       Main Street's core business plan calls for it to invest primarily in illiquid securities issued by private companies. These core investments may be subject to restrictions on resale and will generally have no established trading market. As a result, Main Street determines in good faith the fair value of its portfolio investments pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by its Board of Directors and in accordance with the 1940 Act. Main Street reviews external events, including private mergers, sales and acquisitions involving comparable companies, and includes these events in the valuation process. Main Street's valuation policy and process are intended to provide a consistent basis for determining the fair value of the portfolio.

       For valuation purposes, control investments are composed of equity and debt securities for which Main Street has a controlling interest in the portfolio company or has the ability to nominate a majority of the portfolio company's board of directors. Market quotations are generally not readily available for Main Street's control investments. As a result, Main Street determines the fair value of control investments using a combination of market and income approaches. Under the market approach, Main Street will typically use the enterprise value methodology to determine the fair value of these investments. 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, or 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, Main Street analyzes various factors, including the portfolio company's historical and projected financial results. Main Street allocates the enterprise value to investments in order of the legal priority of the investments. Main Street will also use the income approach to determine the fair value of these securities, based on projections of the discounted future free cash flows that the portfolio company or the debt security will likely generate. The valuation approaches for Main Street's control investments estimate the value of the investment if it were to sell, or exit, the investment, assuming the highest and best use of the investment by market participants. In addition, these valuation approaches consider the value associated with Main Street's ability to control the capital structure of the portfolio company, as well as the timing of a potential exit.

       For valuation purposes, non-control investments are composed of debt and equity securities for which Main Street does not have a controlling interest in the portfolio company, or the ability to nominate a majority of the portfolio company's board of directors. Market quotations for Main Street's non-control investments are generally not readily available. For Main Street's non-control investments, Main Street uses a combination of market and income approaches to value its equity investments and the income approach to value its debt instruments. For non-control debt investments, Main Street determines the fair value primarily using a yield 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. Main Street's estimate of the expected repayment date of a debt security is generally the legal maturity date of the instrument, as Main Street generally intends to hold its loans to maturity. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. Main Street will use the value determined by the yield analysis as the fair value for that security; however, because of Main Street's general intent to hold its loans to maturity, the fair value will not exceed the face amount of the debt security. A change in the assumptions that Main Street uses to estimate the fair value of its debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a debt security is in workout status, Main Street may consider other factors in determining the fair value of a debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

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       Due to the inherent uncertainty in the valuation process, Main Street's estimate of fair value may differ materially from the values that would have been used had a ready 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 gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. Main Street determines the fair value of each individual investment and records changes in fair value as unrealized appreciation or depreciation.

       Main Street uses a standard internal investment rating system in connection with its investment oversight, portfolio management/analysis and investment valuation procedures. This system takes into account both quantitative and qualitative factors of the portfolio company and the investments held.

       Pursuant to its internal valuation process, Main Street performs valuation procedures on each portfolio company once a quarter. In addition to its internal valuation process, in arriving at estimates of fair value for portfolio companies, Main Street, among other things, consults with a nationally recognized independent advisor. The nationally recognized independent advisor is generally consulted relative to each portfolio investment at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders' best interest, to consult with the nationally recognized independent advisor on one or more portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street's investment in a portfolio company is determined to be insignificant relative to the total investment portfolio. Main Street consulted with its independent advisor in arriving at Main Street's determination of fair value on a total of 26 portfolio companies for the year ended December 31, 2009, representing approximately 82% of the total portfolio investments at fair value as of December 31, 2009. Main Street consulted with its advisor relative to Main Street's determination of fair value on 4, 9, 6, and 7 portfolio investments for the quarters ended March 31, June 30, September 30 2009, and December 31, 2009 respectively. The Board of Directors of Main Street has the final responsibility for reviewing and approving, in good faith, Main Street's estimate of the fair value for the investments consistent with the 1940 Act requirements.

       Main Street believes its investments as of December 31, 2009 and 2008 approximate fair value as of those dates based on the market in which Main Street operates and other conditions in existence at those reporting periods.

2.    Use of Estimates

       The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from these estimates under different conditions or assumptions. Additionally, as explained above, the financial statements include portfolio investments whose values have been estimated by Main Street with the oversight, review and approval by Main Street's Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the portfolio investment valuations, those estimated values may differ significantly from the values that would have been used had a readily available market for the investments existed, and it is reasonably possible that the differences could be material.

3.    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.

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4.    Marketable Securities and Idle Funds Investments

       Marketable securities and idle funds investments include investments in certificates of deposit, U.S. government agency securities, intermediate-term secured debt, independently rated debt investments, and diversified bond funds. See the "Consolidated Schedule of Investments" for more information on marketable securities and idle funds investments.

5.    Interest and Dividend Income

       Interest and dividend income is recorded on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. In accordance with Main Street's valuation policy, accrued interest and dividend income is evaluated periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if Main Street otherwise does not expect the debtor to be able to service all of its debt or other obligations, Main Street will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security's status significantly improves regarding ability to service the debt or other obligations, or if a loan or debt security is fully impaired or written off, it will be removed from non-accrual status.

       While not significant to its total core portfolio, Main Street holds debt instruments in its core investment portfolio that contain payment-in-kind ("PIK") interest provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. To maintain regulated investment company ("RIC") tax treatment (as discussed below), this non-cash source of income will need to be paid out to stockholders in the form of distributions, even though Main Street may not have collected the PIK interest in cash.

       As of December 31, 2009, Main Street had three investments on non-accrual status, which comprised approximately 1.4% of the core investment portfolio at fair value. At December 31, 2008, Main Street had one investment on non-accrual status, which comprised approximately 0.5% of the core investment portfolio at fair value.

6.    Deferred Financing Costs

       Deferred financing costs include SBIC debenture commitment fees and SBIC debenture leverage fees which have been capitalized and which are amortized into interest expense over the term of the debenture agreement (10 years).

       Deferred financing costs also include costs related to a two-year term treasury line of credit and a three-year term investment credit facility. These costs have been capitalized and are amortized into interest expense over their respective terms. The treasury line of credit was voluntarily terminated in 2009, and the remaining unamortized costs associated with the treasury line of credit were expensed in 2009.

7.    Fee Income — Structuring and Advisory Services

       Main Street may periodically provide services, including structuring and advisory services, to its portfolio companies. 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 accreted into interest income over the life of the financing.

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8.    Unearned Income — Debt Origination Fees and Original Issue Discount

       Main Street capitalizes upfront debt origination fees received in connection with financings and reflects such fees as unearned income netted against investments. Main Street will also capitalize and offset direct loan origination costs against the origination fees received. The unearned income from the fees, net of direct debt origination costs, is accreted into interest income based on the effective interest method over the life of the financing.

       In connection with its core portfolio debt investments, Main Street sometimes receives nominal cost warrants ("nominal cost equity") that are valued as part of the negotiation process with the particular portfolio company. When Main Street receives nominal cost equity, Main Street allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the debt is reflected as unearned income, which is netted against the debt investment, and accreted into interest income based on the effective interest method over the life of the debt.

9.    Share-Based Compensation

       Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation — Stock Compensation. Accordingly, for restricted stock awards, Main Street measures the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes that fair value as share-based compensation expense over the requisite service period or vesting term.

10.  Income Taxes

       MSCC has elected and intends to qualify for the tax treatment applicable to a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and, among other things, intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, MSCC is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, each year. Depending on the level of taxable income earned in a tax year, MSCC may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income.

       MSCC's wholly owned subsidiary, MSEI, is a taxable entity which holds certain core portfolio investments of Main Street. MSEI is consolidated for U.S. GAAP reporting purposes, and the core portfolio investments held by MSEI are included in Main Street's consolidated financial statements. The principal purpose of MSEI is to permit Main Street to hold equity investments in portfolio companies which are "pass through" entities for tax purposes in order to comply with the "source income" requirements contained in the RIC tax provisions. MSEI is not consolidated with Main Street for income tax purposes and may generate income tax expense as a result of its ownership of certain core portfolio investments. This income tax expense, or benefit, is reflected in Main Street's Consolidated Statement of Operations.

       MSEI uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

       Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net

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unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

11.  Net Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation or Depreciation from Investments

       Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries. Net change in unrealized appreciation or depreciation from investments reflects the net change in the valuation of the investment portfolio and financial instruments pursuant to Main Street's valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation on exited investments.

12.  Concentration of Credit Risks

       Main Street places its cash in financial institutions, and, at times, such balances may be in excess of the federally insured limit.

13.  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. Main Street believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate the fair values of such items. Marketable securities and idle funds investments include investments in certificates of deposit, U.S. government agency securities, intermediate-term secured debt, independently rated debt investments, and diversified bond funds. The fair value determination for these investments under the provisions of ASC 820 primarily consists of Level 2 observable inputs. The SBIC debentures remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. As of December 31, 2009, had Main Street adopted the fair value option under ASC 825, Financial Instruments, relating to accounting for debt obligations at their fair value, Main Street estimates the fair value of its SBIC debentures would be approximately $52.0 million, or $13.0 million less than the face value of the SBIC debentures.

14.  Initial Public Offering Costs

       For the year ended December 31, 2007, Main Street incurred total costs of $2,337,823 associated with the initial public offering of Main Street. These costs principally related to accounting, legal and other professional fees associated with the company's initial public offering which was completed in October 2007.

       Of the $2,337,823 in total costs incurred related to initial public offering, $695,250 of such costs were professional fees related to the IPO which were deducted in determining the Net Investment Income and Net Increase in Net Assets Resulting from Operations for the year ended December 31, 2007. The remaining $1,642,573 in offering costs incurred has been reflected as a reduction to "Additional Paid In Capital."

15.  Earnings per Share

       Basic and diluted per share calculations are computed utilizing the weighted average number of shares of common stock outstanding for the period. The weighted average number of shares of common stock outstanding for 2007 was calculated as if the Formation Transactions and the IPO had occurred on January 1, 2007, consistent with the guidance on exchanges of shares between entities under common control contained

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in ASC 805, Business Combinations ("ASC 805"). This approach resulted in more relevant and meaningful per share computations.

       As discussed further in "Recently Issued Accounting Standards," Main Street adopted the amended guidance in ASC 260, Earnings Per Share. Based on the guidance, Main Street determined that unvested shares of restricted stock are participating securities and should therefore be included in the basic earnings per share calculation. As a result, for all periods presented, there is no difference between diluted earnings per share and basic earnings per share amounts.

16.  Recently Issued Accounting Standards

       In December 2007, the FASB issued ASC 805, Business Combinations. Under ASC 805, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, replacing the previous cost-allocation process. ASC 805 also includes a substantial number of new disclosure requirements. ASC 805 is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. Main Street adopted ASC 805 on January 1, 2009. Main Street is accounting for the Exchange Offer under ASC 805 with the impact on the financial statements discussed in Note R.

       In June 2008, the FASB amended ASC 260, Earnings Per Share with ASC 260-10-45-61A which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS"). ASC 260-10-45-61A is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented is required to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the amended provisions of ASC 260. Early application was not permitted. On July 1, 2008 and 2009, Main Street's Board of Directors approved the issuance of shares of restricted stock to Main Street employees and independent directors as discussed further in Note M. Main Street determined that these shares of restricted stock are participating securities prior to vesting. For the years ended December 31, 2009 and 2008, 291,739 and 255,645 shares, respectively, of non-vested restricted stock have been included in Main Street's basic and diluted EPS computations. Earnings per share and the weighted average share amount for 2008 has been revised to apply this standard retrospectively.

       In October 2008, the FASB amended ASC 820 with ASC 820-10-35-15A, Financial Assets in a Market That Is Not Active, to provide an illustrative example of how to determine the fair value of a financial asset in an inactive market. ASC 820-10-35-15A does not change the fair value measurement principles previously set forth. Since adopting ASC 820 in January 2008, Main Street's practices for determining the fair value of its investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in ASC 820-10-35-15A. Therefore, Main Street's adoption of the update did not affect its practices for determining the fair value of its investment portfolio and financial instruments, and its adoption did not have a material effect on its financial position or results of operations.

       In April 2009, the FASB amended ASC 820 and ASC 825 with ASC 820-10-35, Subsequent Measurement, and ASC 825-10-65, Transition and Open Effective Date Information. Both amendments are effective for reporting periods ending on or after June 15, 2009. Since adopting ASC 820 and ASC 825 in January 2008, Main Street's practices for determining fair value and for disclosures about the fair value of its investment portfolio and financial instruments have been, and continue to be, consistent with the guidance provided in the amended pronouncements. Therefore, Main Street's adoption of these updates did not affect its practices for determining the fair value of its investment portfolio and financial instruments, and its adoption did not have a material effect on its financial position or results of operations.

       In May 2009, the FASB amended ASC 855, Subsequent Events with ASC 855-10-50, Disclosure, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10-50 is effective for interim periods or fiscal years ending after June 15, 2009. Main Street's adoption of ASC 855-10-50 did not have a material effect on its financial position or results of operations.

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       In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles, which became the single official source of authoritative, nongovernmental U.S. GAAP, other than rules and interpretive releases issued by the Securities and Exchange Commission. The Codification reorganized the literature and changed the naming mechanism by which topics are referenced. ASC 105 was effective for Main Street during its interim period ended September 30, 2009. As required, references to pre-codification accounting literature have been changed throughout this annual report on Form 10-K to appropriately reference the Codification. The Company's accounting policies and amounts presented in the financial statements were not impacted by this change.

NOTE C — FAIR VALUE HIERARCHY FOR PORTFOLIO AND IDLE FUNDS INVESTMENTS

       In connection with valuing portfolio investments, marketable securities and idle funds investments, Main Street adopted the provisions of ASC 820 in the first quarter of 2008. 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. Main Street accounts for these investments at fair value.

Fair Value Hierarchy

       In accordance with ASC 820, Main Street has categorized its portfolio investments, marketable securities and idle funds investments based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).

       Portfolio investments, marketable securities and idle funds investments, recorded on Main Street's balance sheet are categorized based on the inputs to the valuation techniques as follows:

       Level 3 — Investments whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the investment (for example, investments in illiquid securities issued by private companies).

       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

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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). Main Street 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 December 31, 2009 and 2008, all of Main Street's marketable securities and idle funds investments consisted primarily of investments in secured debt investments, certificates of deposit, and diversified bond funds. The fair value determination for these investments primarily consisted of observable inputs in non-active markets. As a result, all of Main Street's marketable securities and idle funds investments were categorized as Level 2 as of December 31, 2009 and 2008, with a fair value of $18,070,887 and $4,389,795, respectively.

       As of December 31, 2009, all of Main Street's portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of Main Street's portfolio investments were categorized as Level 3. The fair value determination of each portfolio investment required one or more of the following unobservable inputs:

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       The following table provides a summary of changes in fair value of Main Street's Level 3 portfolio investments for the year ended December 31, 2009:

Type of
Investment
  December 31, 2008
Fair Value 		  Accretion of
Unearned Income 		  Redemptions/
Repayments/
Exits(1) 		  New
Investments(1) 		  Net
Changes from
Unrealized
to Realized 		  Net
Unrealized
Appreciation
(Depreciation) 		  December 31, 2009
Fair Value 		 

Debt

   $ 81,751,043   $ 634,921   $ (20,667,760 ) $ 22,222,358   $ 7,731,945   $ (7,362,526 ) $ 84,309,981  

Equity

     22,735,146     —     (1,524,543 )   4,381,451     1,026,210     3,759,407     30,377,671  

Equity warrants

     5,845,000     —     (109,510 )   2,392,611     (428,000 )   3,497,470     11,197,571  

Investment Manager

     16,675,626     —     —     —     —     (638,788 )   16,036,838  
                               

  $ 127,006,815   $ 634,921   $ (22,301,813 ) $ 28,996,420   $ 8,330,155   $ (744,437 ) $ 141,922,061  
                               
(1)
Includes the impact of non-cash conversions

Core Portfolio Investments

       Main Street's core portfolio investments principally consist of secured debt, equity warrants and direct equity investments in privately held companies. The core debt investments are secured by either a first or second lien on the assets of the portfolio company, generally bear interest at fixed rates, and generally mature between five and seven years from the original investment. In most portfolio companies, Main Street also receives nominally priced equity warrants and/or makes direct equity investments, usually in connection with a debt investment.

       As discussed further in Note D, the Investment Manager is a wholly owned subsidiary of MSCC. However, the Investment Manager is accounted for as a portfolio investment of Main Street since it conducts a significant portion of its investment management activities for entities outside of MSCC and its subsidiaries. To allow for more relevant disclosure of Main Street's core investment portfolio, Main Street's investment in the Investment Manager has been excluded from the tables and amounts set forth below in this Note C.

       Investment income, consisting of interest, dividends and fees, can fluctuate dramatically due to various factors, including repayment of a debt investment or sale of an equity interest. Revenue recognition in any given year could be highly concentrated among several portfolio companies. For the year ended December 31, 2009, Main Street did not record investment income from any portfolio company in excess of 10% of total investment income. For the year ended December 31, 2008, Main Street recorded investment income from one portfolio company in excess of 10% of total investment income. The investment income from that portfolio company represented approximately 21% of the total investment income for the period, principally related to high levels of dividend income and transaction and structuring fees on the new investment in such company.

       As of December 31, 2009, Main Street had debt and equity investments in 35 core portfolio companies with an aggregate fair value of $125,885,223 and a weighted average effective yield on its debt investments of approximately 14.3%. Approximately 80% of Main Street's total core portfolio investments at cost were in the form of debt investments and 87% of such debt investments at cost were secured by first priority liens on the assets of Main Street's portfolio companies as of December 31, 2009. At December 31, 2009, Main Street had equity ownership in approximately 91% of its core portfolio companies and the average fully diluted equity ownership in those portfolio companies was approximately 24%. As of December 31, 2008, Main Street had debt and equity investments in 31 core portfolio companies with an aggregate fair value of $110,331,189 and a weighted average effective yield on its debt investments of approximately 14.0%. The weighted average yields were computed using the effective interest rates for all debt investments at December 31, 2009 and December 31, 2008, including amortization of deferred debt origination fees and accretion of original issue discount but excluding any debt investments on non-accrual status.

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       Summaries of the composition of Main Street's core investment portfolio at cost and fair value as a percentage of total core portfolio investments are shown in the following table:

Cost:
  December 31, 2009   December 31, 2008  

First lien debt

     69.3 %   76.2 %

Equity

     13.4 %   11.0 %

Second lien debt

     10.7 %   7.4 %

Equity warrants

     6.6 %   5.4 %
           

    100.0 %   100.0 %
           

 

Fair Value:
  December 31, 2009   December 31, 2008  

First lien debt

     57.4 %   67.0 %

Equity

     19.5 %   15.7 %

Equity warrants

     13.5 %   10.2 %

Second lien debt

     9.6 %   7.1 %
           

    100.0 %   100.0 %
           

       The following table shows the core portfolio composition by geographic region of the United States at cost and fair value as a percentage of total core portfolio investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

Cost:
  December 31, 2009   December 31, 2008  

Southwest

     50.1 %   50.2 %

West

     28.6 %   36.3 %

Southeast

     9.0 %   5.1 %

Midwest

     6.9 %   4.7 %

Northeast

     5.4 %   3.7 %
           

    100.0 %   100.0 %
           

 

Fair Value:
  December 31, 2009   December 31, 2008  

Southwest

     51.1 %   56.0 %

West

     28.4 %   31.1 %

Southeast

     8.4 %   4.1 %

Midwest

     6.3 %   5.1 %

Northeast

     5.8 %   3.7 %
           

    100.0 %   100.0 %
           

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       Main Street's core portfolio investments are generally in lower middle market companies conducting business in a variety of industries. Set forth below are tables showing the composition of Main Street's core portfolio investments by industry at cost and fair value as of December 31, 2009 and 2008:

Cost:
  December 31, 2009   December 31, 2008  

Professional services

     10.1 %   4.1 %

Precast concrete manufacturing

     9.7 %   11.3 %

Custom wood products

     9.1 %   9.3 %

Retail

     7.5 %   6.5 %

Electronics manufacturing

     7.1 %   7.6 %

Agricultural services

     6.6 %   8.3 %

Industrial equipment

     6.4 %   12.0 %

Transportation/Logistics

     6.1 %   6.6 %

Restaurant

     5.6 %   6.1 %

Information services

     5.1 %   0.9 %

Industrial services

     5.0 %   0.5 %

Health care services

     4.7 %   4.2 %

Manufacturing

     4.1 %   4.7 %

Equipment rental

     3.6 %   2.1 %

Health care products

     3.0 %   5.8 %

Metal fabrication

     2.5 %   3.4 %

Governmental services

     2.0 %   0.0 %

Infrastructure products

     1.6 %   1.7 %

Distribution

     0.2 %   0.1 %

Mining and minerals

     0.0 %   4.8 %
           

    100.0 %   100.0 %
           

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Fair Value:
  December 31, 2009   December 31, 2008  

Precast concrete manufacturing

     11.5 %   13.7 %

Professional services

     10.1 %   5.4 %

Health care services

     9.1 %   6.1 %

Agricultural services

     7.9 %   8.1 %

Industrial services

     7.0 %   2.8 %

Retail

     6.6 %   7.0 %

Transportation/Logistics

     6.3 %   6.5 %

Electronics manufacturing

     6.2 %   7.7 %

Restaurant

     6.2 %   6.7 %

Industrial equipment

     5.2 %   10.2 %

Metal fabrication

     4.5 %   4.3 %

Information services

     4.4 %   0.9 %

Manufacturing

     3.9 %   5.1 %

Custom wood products

     3.2 %   6.8 %

Health care products

     2.9 %   5.8 %

Equipment rental

     2.3 %   2.0 %

Governmental services

     2.1 %   0.0 %

Distribution

     0.4 %   0.4 %

Infrastructure products

     0.2 %   0.5 %
           

    100.0 %   100.0 %
           

       At December 31, 2009, Main Street had one investment that was greater than 10% of its total core investment portfolio at fair value. That investment represented approximately 12% of the core portfolio at fair value. At December 31, 2008, Main Street had one investment that was greater than 10% of its total core investment portfolio at fair value. That investment represented approximately 14% of the core portfolio at fair value at December 31, 2008.

NOTE D — WHOLLY OWNED INVESTMENT MANAGER

       As part of the Formation Transactions, the Investment Manager became a wholly owned subsidiary of MSCC. However, the Investment Manager is accounted for as a portfolio investment, since the Investment Manager is not an investment company and since it conducts a significant portion of its investment management activities for parties outside of MSCC and its consolidated subsidiaries. The Investment Manager has received recurring investment management fees from MSC II pursuant to a separate investment advisory agreement, paid quarterly, which currently total $3.3 million per year, and the Investment Manager also receives certain management, consulting and advisory fees for providing these services for third parties (collectively, the "External Services"). The portfolio investment in the Investment Manager is accounted for using fair value accounting, with the fair value determined by Main Street and approved, in good faith, by Main Street's Board of Directors, based on the same valuation methodologies applied to determine the original $18 million valuation. The valuation for the Investment Manager is based on the total estimated present value of the net cash flows received for the External Services, over the estimated dollar averaged life of the related investment management, advisory or consulting contract, and is also based on comparable public market transactions. The net cash flows utilized in the valuation of the Investment Manager exclude any revenues and expenses from MSCC and its subsidiaries, but include the revenues attributable to External Services, and are reduced by an estimated allocation of costs related to providing such External Services. Any change in fair value of the investment in the Investment Manager is recognized on Main Street's statement of operations as "Unrealized appreciation (depreciation) in Investment in affiliated Investment Manager," with a

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corresponding increase (in the case of appreciation) or decrease (in the case of depreciation) to "Investment in affiliated Investment Manager" on Main Street's balance sheet. Main Street believes that the valuation for the Investment Manager will generally decrease over the life of the investment management, advisory and consulting contracts attributable to third parties, absent obtaining additional recurring cash flows from performing External Services for other external investment entities or other third parties.

       The Investment Manager has elected, for tax purposes, to be treated as a taxable entity and is taxed at normal corporate tax rates based on its taxable income. The taxable income of the Investment Manager may differ from its book income due to temporary book and tax timing differences, as well as permanent differences. The Investment Manager provides for any current taxes payable and deferred tax items in its separate financial statements.

       MSCC has a support services agreement with the Investment Manager that is structured to provide reimbursement to the Investment Manager for any personnel, administrative and other costs it incurs in conducting its operational and investment management activities in excess of the fees received for providing External Services. As a wholly owned subsidiary of MSCC, the Investment Manager manages the day-to-day operational and investment activities of MSCC and its subsidiaries, as well as the investment activities of MSC II. The Investment Manager pays personnel and other administrative expenses, except those specifically required to be borne by MSCC, which principally include direct costs that are specific to MSCC's status as a publicly traded entity. The expenses paid by the Investment Manager include the cost of salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations.

       Pursuant to the support services agreement with MSCC, the Investment Manager is reimbursed by MSCC for its excess cash expenses associated with providing investment management and other services to MSCC and its subsidiaries, as well as MSC II and third parties. Each quarter, as part of the support services agreement, MSCC makes payments to cover all cash expenses incurred by the Investment Manager, less the External Services fees that the Investment Manager receives from MSC II and third parties pursuant to long-term investment advisory agreements and consulting agreements. For the years ended December 31, 2009 and 2008, the expenses reimbursed by MSCC to the Investment Manager were $569,868 and $1,006,835, respectively.

       In its separate stand alone financial statements as summarized below, the Investment Manager recognized an $18 million intangible asset related to the investment advisory agreement with MSC II consistent with Staff Accounting Bulletin No. 54, Application of "Pushdown" Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase ("SAB 54"). Under SAB 54, push-down accounting is required in "purchase transactions that result in an entity becoming substantially wholly owned." In this case, MSCC acquired 100% of the equity interests in the Investment Manager. Because the $18 million value attributed to MSCC's investment in the Investment Manager was derived from the long-term, recurring management fees under the investment advisory agreement with MSC II, the same methodology used to determine the $18 million valuation of the Investment Manager was utilized to establish the push-down accounting basis for the intangible asset. The intangible asset is being amortized over the estimated economic life of the investment advisory agreement with MSC II. For the years ended December 31, 2009 and 2008, the Investment Manager recognized $950,589 and $1,174,207 in amortization expense associated with the intangible asset. Amortization expense is not included in the expenses reimbursed by MSCC to the Investment Manager based upon the support services agreement since it is non-cash in nature.

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       Summarized financial information from the separate financial statements of the Investment Manager is as follows:

 
   As of December 31,  
 
   2009   2008  
 
   (Unaudited)
  

ASSETS

  

Cash

   $ 70,882   $ 20,772  

Accounts receivable

     24,796     17,990  

Accounts receivable — MSCC

     217,422     302,633  

Ingangible asset (net of accumulated amortization of $2,124,797 and $1,174,207 as of December 31, 2009 and 2008, respectively)

     15,875,203     16,825,793  

Deposits and other

     80,719     103,392  
           
 

Total assets

   $ 16,269,022   $ 17,270,580  
           

LIABILITIES

  

Accrued liabilities

   $ 538,391   $ 589,360  

Equity

     15,730,631     16,681,220  
           
 

Total liabilities and equity

   $ 16,269,022   $ 17,270,580  
           

 

 
   Years Ended    
  
 
   For the Period
October 2, 2007
through
December 31, 2007 		 
 
   December 31,
2009 		  December 31,
2008 		 
 
   (Unaudited)
   (Unaudited)
   (Unaudited)
  

Management fee income from Main Street Capital II

   $ 3,325,200   $ 3,325,200   $ 831,300  

Other management advisory fees

     287,200     47,750     —  
               
 

Total income

     3,612,400     3,372,950     831,300  

EXPENSES

                    

Salaries, benefits and other personnel costs

     (3,415,837 )   (3,483,336 )   (612,377 )

Occupancy expense

     (348,761 )   (184,285 )   (45,343 )

Professional expenses

     (12,794 )   (81,208 )   (57,703 )

Amortization expense — intangible asset

     (950,589 )   (1,174,207 )   —  

Other

     (404,876 )   (630,956 )   (115,877 )

Expense reimbursement from MSCC

     569,868     1,006,835     —  
               
 

Total net expenses

     (4,562,989 )   (4,547,157 )   (831,300 )
               

Net income

   $ (950,589 ) $ (1,174,207 ) $ —  
               

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NOTE E — DEFERRED FINANCING COSTS

       Deferred financing costs balances as of December 31, 2009 and 2008 are as follows:

 
   December 31,  
 
   2009   2008  

SBIC debenture commitment fees

   $ 650,000   $ 550,000  

SBIC debenture leverage fees

     1,610,075     1,367,575  

Other

     423,109     673,700  
           

Subtotal

     2,683,184     2,591,275  

Accumulated amortization

     (1,071,676 )   (956,037 )
           

Net deferred financing costs balance

   $ 1,611,508   $ 1,635,238  
           

       Estimated aggregate amortization expense for each of the five years succeeding December 31, 2009 and thereafter is as follows:

Years Ending December 31,
  Estimated
Amortization 		 

2010

   $ 377,637  

2011

   $ 342,133  

2012

   $ 226,008  

2013

   $ 216,674  

2014

   $ 169,570  

2015 and thereafter

   $ 279,486  

NOTE F — SBIC DEBENTURES

       SBIC debentures payable at December 31, 2009 and 2008 were $65 million and $55 million, respectively. SBIC debentures provide for interest to be paid semi-annually, with principal due at the applicable 10-year maturity date. The weighted average interest rate as of December 31, 2009 and 2008 was 5.04% and 5.78%, respectively. The first principal maturity due under the existing SBIC debentures is in 2013, and the weighted average duration is approximately 6.1 years. In accordance with SBA regulations, MSMF is precluded from incurring additional non-SBIC debt without the prior approval of the SBA. MSMF is subject to regular compliance examinations by the SBA. There have been no historical findings resulting from these examinations.

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       SBIC Debentures payable at December 31, 2009 and 2008 consist of the following:

Pooling Date
  Maturity Date   Fixed Interest Rate   Amount  

9/24/2003

     9/1/2013     5.76 % $ 4,000,000  

3/24/2004

     3/1/2014     5.01 %   3,000,000  

9/22/2004

     9/1/2014     5.57 %   9,000,000  

9/22/2004

     9/1/2014     5.54 %   6,000,000  

3/23/2005

     3/1/2015     5.93 %   2,000,000  

3/23/2005

     3/1/2015     5.89 %   2,000,000  

9/28/2005

     9/1/2015     5.80 %   19,100,000  

3/28/2007

     3/1/2017     6.23 %   3,900,000  

3/28/2007

     3/1/2017     6.26 %   1,000,000  

3/28/2007

     3/1/2017     6.32 %   5,000,000  
                   

Balances as of December 31, 2008

                 55,000,000  

12/8/2009

     3/1/2020     0.99% (1)   10,000,000  
                   

Balances as of December 31, 2009

               $ 65,000,000  
                   
(1)
This draw will pool in March 2010 at which time the current short-term interim interest rate will reset to a higher long-term fixed rate.

NOTE G — INVESTMENT AND TREASURY CREDIT FACILITIES

       On October 24, 2008, Main Street entered into a $30 million, three-year investment credit facility (the "Investment Facility") with Branch Banking and Trust Company ("BB&T") and Compass Bank, as lenders, and BB&T, as administrative agent for the lenders. The purpose of the Investment Facility is to provide additional liquidity in support of future investment and operational activities. The Investment Facility allows for an increase in the total size of the facility up to $75 million, subject to certain conditions, and has a maturity date of October 24, 2011. Borrowings under the Investment Facility bear interest, subject to Main Street's election, on a per annum basis equal to (i) the applicable LIBOR rate plus 2.75% or (ii) the applicable base rate plus 0.75%. Main Street pays unused commitment fees of 0.375% per annum on the average unused lender commitments under the Investment Facility. The Investment Facility is secured by a first lien on the assets of MSCC, MSEI and the Investment Manager. The Investment Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum liquidity of not less than 10% of the aggregate principal amount outstanding, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, and (iii) maintaining a minimum tangible net worth. At December 31, 2009, Main Street had no borrowings outstanding under the Investment Facility, and Main Street was in compliance with the required financial covenants of the Investment Facility.

       On December 31, 2007, Main Street entered into a treasury-based credit facility (the "Treasury Facility") among Main Street, Wachovia Bank, National Association and BB&T, as administrative agent for the lenders. The purpose of the Treasury Facility was to provide flexibility in the sizing of portfolio investments and to facilitate the growth of Main Street's investment portfolio. However, due to the maturation of Main Street's investment portfolio and the additional flexibility provided by the Investment Facility, Main Street unilaterally terminated the Treasury Facility on July 10, 2009 in order to eliminate the unused commitment fees that would have been paid under this facility over its remaining term.

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NOTE H — FINANCIAL HIGHLIGHTS

 
   Years Ended December 31,  
Per Share Data:
  2009   2008  

Net asset value at beginning of period

   $ 12.20   $ 12.85  

Net investment income(1)

     0.92     1.13  

Net realized gains (losses)(1)(2)

     (0.78 )   0.16  

Net change in unrealized appreciation (depreciation) on investments(1)(2)

     0.82     (0.44 )

Income tax (provision) benefit(1)(2)

     0.23     0.35  
           

Net increase in net assets resulting from operations(1)

     1.19     1.20  

Net decrease in net assets from dividends paid to stockholders

     (1.50 )   (1.43 )

Impact of monthly dividend declared as of December 31, 2008 but paid on January 15, 2009

     0.13     (0.13 )

Other(3)

     (0.06 )   (0.29 )
           

Net asset value at December 31, 2009 and 2008

   $ 11.96   $ 12.20  
           

Market value at December 31, 2009 and 2008

   $ 16.12   $ 9.77  

Shares outstanding at December 31, 2009 and 2008

     10,842,447     9,206,483  
(1)
Based on weighted average number of common shares outstanding for the period.

(2)
Net realized gains or losses, net change in unrealized appreciation or depreciation, and income taxes can fluctuate significantly from period to period.

(3)
Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.

 
   Years Ended December 31,  
 
   2009   2008   2007  

Net assets at end of period

   $ 129,660,131   $ 112,356,056   $ 115,149,208  

Average net assets

   $ 120,539,528   $ 114,977,272   $ 56,882,526  

Average outstanding debt

   $ 57,000,000   $ 55,000,000   $ 53,020,000  

Ratio of total expenses, excluding interest expense, to average net assets(1)

     2.48 %   2.79 %   4.76 %

Ratio of total expenses to average net assets(1)

     5.63 %   6.07 %   10.47 %

Ratio of net investment income to average net assets(1)

     7.65 %   8.97 %   11.47 %

Total return based on change in net asset value(2)

     10.64 %   9.84 %   5.88 %
(1)
The December 31, 2007 ratio includes the impact of professional costs related to the IPO. These costs were 25.7% and 11.7% of operating expense and total expenses, respectively, for that period.

(2)
Total return based on change in net asset value was calculated using the sum of ending net asset value plus distributions to stockholders during the period less equity issuances during the period, as divided by the beginning net asset value.

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NOTE I — DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

       In September 2008, Main Street announced that beginning in October 2008, it would begin making dividend payments on a monthly, as opposed to a quarterly, basis. Main Street paid monthly dividends of $0.125 per share for each month beginning January 2009 through December 2009, totaling $14.9 million, or $1.50 per share, for the period. For tax purposes, the monthly dividend paid in January 2009 was applied against the calendar year 2008 taxable income distribution since that dividend was declared and accrued prior to December 31, 2008. For tax purposes, the 2009 dividends were comprised of ordinary income totaling approximately $1.22 per share and long term capital gain totaling approximately $0.16 per share. For the year ended December 31, 2008, Main Street paid dividends of approximately $13.0 million, or $1.43 per share, for the period. The dividends, which included the dividend paid in January 2009 for tax purposes, were comprised of ordinary income totaling approximately $0.95 per share and long term capital gain totaling approximately $0.60 per share. Ordinary dividend distributions from a RIC do not qualify for the 15% maximum tax rate on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations (which Main Street did not receive during the 2009 year).

       MSCC has elected to be treated for federal income tax purposes as a RIC. As a RIC, MSCC generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that MSCC distributes to its stockholders as dividends. MSCC must generally distribute at least 90% of its investment company taxable income to qualify for pass-through tax treatment and maintain its RIC status. As part of maintaining RIC status, undistributed taxable income (subject to a 4% excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared prior to the filing of the federal income tax return for the prior year.

       One of MSCC's wholly owned subsidiaries, MSEI, is a taxable entity which holds certain core portfolio investments for Main Street. MSEI is consolidated with Main Street for financial reporting purposes, and the core portfolio investments held by MSEI are included in Main Street's consolidated financial statements. The principal purpose of MSEI is to permit Main Street to hold equity investments in portfolio companies which are "pass through" entities for tax purposes in order to comply with the "source income" requirements contained in the RIC tax provisions of the Code. MSEI is not consolidated with Main Street for income tax purposes and may generate income tax expense or income tax benefit as a result of its ownership of various core portfolio investments. This income tax expense or benefit, if any, is reflected in Main Street's Consolidated Statement of Operations. For the year ended December 31, 2009, Main Street recognized an income tax benefit of $2.3 million primarily consisting of deferred tax benefits related to net unrealized depreciation on certain portfolio investments held by MSEI.

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       Main Street's provision for income taxes, including MSEI, was comprised of the following:

 
   Years Ended December 31,  
 
   2009   2008  

Current tax expense (benefit):

              

Federal

   $ (823,045 ) $ 663,767  

State

     87,923     188,560  
           
 

Total current tax expense (benefit)

     (735,122 )   852,327  

Deferred tax expense (benefit):

              

Federal

     (1,594,719 )   (4,061,969 )

State

      —     (85,384 )
           
 

Total deferred tax expense (benefit)

     (1,594,719 )   (4,147,353 )

Excise tax

     40,000     112,625  
           

Total income tax provision (benefit)

   $ (2,289,841 ) $ (3,182,401 )
           

       Listed below is a reconciliation of "Net Increase in Net Assets Resulting From Operations" to taxable income and to total distributions declared to common stockholders for the years ended December 31, 2009 and 2008.

 
   Years Ended December 31,  
 
   2009   2008  
 
   (estimated)
    
  

Net increase in net assets resulting from operations

   $ 11,956,229   $ 10,933,939  

Share-based compensation expense

     1,068,397     511,452  

Net change in unrealized (appreciation) depreciation on investments

     (8,242,107 )   3,961,092  

Income tax provision (benefit)

     (2,289,841 )   (3,182,401 )

Pre-tax book loss of taxable subsidiary, MSEI, not consolidated for tax purposes

     8,773,006     2,182,580  

Book income and tax income differences, including debt origination, structuring fees and realized gains

     187,971     1,363,200  
           

Taxable income

     11,453,655     15,769,862  

Taxable income earned in prior year and carried forward for distribution in current year

     3,129,727     1,481,131  

Taxable income earned in current period and carried forward for distribution

     (848,452 )   (3,129,727 )
           

Total distributions to common stockholders

   $ 13,734,930   $ 14,121,266  
           
(1)
Main Street's taxable income for 2009 is an estimate and will not be finally determined until the company files its 2009 tax return in 2010. Therefore, the final taxable income, and the taxable income earned in 2009 and carried forward for distribution in 2010, may be different than this estimate.

       The net deferred tax asset at December 31, 2009 and 2008 was $2.7 million and $1.1 million, respectively, and primarily related to timing differences from recognition of unrealized depreciation from debt and equity investments in portfolio investments as well as timing differences from taxable income from equity investments in portfolio companies which are flow through entities. Management believes that the realization of the deferred tax asset is more likely than not based on expectations as to future taxable income and

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scheduled reversals of temporary differences. Accordingly, Main Street did not record a valuation allowance at December 31, 2009.

NOTE J — COMMON STOCK AND SHARE REPURCHASE PROGRAM

       In June 2009, Main Street completed a public stock offering consisting of the public offering and sale of 1,437,500 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $12.10 per share. The offering resulted in total net proceeds of approximately $16.2 million, after deducting underwriters' commissions and offering costs.

       On November 13, 2008, Main Street announced that its Board of Directors authorized its officers, in their discretion and subject to compliance with the 1940 Act and other applicable laws, to purchase on the open market or in privately negotiated transactions, an amount up to $5 million of the outstanding shares of Main Street's common stock at prices per share not to exceed Main Street's last reported net asset value per share. The repurchase program terminated as of December 31, 2009. During November and December 2008, Main Street purchased 34,700 shares in connection with the repurchase program at a weighted average cost of $9.54 per share. During January through March of 2009, Main Street purchased 164,544 shares in connection with the repurchase program at a weighted average cost of $9.82 per share.

       On October 2, 2007, Main Street initiated the Formation Transactions and acquired 100% of the equity interests in MSMF, MSMF GP, and the Investment Manager in exchange for 4,525,726 shares.

       On October 4, 2007, Main Street completed the IPO. The IPO consisted of the public offering and sale of 4,300,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $15.00 per share, resulting in net proceeds of approximately $60.2 million, after deducting underwriters' commissions totaling approximately $4.3 million.

NOTE K — PARTNERS' CAPITAL CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS

       Prior to the Formation Transactions, MSMF had received irrevocable commitments from investors to contribute capital of $26,665,548, which had been substantially paid in through the date of the Formation Transactions (October 2, 2007).

       MSMF is a licensed SBIC, and prior to the Formation Transactions, was able to make distributions of cash and/or property only at such times as permitted by the SBIC Act and as determined under the Partnership Agreement. Under the Partnership Agreement, MSMF GP was entitled to 20% of MSMF's distributions, subject to a "clawback" provision that required MSMF GP to return an amount of allocated profits and distributions to MSMF if, and to the extent that, distributions to MSMF GP over the life of MSMF caused the limited partners of MSMF to receive cumulative distributions which were less than their share (approximately 80%) of the cumulative net profits of MSMF. MSMF made total distributions of $6,500,000 from January 1, 2007 through the date of the Formation Transactions (October 2, 2007).

NOTE L — DIVIDEND REINVESTMENT PLAN ("DRIP")

       Main Street's DRIP provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if Main Street declares a cash dividend, the company's stockholders who have not "opted out" of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. Main Street has the option to satisfy the share requirements of the DRIP through the issuance of shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of MSCC's common stock on the valuation date determined for each dividend by Main Street's Board of Directors. Shares purchased in the open market to satisfy the DRIP

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requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs. Main Street's DRIP is administered by its transfer agent on behalf of Main Street's record holders and participating brokerage firms. Brokerage firms and other financial intermediaries may decide not to participate in Main Street's DRIP but may provide a similar dividend reinvestment plan.

       For the year ended December 31, 2009, $5.4 million of the total $14.9 million in dividends paid to stockholders represented DRIP participation. During this period, Main Street satisfied the DRIP participation requirements with the purchase of 169,742 shares of common stock in the open market and the issuance of 271,906 new shares. For the year ended December 31, 2008, $4.9 million of the total $13.0 million in dividends paid to stockholders represented DRIP participation. Main Street satisfied the DRIP participation requirements with the purchase of 382,794 shares of common stock in the open market and the issuance of 15,820 new shares. The shares disclosed above relate only to Main Street's DRIP and exclude any activity related to broker-managed dividend reinvestment plans.

NOTE M — SHARE-BASED COMPENSATION

       Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation — Stock Compensation. Accordingly, for restricted stock awards, Main Street measured the grant date fair value based upon the market price of its common stock on the date of the grant and will amortize this fair value to share-based compensation expense over the requisite service period or vesting term.

       On July 1, 2009, Main Street's Board of Directors approved the issuance of 99,312 shares of restricted stock to Main Street employees pursuant to the Main Street Capital Corporation 2008 Equity Incentive Plan. These shares will vest over a four-year period from the grant date and will be expensed over the four-year service period starting on the grant date. On July 1, 2008, Main Street's Board of Directors approved the issuance of 245,645 shares of restricted stock to Main Street employees pursuant to the Main Street Capital Corporation 2008 Equity Incentive Plan. These shares are vesting over a four-year period from the grant date and are being expensed over the four-year service period starting on the grant date.

       On July 1, 2009, a total of 8,512 shares of restricted stock was issued to Main Street's independent directors pursuant to the Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan. These shares will vest on the day immediately preceding Main Street's next annual meeting of stockholders and will be expensed over a one-year service period starting on the grant date. On July 1, 2008, a total of 20,000 shares of restricted stock was issued to Main Street's independent directors pursuant to the Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan. One-half of those shares vested immediately on the grant date, and the remaining half vested on the day immediately preceding the June 2009 annual meeting of stockholders. As a result, 50% of those shares were expensed during July 2008, and the remaining 50% were expensed over a one-year service period starting on the grant date and ending in June 2009.

       For the years ended December 31, 2009 and 2008, Main Street recognized total share-based compensation expense of $1,068,397 and $511,452, respectively, related to the restricted stock issued to Main Street employees and Main Street's independent directors.

       As of December 31, 2009, there was $3,123,710 of total unrecognized compensation expense related to Main Street's non-vested restricted shares. This compensation expense is expected to be recognized over a weighted-average period of approximately 2.9 years.

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE N — COMMITMENTS

       At December 31, 2009, Main Street had three outstanding commitments to fund unused revolving loans for up to $6,315,000 in total.

NOTE O — SUPPLEMENTAL CASH FLOW DISCLOSURES

       Listed below are the supplemental cash flow disclosures for the years ended December 31, 2009, 2008, and 2007:

 
   Year Ended December 31,  
 
   2009   2008   2007  

Interest paid

   $ 3,415,200   $ 3,306,313   $ 2,852,002  

Taxes paid

   $ 109,404   $ 355,053   $ —  

Non-cash financing activities:

                    
 

Shares issued for Investment in the Investment Manager

   $ —   $ —   $ 18,000,000  
 

Shares issued pursuant to the DRIP

   $ 3,692,720   $ 213,729   $ 1,903,116  

NOTE P — SELECTED QUARTERLY DATA (UNAUDITED)

 
   2009  
 
   Qtr. 1   Qtr. 2   Qtr. 3   Qtr. 4  

Total investment income

   $ 3,592,425   $ 3,600,070   $ 4,501,598   $ 4,308,154  

Net investment income

   $ 2,116,266   $ 1,987,140   $ 2,625,041   $ 2,493,382  

Net increase (decrease) in net assets resulting from operations

   $ (467,798 ) $ 3,739,137   $ 7,037,142   $ 1,647,748  

Net investment income per share-basic and diluted

   $ 0.23   $ 0.21   $ 0.25   $ 0.23  

Net increase (decrease) in net assets resulting from operations per share-basic and diluted

   $ (0.05 ) $ 0.39   $ 0.66   $ 0.15  

 

 
   2008  
 
   Qtr. 1   Qtr. 2   Qtr. 3   Qtr. 4  

Total investment income

   $ 4,027,366   $ 4,176,911   $ 4,457,324   $ 4,633,825  

Net investment income

   $ 2,504,062   $ 2,586,575   $ 2,529,950   $ 2,694,549  

Net increase in net assets resulting from operations

   $ 3,202,636   $ 4,488,097   $ 2,673,703   $ 569,503  

Net investment income per share-basic and diluted

   $ 0.28   $ 0.29   $ 0.27   $ 0.30  

Net increase in net assets resulting from operations per share-basic and diluted

   $ 0.36   $ 0.50   $ 0.29   $ 0.06  

NOTE Q — RELATED PARTY TRANSACTIONS

       We co-invested with MSC II in several existing portfolio investments prior to the Formation Transactions, but did not co-invest with MSC II subsequent to the Formation Transactions and prior to June 2008. In June 2008, we received exemptive relief from the SEC to allow us to resume co-investing with MSC II in accordance with the terms of such exemptive relief. The co-investments among us and MSC II have all been

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


made at the same time and on the same terms and conditions. The co-investments were also made in accordance with the Investment Manager's conflicts policy and in accordance with the applicable SBIC conflict of interest regulations. MSC II is managed by the Investment Manager, and the Investment Manager is wholly owned by us. In January 2010, pursuant to the Exchange Offer Transactions, we issued 1,239,695 shares of common stock in exchange for approximately 88% of the total dollar value of the limited partner interests in MSC II.

       As discussed further in Note D to the accompanying consolidated financial statements, subsequent to the completion of the Formation Transactions, the Investment Manager is a wholly owned portfolio company of MSCC. At December 31, 2009 and 2008, the Investment Manager had a receivable of $217,422 and $302,633, respectively, with MSCC related to net cash expenses incurred by the Investment Manager required to support Main Street's business.

NOTE R — SUBSEQUENT EVENTS

       On January 7, 2010, MSCC consummated the Exchange Offer to exchange 1,239,695 shares (the "Exchange Shares") of its common stock for approximately 88% of the total dollar value of the limited partner interests in MSC II. Pursuant to the terms of the Exchange Offer, 100% of the membership interests in MSC II GP were also transferred to MSCC for no consideration. MSC II commenced operations in January 2006, is an investment fund that operates as an SBIC and is managed by the Investment Manager. The Exchange Offer was applicable to all MSC II limited partner interests except for any limited partner interests owned by affiliates of MSCC, including any limited partner interests owned by officers or directors of MSCC. The Exchange Offer was formally approved by the SBA prior to closing. The Exchange Shares are subject to a one-year contractual lock-up from the Exchange Offer closing date. An approximately 12% minority ownership in the total dollar value of the MSC II limited partnership interests remains outstanding, including approximately 5% owned by affiliates of MSCC.

       As of the closing date of the Exchange Offer, MSC II had $70 million of SBIC debentures outstanding, which are guaranteed by the SBA and carry an average fixed interest rate of approximately 6%. The first principal maturity related to MSC II's SBIC debentures does not occur until 2016.

       The Exchange Offer is being accounted for under the acquisition method of accounting in accordance with ASC 805. Accordingly, the purchase price was preliminarily allocated to the acquired assets and liabilities based on their estimated fair values at the Exchange Offer acquisition date as summarized in the following table. The fair value of the MSC II net assets acquired exceeded the fair value of the stock

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


consideration issued, resulting in a bargain purchase gain that will be recorded by Main Street in the period that the Exchange Offer was completed.

Value of the stock consideration issued for limited partner interests acquired

   $ 19,934,296 (1)

Fair value of noncontrolling limited partner interests

     3,322,370 (2)
       

Total stock consideration and noncontrolling interest value

     23,256,666  

Fair value of MSC II assets and liabilities:

        

Cash and marketable securities (net of distribution to limited partners)

     10,841,421  

Debt investments acquired at fair value

     56,143,457  

Equity investments acquired at fair value

     14,930,614  

Other assets

     808,558  

SBIC debt at fair value

     (53,139,092 )

Deferred tax liability assumed

     (378,932 )

Other liabilities

     (1,519,608 )
       

Total fair value of MSC II net assets

     27,686,418  
       

Estimated bargain purchase gain

     4,429,752  

Estimated transaction costs associated with the Exchange Offer

     (250,000 )
       

Estimated bargain purchase gain, net of transaction costs

   $ 4,179,752  
       
(1)
The value of the shares of common stock exchanged for a majority of MSC II limited partner interests was based upon the closing price of Main Street's common stock at January 7, 2010, the closing date of the Exchange Offer.

(2)
The fair value of the noncontrolling limited partner interests is based on the noncontrolling interests' 12% share in the total fair value of MSC II net assets.

       Consummation of the Exchange Offer Transactions provides Main Street with access to additional long-term, low-cost leverage capacity through the SBIC program. The American Recovery and Reinvestment Act of 2009 enacted in February 2009 (the "Stimulus Bill") increased the maximum amount of combined SBIC leverage (or SBIC leverage cap) to $225 million for affiliated SBIC funds from the previous SBIC leverage cap of approximately $137 million. Since the increase in the SBIC leverage cap applies to affiliated SBIC funds, Main Street is required to allocate such increased borrowing capacity between MSMF and MSC II. Subsequent to the Exchange Offer, Main Street will have access to an incremental $90 million in SBIC leverage capacity, subject to the required capitalization of each of the Funds, in addition to the $70 million of existing MSC II SBIC leverage and the $65 million of SBIC leverage at MSMF. At the closing of the Exchange Offer, Main Street funded approximately $24 million in unfunded limited partner commitments for the limited partner interests it acquired in connection with the Exchange Offer in order to comply with SBA regulatory requirements. The $24 million capital contribution to MSC II was funded by Main Street in part with approximately $12 million drawn down under its $30 million investment credit facility. Main Street currently projects that consummation of the Exchange Offer Transactions will be accretive to its calendar year 2010 distributable net investment income per share.

       Subsequent to the Exchange Offer in January 2010, we completed a public stock offering consisting of the public offering and sale of 2,875,000 shares of common stock, including the underwriters' exercise of the over-allotment option, at a price to the public of $14.75 per share, resulting in total net proceeds of

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MAIN STREET CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

approximately $40.1 million, after deducting underwriters' commissions and offering costs. Based upon the net proceeds from this offering and existing cash, marketable securities, and idle funds investments, we estimate that we have the required capitalization to access all of the $90 million in incremental SBIC leverage available through the SBIC Funds. Main Street used approximately $12 million of the net proceeds from this offering to repay outstanding debt borrowed under its $30 million investment credit facility to fund MSC II capital commitments assumed in the Exchange Offer. Main Street intends to use the remaining net proceeds from this offering to make investments in lower middle market companies in accordance with its investment objective and strategies, pay operating expenses and other cash obligations and for general corporate purposes. Pending such uses, Main Street may invest the net proceeds of this offering primarily in marketable securities and idle funds investments, which may include investments in secured intermediate term bank debt and other independently rated debt investments.

       During January 2010, Main Street sold its investment in Quest Design and Production, LLC ("Quest"), which was on non-accrual status as of December 31, 2009. Main Street had recorded unrealized depreciation as of December 31, 2009 on its investment in Quest equal to the $4.0 million loss it will realize in the first quarter of 2010 related to the exit of this investment.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders' of
Main Street Capital Corporation

       We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Main Street Capital Corporation referred to in our report dated March 10, 2010, which is included in the annual report on Form 10-K. Our report on the consolidated financial statements includes explanatory paragraphs, which discussed the adoption of new accounting guidance related to fair value measurements and the calculation of basic earnings per common share reflecting the inclusion of certain instruments granted in share based payment transactions as discussed in Note B to the consolidated financial statements. Our audits of the basic financial statements include the financial statement schedule listed in the index appearing under Item 15(2) which is the responsibility of the Company's management. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP
Houston, Texas
March 10, 2010

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Schedule 12-14

MAIN STREET CAPITAL CORPORATION

Schedule of Investments in and Advances to Affiliates
Year ended December 31, 2009

Company
 
Investments(1)
  Amount of
Interest or
Dividends
Credited to
Income(2) 		  December 31,
2008 Value 		  Gross
Additions(3) 		  Gross
Reductions(4) 		  December 31,
2009 Value 		 

CONTROL INVESTMENTS

                                

Café Brazil, LLC

   12% Secured Debt   $ 334,206   $ 2,750,000   $ —   $ 250,000   $ 2,500,000  

  Member Units     14,467     1,000,000     520,000     —     1,520,000  
                           

CBT Nuggets, LLC

   14% Secured Debt     252,349     1,680,000     —     —     1,680,000  

  10% Secured Debt     79,300     150,000     1,065,000     300,000     915,000  

  Member Units     141,479     1,625,000     —     125,000     1,500,000  

  Warrants     180,000     500,000     —     500,000     —  
                           

Ceres Management, LLC

   14% Secured Debt     345,453     2,372,601     4,787     —     2,377,388  
 

(Lambs)

   Member Units     —     1,300,000     —     380,000     920,000  

  Class B Member Units     14,395     —     218,395     —     218,395  
                           

Condit Exhibits, LLC

   13% Current/5% PIK Secured Debt     448,771     2,273,194     348,913     —     2,622,107  

  Warrants     —     300,000     —     270,000     30,000  
                           

Gulf Manufacturing, LLC

   Prime plus 1% Secured Debt     54,079     1,200,000     —     —     1,200,000  

  13% Secured Debt     285,548     1,880,000     18,095     900,000     998,095  

  Member Units     162,859     1,100,000     1,260,000     —     2,360,000  

  Warrants     —     550,000     530,000     —     1,080,000  
                           

Hawthorne Customs &

   13% Secured Debt     128,681     1,171,988     28,012     1,200,000     —  
 

Dispatch Services, LLC

   Member Units     956,788     435,000     405,000     —     840,000  

  Warrants     —     230,000     —     230,000     —  
                           

Hydratec Holdings, LLC

   12.5% Secured Debt     550,437     5,311,329     50,062     2,404,756     2,956,635  

  Prime plus 1% Secured Debt     50,749     1,579,911     354,000     1,595,244     338,667  

  Member Units     200,000     2,050,000     4,570,000     —     6,620,000  
                           

Jensen Jewelers of

   Prime plus 2% Secured Debt     59,935     1,044,000     —     —     1,044,000  
 

Idaho, LLC

   13% Current/6% PIK Secured Debt     204,339     1,004,591     62,846     —     1,067,437  

  Member Units     —     380,000     —     90,000     290,000  
                           

NAPCO Precast, LLC

   Prime plus 2% Secured Debt     326,765     3,692,308     —     307,693     3,384,615  

  18% Secured Debt     1,141,478     6,461,538     —     538,461     5,923,077  

  Member Units     64,475     5,100,000     120,000     —     5,220,000  
                           

OMi Holdings, Inc.

   12% Secured Debt     791,165     6,603,400     12,995     318,000     6,298,395  

  Common Stock     2,400     570,000     —     300,000     270,000  
                           

Quest Design &

   10% Secured Debt     44,957     600,000     —     400,000     200,000  
 

Production LLC

   0% Secured Debt     —     1,400,000     120,000     1,520,000     —  

  Warrants     —     —     —     —     —  

  Warrants     —     —     —     —     —  
                           

Thermal & Mechanical

   13% Current/5% PIK Secured Debt     230,295     —     3,301,405     —     3,301,405  
 

Equipment, LLC

   Prime plus 2% Secured Debt     47,013     —     1,043,471     —     1,043,471  

  Warrants     —     —     600,000     —     600,000  
                           

Universal Scaffolding &

   Prime plus 1% Secured Debt     43,489     875,072     1,208     876,280     —  
 

Equipment, LLC

   13% Current/5% PIK Secured Debt     162,453     3,160,000     20,491     3,180,491     —  

  Member Units           —     —     —     —  
                           

Uvalco Supply, LLC

   Equity     94,789     1,575,000     207,500     392,500     1,390,000  
                           

Ziegler's NYPD, LLC

   Prime plus 2% Secured Debt     55,763     594,239     1,013     —     595,252  

  13% Current/5% PIK Secured Debt     514,461     2,663,437     148,093     35,887     2,775,643  

  Warrants     —     360,000     —     —     360,000  
                           

Other

         39,349     —     1,961,085     —     1,961,085  
                           

Income from Control Investments disposed of during the year

         —     —     —     —     —  
                           

  Total-Control   $ 8,022,687   $ 65,542,608   $ 16,972,371   $ 16,114,312   $ 66,400,667  
                           

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Company
 
Investments(1)
  Amount of
Interest or
Dividends
Credited to
Income(2) 		  December 31,
2008 Value 		  Gross
Additions(3) 		  Gross
Reductions(4) 		  December 31,
2009 Value 		 

AFFILATE INVESTMENTS

                                

Advantage Millwork

   12% Secured Debt   $ 200,237   $ 2,955,442   $ 15,214   $ 1,770,656   $ 1,200,000  
 

Company, Inc.

   Warrants     —     —     —     —     —  
                           

American Sensor

   Prime plus .5% Secured Debt     269,694     3,800,000     —     —     3,800,000  
 

Technologies, Inc.

   Warrants     —     250,000     570,010     10     820,000  
                           

California Healthcare Medical

   12% Secured Debt     207,806     1,141,706     133,694     —     1,275,400  
 

Billing, Inc.

   12% Current/6% PIK Secured Debt     56,012     —     842,583     —     842,583  

  Common Stock     —     390,000     790,000     —     1,180,000  

  Warrants     —     240,000     1,040,000     —     1,280,000  
                           

Compact Power Equipment

   12% Secured Debt     52,364     —     1,778,702     —     1,778,702  
 

Centers, LLC

   Member Units     —     —     688     —     688  
                           

Houston Plating &

   Prime Plus 2%     15,750     300,000     —     —     300,000  
 

Coatings, LLC

   Member Units     317,100     2,750,000     815,000     —     3,565,000  
                           

Indianapolis Aviation

   12% Secured Debt     153,486     —     2,564,759     120,000     2,444,759  
 

Partners, LLC

   Warrants     —     —     677,571     —     677,571  
                           

KBK Industries, LLC

   14% Secured Debt     624,974     3,937,500     50,467     134,142     3,853,825  

  8% Secured Debt     21,479     468,750     —     375,000     93,750  

  8% Secured Debt     36,500     450,000     —     —     450,000  

  Member Units     36,197     775,000     —     315,000     460,000  
                           

Laurus Healthcare, LP,

   13% Secured Debt     383,444     2,275,000     —     —     2,275,000  

  Warrants     —     2,500,000     1,900,000     —     4,400,000  
                           

National Trench Safety, LLC

   10% PIK Debt     42,946     404,256     42,947     —     447,203  

  Member Units     —     1,792,308     —     1,092,308     700,000  
                           

Olympus Building

   12% Secured Debt     225,146     —     1,830,000     —     1,830,000  
 

Services, Inc.

   12% Current/3% PIK Secured Debt     3,908     —     342,782     —     342,782  

  Warrants     —     —     480,000     —     480,000  
                           

Pulse Systems, LLC

   14% Secured Debt     77,327     1,831,274     —     1,831,274     —  

  Warrants     —     450,000     —     110,000     340,000  
                           

Schneider Sales

   13% Secured Debt     270,768     1,909,972     17,728     —     1,927,700  
 

Management, LLC

   Warrants     —     45,000     —     45,000     —  
                           

Vision Interests, Inc.

   13% Secured Debt     538,632     3,579,117     31,714     390,831     3,220,000  

  Common Stock     —     420,000     —     420,000     —  

  Warrants     —     420,000     —     420,000     —  
                           

Walden Smokey Point, Inc.

   14% Current/4% PIK Secured Debt     886,249     4,704,533     210,481     —     4,915,014  

  Common Stock     7,595     600,000     640,000     —     1,240,000  
                           

WorldCall, Inc.

   13% Secured Debt     103,433     640,000     6,225     —     646,225  

  Common Stock     —     382,837     —     282,837     100,000  
                           

Other

         50,248     —     —     —     —  
                           

Income from Affiliate Investments disposed of during the year

         —     —     —     —     —  
                           

  Total-Affiliate Investments   $ 4,581,295   $ 39,412,695   $ 14,780,565   $ 7,307,058   $ 46,886,202  
                           
(1)
The principal amount, the ownership detail for equity investments and if the investment is income producing is shown in the Consolidated and Combined Schedule of Investments.

(2)
Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in Control or Affiliate categories, respectively. For investments transferred between Control and Affiliate categories during the year, any income related to the time period it was in

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(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investment, follow on investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross Additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category and out of a different category.

(4)
Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

       Not applicable.

Item 9A.    Controls and Procedures

       (a)  Evaluation of Disclosure Controls and Procedures.    As of the end of the period covered by this annual report on Form 10-K, our Chief Executive Officer, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, our Chief Executive Officer, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective to allow timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

       (b)  Management's Report on Internal Control Over Financial Reporting.    The management of Main Street Capital Corporation and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company's evaluation under the framework in Internal Control — Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2009. Grant Thornton, LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2009, as stated in its report which is included herein.

       (c)  Attestation Report of the Registered Public Accounting Firm.    Our independent registered public accounting firm, Grant Thornton LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting, which is set forth above under the heading "Report of Independent Registered Public Accounting Firm" in Item 8.

       (d)  Changes in Internal Control over Financial Reporting.    There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

       None.


PART III

Item 10.    Directors, Executive Officers and Corporate Governance

       The information required by this Item will be contained in the definitive proxy statement relating to our 2010 annual meeting of stockholders (the "Proxy Statement") under the headings "Election of Directors," "Corporate Governance," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance," to be filed with the Securities and Exchange Commission on or prior to April 30, 2010, and is incorporated herein by reference.

       We have adopted a code of business conduct and ethics that applies to directors, officers and employees of Main Street. This code of ethics is published on our Web site at www.mainstcapital.com. We intend to

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disclose any future amendments to, or waivers from, this code of conduct within four business days of the waiver or amendment through a Web site posting.

Item 11.    Executive Compensation

       The information required by this Item will be contained in the Proxy Statement under the headings "Compensation of Executive Officers," "Compensation of Directors," "Compensation Discussion and Analysis," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report," to be filed with the Securities and Exchange Commission on or prior to April 30, 2010, and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

       The following table provides information regarding our equity compensation plans as of December 31, 2009:

Plan Category
  Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights 		  Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights 		  Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a)) 		 
 
   (a)
   (b)
   (c)
  

Equity compensation plans approved by security holders

     —   $ —     1,826,850 (1)

Equity compensation plans not approved by security holders

    
—		    
—		    
—		  
               

Total

    
—		  
$
—		    
1,826,850		  
               
(1)
All of our equity compensation plans have been approved by our stockholders. As of December 31, 2009, we had issued 373,469 shares of restricted stock pursuant to our equity compensation plans, of which 81,411 shares had vested and 319 shares were forfeited as of December 31, 2009. Pursuant to each of our equity compensation plans, if any award issued thereunder shall for any reason expire or otherwise terminate or be forfeited, in whole or in part, the shares of stock not acquired under such award shall revert to and again become available for issuance under such plan.

       The other information required by this Item will be contained in the Proxy Statement under the headings "Security Ownership of Certain Beneficial Owners and Management," to be filed with the Securities and Exchange Commission on or prior to April 30, 2010, and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

       The information required by this Item will be contained in the Proxy Statement under the headings "Certain Relationships and Related Transactions" and "Corporate Governance," to be filed with the Securities and Exchange Commission on or prior to April 30, 2010, and is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services

       The information required by this Item will be contained in the Proxy Statement under the heading "Ratification of Appointment of Independent Registered Public Accounting Firm for the Year Ending December 31, 2010," to be filed with the Securities and Exchange Commission on or prior to April 30, 2010, and is incorporated herein by reference.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

       The following documents are filed or incorporated by reference as part of this Annual Report:

1.    Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

     64  

Consolidated Balance Sheets as of December 31, 2009 and 2008

     66  

Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008, and 2007

     67  

Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2009, 2008, and 2007

     68  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007

     69  

Consolidated Schedules of Investments as of December 31, 2009 and 2008

     70  

Notes to Consolidated Financial Statements

     81  

2.    Consolidated Financial Statement Schedule

   

Report of Independent Registered Public Accounting Firm

        
   

Schedule of Investments in and Advances to Affiliates for the Year Ended December 31, 2009

        

3.    Exhibits

       The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

Exhibit
Number
 
Description
    3.1*   Articles of Amendment and Restatement of Main Street Capital Corporation (previously filed as Exhibit (a) to Main Street Capital Corporation's Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed on August 15, 2007 (Reg. No. 333-142879))
    3.2*   Amended and Restated Bylaws of Main Street Capital Corporation (previously filed as Exhibit 99.1 to Main Street Capital Corporation's Current Report on Form 8-K filed on May 2, 2008 (File No. 1-33723))
    4.1*   Form of Common Stock Certificate (previously filed as Exhibit (d) to Main Street Capital Corporation's Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed on August 15, 2007 (Reg. No. 333-142879))
    4.2*   Dividend Reinvestment Plan (previously filed as Exhibit 4.2 to Main Street Capital Corporation's Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 21, 2008 (File. No. 1-33723))
    4.3*   Main Street Mezzanine Fund, LP SBIC debentures guaranteed by the SBA (previously filed as Exhibit (f)(1) to Main Street Capital Corporation's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 filed on June 22, 2007 (Reg. No. 333-142879))
    4.4*   Main Street Capital II, LP SBIC debentures guaranteed by the SBA (see Exhibit (f)(1) to Pre-Effective Amendment No. 1 to Form N-2 of Main Street Capital Corporation filed with the SEC on June 22, 2007 for a substantially identical copy of the form of debentures)
  10.1*   Credit Agreement dated October 24, 2008 (previously filed as Exhibit 10.1 to Main Street Capital Corporation's Current Report on Form 8-K filed October 28, 2008 (File No. 1-33723))
  10.2*   General Security Agreement dated October 24, 2008 (previously filed as Exhibit 10.2 to Main Street Capital Corporation's Current Report on Form 8-K filed October 28, 2008 (File No. 1-33723))

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Exhibit
Number
 
Description
  10.3*   Custodial Agreement dated October 24, 2008 (previously filed as Exhibit 10.3 to Main Street Capital Corporation's Current Report on Form 8-K filed October 28, 2008 (File No. 1-33723))
  10.4*   Equity Pledge Agreement dated October 24, 2008 (previously filed as Exhibit 10.4 to Main Street Capital Corporation's Current Report on Form 8-K filed October 28, 2008 (File No. 1-33723))
  10.5*   First Amendment to Credit Agreement dated March 26, 2009 (previously filed as Exhibit 10.2 to Main Street Capital Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2009 (File No. 1-33723))
  10.6*   Second Amendment to Credit Agreement, Consent and Limit Waiver dated November 10, 2009 (previously filed as Exhibit (k)(8) to Main Street Capital Corporation's Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed on January 12, 2010 (Reg. No. 333-155806))
  10.7*   Third Amendment to Credit Agreement dated December 17, 2009 (previously filed as Exhibit (k)(9) to Main Street Capital Corporation's Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed on January 12, 2010 (Reg. No. 333-155806))
  10.8*   Form of Amended and Restated Investment Advisory Agreement by and between Main Street Capital Partners, LLC and Main Street Mezzanine Fund, LP (previously filed as Exhibit (g)(1) to Main Street Capital Corporation's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 filed on June 22, 2007 (Reg. No. 333-142879))
  10.9*   Investment Management/Advisory Agreement by and between Main Street Capital Partners, LLC, Main Street Capital II, LP and Main Street Capital II GP, LLC (previously filed as Exhibit (g)(2) to Main Street Capital Corporation's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 filed on June 22, 2007 (Reg. No. 333-142879))
  10.10*†   Main Street Capital Corporation 2008 Equity Incentive Plan (previously filed as Exhibit 10.1 to Main Street Capital Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2009 (File No. 1-33723))
  10.11*†   Main Street Capital Corporation 2008 Non-Employee Director Restricted Stock Plan (previously filed as Exhibit 4.5 to Main Street Capital Corporation's Registration Statement on Form S-8 filed on June 20, 2008 (Reg. No. 333-151799))
  10.12*   Custodian Agreement (previously filed as Exhibit (j) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.13*†   Form of Employment Agreement by and between Main Street Capital Corporation and Todd A. Reppert (previously filed as Exhibit (k)(1) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.14*†   Amendment to Employment Agreement by and between Main Street Capital Corporation and Todd A. Reppert dated as of July 1, 2009 (previously filed as Exhibit 10.2 to Main Street Capital Corporation's Current Report on Form 8-K filed July 1, 2009 (File No. 1-33723))
  10.15*†   Form of Employment Agreement by and between Main Street Capital Corporation and Rodger A. Stout (previously filed as Exhibit (k)(2) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.16*†   Amendment to Employment Agreement by and between Main Street Capital Corporation and Rodger A. Stout dated as of July 1, 2009 (previously filed as Exhibit 10.4 to Main Street Capital Corporation's Current Report on Form 8-K filed July 1, 2009 (File No. 1-33723))
  10.17*†   Form of Employment Agreement by and between Main Street Capital Corporation and Curtis A. Hartman (previously filed as Exhibit (k)(3) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))

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Exhibit
Number
 
Description
  10.18*†   Amendment to Employment Agreement by and between Main Street Capital Corporation and Curtis L. Hartman dated as of July 1, 2009 (previously filed as Exhibit 10.6 to Main Street Capital Corporation's Current Report on Form 8-K filed July 1, 2009 (File No. 1-33723))
  10.19*†   Form of Employment Agreement by and between Main Street Capital Corporation and Dwayne L. Hyzak (previously filed as Exhibit (k)(4) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.20*†   Amendment to Employment Agreement by and between Main Street Capital Corporation and Dwayne L. Hyzak dated as of July 1, 2009 (previously filed as Exhibit 10.8 to Main Street Capital Corporation's Current Report on Form 8-K filed July 1, 2009 (File No. 1-33723))
  10.21*†   Form of Employment Agreement by and between Main Street Capital Corporation and David L. Magdol (previously filed as Exhibit (k)(5) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.22*†   Amendment to Employment Agreement by and between Main Street Capital Corporation and David L. Magdol dated as of July 1, 2009 (previously filed as Exhibit 10.10 to Main Street Capital Corporation's Current Report on Form 8-K filed July 1, 2009 (File No. 1-33723))
  10.23*†   Form of Confidentiality and Non-Compete Agreement by and between Main Street Capital Corporation and Vincent D. Foster (previously filed as Exhibit (k)(12) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.24*†   Form of Indemnification Agreement by and between Main Street Capital Corporation and each executive officer and director (previously filed as Exhibit (k)(13) to Main Street Capital Corporation's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 filed on September 21, 2007 (Reg. No. 333-142879))
  10.25*   Support Services Agreement effective as of October 2, 2007 by and between Main Street Capital Corporation and Main Street Capital Partners, LLC (previously filed as Exhibit (k)(16) to Main Street Capital Corporation's Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 filed on January 30, 2009 (Reg. No. 333-155806))
  10.26**   Loan Agreement between Main Street Capital II, LP and Compass Bank dated April 13, 2006, as amended on April 13, 2007, August 16, 2007, April 12, 2008, April 11, 2009 and June 23, 2009
  14.1*   Code of Ethics (previously filed as Exhibit (r) to Main Street Capital Corporation's Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed on August 15, 2007 (Reg. No. 333-142879))
  21.1   List of Subsidiaries
  23   Consent of Grant Thornton, LLP, independent registered public accounting firm
  31.1   Rule 13a - 14(a)/15d - 14(a) certification of Chief Executive Officer
  31.2   Rule 13a - 14(a)/15d - 14(a) certification of Chief Financial Officer
  32.1   Section 1350 certification of Chief Executive Officer
  32.2   Section 1350 certification of Chief Financial Officer
*
Exhibit previously filed with the Securities and Exchange Commission, as indicated, and incorporated herein by reference.

**
This agreement is not filed herewith; however, Main Street Capital Corporation agrees that this agreement will be provided to the SEC upon request.

†
Management contract or compensatory plan or arrangement.

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SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    MAIN STREET CAPITAL CORPORATION

 
 
By:
 
/s/ VINCENT D. FOSTER
 Vincent D. Foster
Chairman and Chief Executive Officer

Date: March 10, 2010
 
 
 
 

       Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 
 
 
 
 
/s/ VINCENT D. FOSTER
 Vincent D. Foster		   Chairman and Chief Executive Officer
(principal executive officer)		   March 10, 2010

/s/ TODD A. REPPERT
 Todd A. Reppert
 
President, Chief Financial Officer and
Director (principal financial officer)
 
March 10, 2010

/s/ MICHAEL S. GALVAN
 Michael S. Galvan
 
Vice President, Chief Accounting Officer
(principal accounting officer)
 
March 10, 2010

/s/ RODGER A. STOUT
 Rodger A. Stout
 
Senior Vice President-Finance &
Administration, Chief
Compliance Officer and Treasurer
 
March 10, 2010

/s/ MICHAEL APPLING JR.
 Michael Appling Jr.
 
Director
 
March 10, 2010

/s/ JOSEPH E. CANON
 Joseph E. Canon
 
Director
 
March 10, 2010

/s/ WILLIAM D. GUTERMUTH
 William D. Gutermuth
 
Director
 
March 10, 2010

/s/ ARTHUR L. FRENCH
 Arthur L. French
 
Director
 
March 10, 2010

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EXHIBIT INDEX

Exhibit
Number
 
Description
  21.1   List of Subsidiaries
  23   Consent of Grant Thornton LLP, independent registered public accounting firm
  31.1   Rule 13a - 14(a)/15d - 14(a) certification of Chief Executive Officer
  31.2   Rule 13a - 14(a)/15d - 14(a) certification of Chief Financial Officer
  32.1   Section 1350 certification of Chief Executive Officer
  32.2   Section 1350 certification of Chief Financial Officer