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As filed with the Securities and Exchange Commission on May 11, 2007
Securities Act File No. 333-     
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Main Street Capital Corporation
(Exact name of registrant as specified in charter)
 
1300 Post Oak Boulevard, Suite 800
Houston, TX 77056
(713) 350-6000
(Address and telephone number,
including area code, of principal executive offices)
 
Vincent D. Foster
Chief Executive Officer
Main Street Capital Corporation
1300 Post Oak Boulevard, Suite 800
Houston, TX 77056
(Name and address of agent for service)
 
COPIES TO:
 
     
Steven B. Boehm, Esq.
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
Tel: (202) 383-0100
Fax: (202) 637-3593
  John A. Good, Esq.
Bass, Berry & Sims PLC
100 Peabody Place, Suite 900
Memphis, Tennessee 38103-3672
Tel: (901) 543-5901
Fax: (888) 543-4644
 
Approximate date of proposed public offering:  As soon as practicable after the effective date of this Registration Statement.
 
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.  o
 
It is proposed that this filing will become effective (check appropriate box):  o when declared effective pursuant to section 8(c).
 
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
 
             
      Proposed Maximum
    Amount of
Title of Securities
    Aggregate
    Registration
Being Registered     Offering Price(1)     Fee
Common Stock, $0.01 par value per share
    $115,000,000     $3,531
             
 
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely for the purpose of determining the registration fee.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED MAY 11, 2007
 
PRELIMINARY PROSPECTUS
                    Shares
 
 
Main Street Capital Corporation
 
Common Stock
 
 
We are a specialty investment company focused on providing customized debt and equity financing to lower middle market companies that operate in diverse industries. We seek to fill the current financing gap for lower middle market businesses, which have limited access to financing from commercial banks and other traditional sources.
 
Our 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-related investments. Upon completion of this offering, we will be an internally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940.
 
Upon completion of the formation transactions described in this prospectus, we will acquire (i) Main Street Mezzanine Fund, LP, which is licensed as a Small Business Investment Company, or SBIC, by the United States Small Business Administration and (ii) Main Street Mezzanine Management, LLC, the general partner of Main Street Mezzanine Fund, LP. In addition, as part of the formation transactions, we will acquire Main Street Capital Partners, LLC, which is the manager and investment adviser to two SBICs, including Main Street Mezzanine Fund, LP.
 
We are offering           shares of our common stock. This is our initial public offering, and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq Global Market under the symbol “MAIN.”
 
 
Investing in our common stock involves risks, including the risk of leverage. See “Risk Factors” beginning on page 13. Shares of closed-end investment companies have in the past frequently traded at a discount to their net asset value. If our shares trade at a discount to net asset value, it may increase the risk of loss for purchasers in this offering.
 
This prospectus contains important information about us that a prospective investor should know before investing in our common stock. Please read this prospectus before investing and keep it for future reference. Upon completion of this offering, we will file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. This information will be available free of charge by contacting us at 1300 Post Oak Boulevard, Suite 800, Houston, TX 77056 or by telephone at (713) 350-6000 or on our website at www.mainstreethouston.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus. The Securities and Exchange Commission also maintains a website at www.sec.gov that contains such information.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
                 
    Per Share   Total
 
Public offering price
  $             $             
Underwriting discount (sales load)
  $       $    
Proceeds to us, before expenses(1)
  $       $  
 
 
(1) We estimate that we will incur approximately $2 million of expenses in connection with this offering.
 
 
We have granted the underwriters a 30-day option to purchase up to an additional      shares of our common stock at the public offering price, less the underwriting discount (sales load), solely to cover over-allotments, if any. If the over-allotment option is exercised in full, the total public offering price would be $     , the total underwriting discount (sales load) would be $     , and the proceeds to us, before expenses, would be $     .
 
The underwriters expect to deliver the shares on or about          , 2007.
 
 
Morgan Keegan & Company, Inc. BB&T Capital Markets
A Division of Scott & Stringfellow, Inc.


 

 
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  F-1
 Consent of Grant Thornton LLP
 Report of Grant Thornton LLP
 Consent of Proposed Director
 
You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information from that contained in this prospectus. The information contained in this prospectus is complete and accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or sale of our common stock.


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PROSPECTUS SUMMARY
 
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read the entire prospectus carefully, including the section entitled “Risk Factors.”
 
Since commencing investment operations in 2002, our business has been conducted through Main Street Mezzanine Fund, LP, which has invested primarily in secured debt instruments, equity investments, warrants and other securities of lower middle market, privately-held companies based in the United States. Main Street Mezzanine Fund is licensed as a Small Business Investment Company, or SBIC, by the United States Small Business Administration, or SBA. Main Street Mezzanine Management, LLC, or the General Partner, has been the general partner of Main Street Mezzanine Fund since its inception, and Main Street Capital Partners, LLC, or the Investment Adviser, has acted as Main Street Mezzanine Fund’s manager and investment adviser. The Investment Adviser also acts as the manager and investment adviser to Main Street Capital II, LP, a separate affiliated SBIC which commenced its investment operations in January 2006. The Investment Adviser receives management fees pursuant to separate management services agreements with both Main Street Mezzanine Fund and Main Street Capital II. Simultaneously with the consummation of this offering, in what we sometimes refer to in this prospectus as the “formation transactions,” Main Street Capital Corporation will acquire all of the outstanding equity interests of Main Street Mezzanine Fund, the General Partner and the Investment Adviser through a series of transactions described in this prospectus under the caption “Formation; Business Development Company and Regulated Investment Company Elections.” We will not acquire any equity interest in Main Street Capital II in connection with the formation transactions but the Investment Adviser will continue to act as the manager and investment adviser to Main Street Capital II and receive a management fee pursuant to the management services agreement with Main Street Capital II subsequent to such transactions.
 
Unless otherwise noted, the terms “we,” “us,” “our” and “Main Street” refer to Main Street Mezzanine Fund, the General Partner and the Investment Adviser prior to consummation of the formation transactions, and to Main Street Capital Corporation, Main Street Mezzanine Fund, the General Partner and the Investment Adviser after that time.
 
Main Street
 
We are a specialty investment company focused on providing customized financing solutions to lower middle market companies, which we define as companies with annual revenues between $10.0 million and $100.0 million. Our 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-related investments. Our investments generally range in size from $2.0 million to $15.0 million. For larger investments in this range, we have generally secured co-investments from other institutional investors due to our historical regulatory size limits. Since 2002, we have funded approximately $96 million in debt and equity investments. 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 typically seek to partner 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) taking first priority liens on assets; and (iii) providing equity incentives for management teams of our portfolio companies. We seek to avoid competing with other capital providers for transactions because we believe competitive transactions often have execution risks and can result in potential conflicts among creditors and lower returns due to more aggressive valuation multiples and higher leverage ratios. In that regard, based upon information provided to us by our portfolio companies (which we have not independently verified), our portfolio had a total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio of approximately 3.6 to 1.0 and a total EBITDA to interest expense ratio of 2.4 to 1.0. In calculating these ratios, we included all portfolio company


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debt as of December 31, 2006, including debt junior to our debt investments. If we excluded debt junior to our debt investments in calculating these ratios, the ratios would be 3.2 to 1.0 and 2.6 to 1.0, respectively. In addition, over 85.0% of our debt investments at cost were secured by first priority liens on the assets of our portfolio companies as of December 31, 2006. At December 31, 2006, our average fully diluted ownership in portfolio companies where we have an equity warrant and/or direct equity investment was approximately 24%.
 
As of December 31, 2006, we had debt and equity investments in 24 portfolio companies with an aggregate fair market value of $76.2 million and the weighted average effective yield on all of our debt investments was approximately 15%. Weighted average effective yields are computed using the effective interest rates for all debt investments at December 31, 2006, including amortization of deferred debt origination fees and original issue discount. For the year ended December 31, 2006, the weighted average effective yield on all of our outstanding debt investments was 14.1%, excluding the impact of the deferred debt origination fee amortization.
 
The following table sets forth certain information as of December 31, 2006, for each portfolio company in which we had an investment:
 
                     
        Cost of
    Fair Value of
 
Company
 
Nature of Principal Business
  Investment(1)(2)     Investment(3)  
        (dollars in thousands)  
 
All Hose & Specialty, LLC
  Distributes commercial/industrial hoses   $ 2,715     $ 4,641  
American Sensor Technologies, Inc. 
  Manufactures commercial/industrial sensors     3,250       3,775  
Café Brazil, LLC
  Operates casual restaurant chain     3,192       4,050  
Carlton Global Resources, LLC
  Produces and processes industrial minerals     4,000       4,000  
CBT Nuggets, LLC
  Produces and sells IT certification training videos     3,024       3,330  
East Teak Fine Hardwoods, Inc. 
  Distributes hardwood products     4,525       4,730  
Hawthorne Customs & Dispatch Services, LLC
  Provides “one stop” logistics services     2,063       3,100  
Hayden Acquisition, LLC
  Manufactures utility structures     2,420       2,420  
Houston Plating & Coatings, LLC
  Provides plating and industrial coating services     310       1,810  
Jensen Jewelers of Idaho, LLC
  Sells retail jewelry     2,724       2,724  
KBK Industries, LLC
  Manufactures oilfield and industrial products     4,275       5,935  
Laurus Healthcare, LP
  Develops and manages healthcare facilities     3,115       3,115  
Magna Card, Inc. 
  Distributes wholesale/consumer magnetic products     2,000       1,900  
National Trench Safety, LLC
  Rents and sells trench and traffic safety equipment     1,792       1,792  
Pulse Systems, LLC
  Manufactures components for medical devices     2,865       3,147  
Quest Design & Production, LLC
  Designs and fabricates custom displays     3,940       3,940  
TA Acquisition Group, LP
  Produces and processes construction aggregates     3,300       8,140  
Technical Innovations, LLC
  Manufactures specialty cutting tools and punches     2,265       3,170  
Transportation General, Inc. 
  Provides taxi cab/transportation services     3,970       4,295  
Turbine Air Systems, Ltd. 
  Manufactures commercial/industrial chilling systems     1,097       1,097  
Wicks ’N More, LLC
  Manufactures high-end candles     4,110       3,720  
WorldCall, Inc. 
  Provides telecommunication/information services     1,064       1,150  
Other Investments(4)
  Various     608       228  
                     
      Total   $ 62,624     $ 76,209  
                     
 
 
(1) Net of prepayments but before accumulated unearned income allocations.
 
(2) Aggregates the cost of all of our investments in each of our portfolio companies.
 
(3) Aggregates the fair value of all of our investments in each of our portfolio companies.
 
(4) Includes our investments in Barton Springs Grill LP and Digital Music Group, Inc., which were insignificant investments as of December 31, 2006.


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Recent Developments
 
Subsequent to December 31, 2006, KBK Industries, LLC redeemed a warrant we held to purchase approximately 26% of its outstanding limited liability company membership interests. The redemption price was approximately $1.4 million, representing a gain of approximately $1.2 million on our warrant investment. KBK Industries paid 50.0% of the redemption price in cash and the remainder in the form of a note payable due on or before January 30, 2008, which accrues interest at prime rate plus 2.0%.
 
In addition, on February 5, 2007, we made a $2.4 million secured debt investment in Advantage Millwork Company, Inc., a premier designer and manufacturer of high quality wood, decorative metal and wrought iron entry doors. We also received a warrant to purchase approximately 10% of the outstanding shares of common stock of Advantage Millwork Company.
 
Subsequent to December 31, 2006, Main Street Mezzanine Fund has continued to make regular quarterly cash distributions to its partners from accumulated net investment income. On January 2, 2007 and April 2, 2007, Main Street Mezzanine Fund made regular quarterly cash distributions to its partners totaling $0.9 million and $1.0 million, respectively.
 
In addition, Main Street Mezzanine Fund periodically distributes special cash distributions to its partners from the net proceeds of realized gains on investments. On January 5, 2007 and January 31, 2007, Main Street Mezzanine Fund made special cash distributions to its partners of $1.7 million and $1.0 million, respectively, relating to realized gains on its investments.
 
During the first quarter of 2007, Main Street Mezzanine Fund issued $9.9 million of additional SBA-guaranteed debentures. As of May 10, 2007, Main Street Mezzanine Fund had $55.0 million of outstanding indebtedness guaranteed by the SBA.
 
As of April 30, 2007, we have executed non-binding term sheets for approximately $10.1 million of investment commitments in three prospective portfolio companies. These proposed investments are subject to the completion of our due diligence and approval process as well as negotiation of definitive agreements with the prospective portfolio companies and, as a result, may not result in completed investments.
 
Why We Are Going Public
 
In 2002, Main Street Mezzanine Fund raised its initial capital, obtained its license to operate as an SBIC and began investing its capital. While we intend to continue to operate Main Street Mezzanine Fund as an SBIC, subject to SBA approval, and to utilize lower cost capital we can access through the SBA’s SBIC Debenture Program, which we refer to as SBA leverage, to partially fund our investment portfolio, we believe that being a public company will offer certain key advantages for our business that would not be available to us if we continue to operate as a private SBIC. These key advantages include:
 
  •  Permanent Capital Base and Longer Investment Horizon.  Unlike traditional private investment vehicles such as SBICs, which typically are finite-life limited partnerships with a limited investment horizon, we will operate as a corporation with a perpetual life and no requirement to return capital to investors. We believe raising separate pools of capital with finite investment terms unreasonably diverts management’s time from its basic investment activities. We believe that our new structure will allow us to make investments with a longer investment horizon and to better control the timing and method of exiting our investments, which we believe will enhance our returns.
 
  •  Investment Efficiency.  SBICs are subject to a number of regulatory restrictions on their investment activities, including limits on the size of individual investments and the size and types of companies in which they are permitted to invest. Subsequent to the consummation of this offering, we may make investments through Main Street Capital Corporation without these restrictions, allowing us to pursue certain attractive investment opportunities that we previously were required to forgo. In addition, as a public company with more capital available, we will not be required to secure co-investments from non-affiliated investors for investments exceeding our historical regulatory size limits.


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  •  Greater Access to Capital.  As a public company, we expect to have access to greater amounts and types of capital that we can use to grow our investment portfolio. In addition, we should be able to obtain additional capital in a more efficient and cost effective manner than if we were to remain a private entity. We will also have the ability to spread our overhead and operating costs over a larger capital base.
 
  •  Key Personnel Retention.  Retaining and providing proper incentives to key personnel over longer periods of time is critical to the success of our operations. As a public company, we will have the ability to provide competitive rates of compensation, including equity incentives to current and future employees, to further align their economic interests with our stockholders.
 
Market Opportunity
 
Our business is to provide customized financing solutions to lower middle market companies, which we define as companies with annual revenues between $10.0 million and $100.0 million. Based on a search of the Dun and Bradstreet database completed on April 17, 2007, we believe there are approximately 68,000 companies in the United States with revenues between $10.0 million and $100.0 million. We believe many lower middle market companies are unable to obtain sufficient financing from traditional financing sources. Due to evolving market trends, traditional lenders and other sources of private investment capital have focused their efforts on larger companies and transactions. We believe this dynamic is attributable to several factors, including the consolidation of commercial banks and the aggregation of private investment funds into larger pools of capital that are focused on larger investments. In addition, many current funding sources do not have relevant experience in dealing with some of the unique business issues facing lower middle market companies. Consequently, we believe that the market for lower middle market investments, particularly those investments of less than $10.0 million, is currently underserved and less competitive. This market situation creates the opportunity for us to meet the financing requirements of lower middle market companies while also negotiating favorable transaction terms and equity participations.
 
Business Strategy
 
Our 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-related investments. We have adopted the following business strategies to achieve our investment objective:
 
  •  Delivering Customized Financing Solutions.  We believe our ability to provide a broad range of customized financing solutions to lower middle market companies sets us apart from other capital providers that focus on providing a limited number of financing solutions. We offer to our portfolio companies customized debt financing solutions with equity components that are tailored to the facts and circumstances of each situation. Our ability to invest across a company’s capital structure, from senior secured loans to subordinated debt to equity securities, allows us to offer our portfolio companies a comprehensive suite of financing solutions, or “one-stop” financing.
 
  •  Focusing on Established Companies in the Lower Middle Market.  We generally invest in companies with established market positions, experienced management teams and proven revenue streams. Those companies generally possess better risk-adjusted return profiles than newer companies that are building management or are in the early stages of building a revenue base. In addition, established lower middle market companies generally provide opportunities for capital appreciation.
 
  •  Leveraging the Skills and Experience of Our Investment Team.  Our investment team has over 35 years of combined experience in lending to and investing in lower middle market companies. The members of our investment team have broad investment backgrounds, with prior experience at private investment funds, investment banks and other financial services companies, and currently include five certified public accountants and one chartered financial analyst. The expertise of our investment team in analyzing, valuing, structuring, negotiating and closing transactions should provide us with competitive advantages by allowing us to consider customized financing solutions and non-traditional and complex structures.


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  •  Maintaining Portfolio Diversification.  We seek to maintain a portfolio of investments that is appropriately diversified among various companies, industries, geographic regions and end markets. This portfolio diversity is intended to mitigate the potential effects of negative economic events for particular companies, regions and industries.
 
  •  Capitalizing on Strong Transaction Sourcing Network.  Our investment team seeks to leverage its extensive network of referral sources for investments in lower middle market companies developed over the last ten years. Since 2002, we have originated and been the lead investor in over 25 principal investment transactions and have developed a reputation in our marketplace as a responsive, efficient and reliable source of financing, which has created a growing proprietary deal flow for us.
 
  •  Benefiting from Lower Cost of Capital.  Main Street Mezzanine Fund’s SBIC license has allowed us to issue SBA-guaranteed debentures. SBA-guaranteed debentures carry long-term fixed rates that are generally lower than rates on comparable bank and public debt. Because lower cost SBA leverage is, and will continue to be, a significant part of our capital base, our relative cost of debt capital should be lower than many of our competitors.
 
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 opportunities. However, not all of these criteria have been, or will be, met in connection with each of our investments.
 
  •  Proven Management Team with Meaningful Financial Commitment.  We look for operationally-oriented management with direct industry experience and a successful track record. In addition, we expect the management team of each portfolio company to have meaningful equity ownership in the portfolio company to better align our respective economic interests. We believe management teams with these attributes are more likely to manage the companies in a manner that protects our debt investment and enhances the value of our equity investment.
 
  •  Established Companies with Positive Cash Flow.  We seek to invest in established companies in the lower middle market with sound historical financial performance. We typically focus on companies that have historically generated EBITDA of greater than $1.0 million and commensurate levels of free cash flow. We generally do not intend to invest in start-up companies or companies with speculative business plans.
 
  •  Defensible Competitive Advantages/Favorable Industry Position.  We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers to entry, which may help to protect their market position and profitability.
 
  •  Exit Alternatives.  We expect that the primary means by which we exit our debt investments will be through the repayment of our investment from internally generated cash flow and/or refinancing. In addition, we seek to invest in companies whose business models and expected future cash flows may provide alternate methods of repaying our investment, such as through a strategic acquisition by other industry participants or a recapitalization.
 
Formation Transactions
 
We are a newly organized Maryland corporation, formed on March 9, 2007, for the purpose of acquiring Main Street Mezzanine Fund, the General Partner and the Investment Adviser, raising capital in this offering and thereafter operating as an internally-managed business development company under the Investment Company Act of 1940, or the 1940 Act.


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At the time of closing this offering, we will consummate the following formation transactions to create an internally-managed operating structure which we believe will align the interests of management and stockholders and also enhance our net investment income, net cash flow from operations and dividend paying potential:
 
  •  Pursuant to a merger agreement that has received the requisite approval of the General Partner and the limited partners of Main Street Mezzanine Fund, or the Limited Partners, we will acquire 100.0% of the limited partnership interests in Main Street Mezzanine Fund for $40.9 million (which represents the audited net asset value of Main Street Mezzanine Fund as of December 31, 2006, less cash distributed to partners in January 2007 related to realized gains). We will issue to the Limited Partners shares of common stock valued at $40.9 million in exchange for their limited partnership interests. The $40.9 million valuation represents a 54.4% premium over the total capital contributions made by the Limited Partners to Main Street Mezzanine Fund. The aggregate number of shares issuable to the Limited Partners will be determined by dividing $40.9 million by the initial public offering price per share. The shares issuable to the Limited Partners will be allocated among the Limited Partners in proportion to the respective limited partnership interests held by the Limited Partners. In determining the fair value of the investments held by Main Street Mezzanine Fund at December 31, 2006, we utilized independent valuation assistance provided by Duff & Phelps, LLC, an independent third-party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
  •  We will acquire from the members of the General Partner 100.0% of their equity interests in the General Partner and, consequently, 100.0% of the general partnership interest in Main Street Mezzanine Fund for $9.0 million. We will issue to the members of the General Partner shares of common stock valued at $9.0 million in exchange for their equity interests in the General Partner. The aggregate number of shares issuable to the members of the General Partner will be determined by dividing $9.0 million by the initial public offering price per share. Under the current agreement of limited partnership, or partnership agreement, of Main Street Mezzanine Fund, the General Partner is entitled to 20.0% of Main Street Mezzanine Fund’s profits and distributions. We refer to the General Partner’s right to receive such profits and distributions as “carried interest.” The consideration being received by the members of the General Partner is based largely on the estimated present value of the 20.0% carried interest in Main Street Mezzanine Fund and comparable public market transactions, and was determined using industry standard valuation methodologies that we believe are reasonable and supportable. We also received valuation assistance from Duff & Phelps, LLC, an independent third party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
In addition to serving as the general partner of Main Street Mezzanine Fund, the General Partner holds partnership interests in Main Street Mezzanine Fund equaling 0.7% of the total partnership interests.
 
  •  We will acquire from the members of the Investment Adviser 100.0% of their equity interests in the Investment Adviser for $18.0 million. We will issue to the members of the Investment Adviser shares of common stock valued at $18.0 million in exchange for their equity interests in the Investment Adviser. The aggregate number of shares issuable to the members of the Investment Adviser will be determined by dividing $18.0 million by the initial public offering price per share. The consideration payable to the members of the Investment Adviser is based on the estimated present value of net distributable income related to the management fees to which the Investment Adviser is entitled to receive pursuant to certain agreements and comparable public market transactions, and was determined using industry standard valuation methodologies that we believe are reasonable and supportable. We also received valuation assistance provided by Duff & Phelps, LLC, an independent third party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
Under two separate management services agreements with Main Street Mezzanine Fund and Main Street Capital II, the Investment Adviser receives management fees from both Main Street Mezzanine Fund and Main Street Capital II. Until September 30, 2007, the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Mezzanine Fund equal to


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0.625% (2.5% annualized) of the sum of (i) the amount of qualifying private capital contributed or committed to Main Street Mezzanine Fund, (ii) any SBA permitted return of capital distributions made by Main Street Mezzanine Fund to its Limited Partners and (iii) an amount equal to two times qualifying private capital, representing the SBIC leverage available to Main Street Mezzanine Fund. After September 30, 2007, the Investment Adviser is entitled to receive a quarterly management fee from Main Street Mezzanine Fund equal to 0.625% (2.5% annualized) of the sum of (i) the amount of private capital contributed to Main Street Mezzanine Fund and (ii) the actual outstanding SBIC leverage of Main Street Mezzanine Fund.
 
From January 1, 2006 until December 31, 2010 (or an earlier date if Main Street Capital II receives 80.0% or greater of its combined private funding and SBIC leverage), the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Capital II equal to 0.5% (2.0% annualized) of the sum of (i) the amount of qualifying private capital contributed or committed to Main Street Capital II, (ii) any SBA permitted return of capital distributions made by Main Street Capital II to its limited partners, and (iii) an amount equal to two times qualifying private capital, representing the SBIC leverage available to Main Street Capital II. Thereafter, the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Capital II equal to 0.5% (2.0% annualized) of the total cost of all active portfolio investments of Main Street Capital II.
 
Pursuant to the applicable management fee provisions as discussed above and the existing capital committed to both funds, the Investment Adviser is entitled to receive management fees of approximately $2 million and $3 million from Main Street Mezzanine Fund and Main Street Capital II, respectively, for the year ending December 31, 2007.


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(FLOW CHART)
 
 
(1) Based on      shares of common stock to be outstanding after this offering and completion of the formation transactions described elsewhere in this prospectus. Does not include      shares of common stock issuable pursuant to the underwriters’ over-allotment option.
 
After completion of this offering, we will be a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the 1940 Act. We will be internally managed by our executive officers under the supervision of our board of directors (“Board of Directors”). As a result, we will not pay any external investment advisory fees, but instead we will incur the operating costs associated with employing investment and portfolio management professionals.


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As a business development company, we will be required to comply with numerous regulatory requirements. We will be permitted to, and expect to, finance our investments using debt and equity. However, our ability to use debt will be limited in certain significant respects. See “Regulations.” We intend to elect to be treated for federal income tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, or the Code. See “Material U.S. Federal Income Tax Considerations.” As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders if we meet certain source-of-income, asset diversification and other requirements.
 
Corporate Information
 
Our principal executive offices are located at 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056. We maintain a website on the Internet at www.mainstreethouston.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.
 
Available Information
 
We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus.
 
Upon completion of this offering, we will file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SEC’s website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.


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The Offering
 
Common stock offered by us           shares(1)
 
Common stock issued in formation transactions           shares
 
Common stock to be outstanding after this offering           shares(1)
 
Use of proceeds Our net proceeds from this offering will be approximately $      million, assuming an initial public offering price of $      per share. We intend to use all of the net proceeds from this offering to make investments in lower middle market companies in accordance with our investment objective and strategies described in this prospectus, pay our operating expenses and dividends to our stockholders and for general corporate purposes. Pending such use, we will invest the net proceeds primarily in short-term securities consistent with our business development company election and our election to be taxed as a RIC. See “Use of Proceeds.”
 
Proposed Nasdaq Global Market symbol “MAIN”
 
Dividends We intend to pay quarterly dividends to our stockholders out of assets legally available for distribution. Our dividends, if any, will be determined by our Board of Directors.
 
Taxation We intend to elect, effective as of the date of our formation, to be treated as a RIC for federal income tax purposes. 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. To obtain and maintain RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90.0% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Material U.S. Federal Income Tax Considerations.”
 
Dividend reinvestment plan We have adopted a dividend reinvestment plan for our stockholders. The dividend reinvestment plan is an “opt out” reinvestment plan. As a result, if we declare dividends, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive dividends in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their dividends in cash. See “Dividend Reinvestment Plan.”
 
Trading at a discount Shares of closed-end investment companies frequently trade at a discount to their net asset value. This risk is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our shares will trade above, at or below net asset value.
 
Risk factors See “Risk Factors” beginning on page 13 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
(1) Does not include      shares of common stock issuable pursuant to the over-allotment option granted by us to the underwriters.


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FEES AND EXPENSES
 
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us” or “Main Street,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.
 
Stockholder Transaction Expenses:
 
           
Sales load (as a percentage of offering price)
    7.0 % (1)
Offering expenses borne by us (as a percentage of offering price)
    2.0 % (2)
Dividend reinvestment plan expenses
    (3)  
Total stockholder transaction expenses (as a percentage of offering price)
    9.0 %  
 
Annual Expenses (as a percentage of net assets attributable to common stock):
 
         
Operating expenses
    1.6 %(4)
Interest payments on borrowed funds
    1.7 %(5)
Total annual expenses
    3.3 %(6)
 
Example
 
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage and that our annual operating expenses would remain at the levels set forth in the table above, and that you would pay a sales load of 7.0% (the underwriting discount to be paid by us with respect to common stock sold by us in this offering).
 
                                 
    1 Year     3 Years     5 Years     10 Years  
 
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return
  $ 124     $ 193     $ 264     $ 453  
 
 
(1) The underwriting discount with respect to shares sold in this offering, which is a one-time fee, is the only sales load paid in connection with this offering.
 
(2) Amount reflects estimated offering expenses of approximately $2 million to be paid by us.
 
(3) The expenses of administering our dividend reinvestment plan are included in operating expenses.
 
(4) Operating expenses represent our estimated annual operating expenses, excluding overhead incurred by the Investment Adviser related to its investment management responsibilities for Main Street Mezzanine Fund and Main Street Capital II. Upon consummation of the formation transactions, the Investment Adviser will be reflected as an investment in affiliated operating company as it does not conduct substantially all of its investment management activities for Main Street Mezzanine Fund. Operating expenses also exclude interest payments on borrowed funds, which is presented separately above.
 
(5) Interest payments on borrowed funds represent our estimated annual interest payments on borrowed funds.
 
(6) The total annual expenses are the sum of operating expenses and interest payments on borrowed funds. We may borrow money to leverage our net assets and increase our total assets.
 
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the dividend payment date, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.


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SUMMARY FINANCIAL AND OTHER DATA
 
The summary financial and other data below reflects the combined operations of Main Street Mezzanine Fund and the General Partner. The summary financial data for the years ended December 31, 2004, 2005 and 2006, and as of December 31, 2006, have been derived from combined financial statements that have been audited by Grant Thornton LLP, an independent registered public accounting firm. You should read this summary 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 notes thereto.
 
                         
    Year Ended December 31,  
    2004     2005     2006  
    (dollars in thousands)  
 
Income statement data:
                       
Investment income:
                       
Total interest, fee and dividend income
  $ 4,452     $ 7,338     $ 9,013  
Interest from idle funds and other
    9       222       749  
                         
Total investment income
    4,461       7,560       9,762  
                         
Expenses:
                       
Management fees to affiliate
    1,916       1,929       1,942  
Interest
    869       2,064       2,717  
General and administrative
    184       197       198  
                         
Total expenses
    2,969       4,190       4,857  
                         
Net investment income
    1,492       3,370       4,905  
Total net realized gain (loss) from investments
    1,171       1,488       2,430  
                         
Net realized income
    2,663       4,858       7,335  
Total net change in unrealized appreciation (depreciation) from investments
    1,764       3,032       8,488  
                         
Net increase (decrease) in members’ equity and partners’ capital resulting from operations
  $ 4,427     $ 7,890     $ 15,823  
                         
Other data:
                       
Weighted average effective yield on debt investments(1)
    15.3 %     15.3 %     15.0 %
Number of portfolio companies
    14       19       24  
Expense ratios (as percentage of average net assets):
                       
Operating expenses
    13.7 %     9.0 %     5.5 %
Interest expense
    5.7 %     8.8 %     7.0 %
 
         
    As of
 
    December 31, 2006  
    (dollars in thousands)  
 
Balance sheet data:
       
Assets:
       
Total investments at fair value
  $ 76,209  
Accumulated unearned income
    (2,498 )
         
Total investments net of accumulated unearned income
    73,711  
Cash and cash equivalents
    13,769  
Deferred financing costs, net of accumulated amortization
    1,333  
Interest receivable and other assets
    630  
         
Total assets
  $ 89,443  
         
Liabilities, members’ equity and partners’ capital:
       
SBIC debentures
  $ 45,100  
Interest payable
    855  
Accounts payable and other liabilities
    216  
         
Total liabilities
    46,171  
Total members’ equity and partners’ capital
    43,272  
         
Total liabilities, members’ equity and partners’ capital
  $ 89,443  
         
 
 
(1) Weighted average effective yield is calculated based upon our debt investments at the end of each period and includes amortization of deferred debt origination fees.
 


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RISK FACTORS
 
Investing in our common stock involves a number of significant risks. In addition to the other information contained in this prospectus, you 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. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.
 
Risks Relating to Our Business and Structure
 
A significant portion of our investment portfolio is and will continue to be recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is and will continue to be uncertainty as to the value of our portfolio investments.
 
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 our Board of Directors. 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 will value these securities quarterly at fair value as determined in good faith by our Board of Directors.
 
Certain factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. 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 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 upon 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 financial condition and results of operations will depend on our ability to effectively manage and deploy capital.
 
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-related investments will depend on our ability to effectively manage and deploy capital raised in this offering, which will depend, 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. We cannot assure you that we will achieve our investment objective.
 
Accomplishing our investment objective on a cost-effective basis will be 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 may also be called upon to provide managerial assistance to 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 in a manner commensurate with the increased capital available to us as a result of this offering, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects.


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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 in this prospectus, it could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.
 
We may face increasing competition for investment opportunities.
 
We compete for investments with other business development companies and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas they have not traditionally invested in, including making investments in lower middle market companies. As a result of these new entrants, competition for investment opportunities in lower middle market companies may intensify. 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. 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 will impose on us as a business development company.
 
We are dependent upon our key investment personnel for our future success.
 
We depend on the members of our investment team, particularly Vincent D. Foster, Todd A. Reppert, 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. Although we intend to enter into employment agreements with these individuals, we have no guarantee that they 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.
 
Additionally, the increase in available capital for investment resulting from this offering will require that we retain new investment and administrative personnel. We believe our future success will depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and retaining these personnel, we may not be able to operate our business as we expect.
 
We have no operating history as a business development company or as a regulated investment company, which may impair your ability to assess our prospects.
 
Main Street Mezzanine Fund was formed in 2002 by certain members of our management team. Prior to this offering, however, we have not operated, and our management team has no experience operating, as a business development company under the 1940 Act or as a RIC under Subchapter M of the Code. As a result, we have no operating results under these regulatory frameworks that can demonstrate to you either their effect on our business or our ability to manage our business under these frameworks. If we fail to operate our business so as to maintain our status as a business development company or a RIC, our operating flexibility will be significantly reduced.


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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.
 
Borrowings, also known as leverage, magnify the potential for gain or loss on invested equity capital. As we intend to use leverage to partially finance our investments, you will experience increased risks of investing in our common stock. We, through Main Street Mezzanine Fund, 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 Main Street Mezzanine Fund that are superior to the claims of our common stockholders. We may also borrow from banks and other lenders in the future. If the value of our assets also increases, 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. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net 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.
 
On December 31, 2006, we, through Main Street Mezzanine Fund, had $45.1 million of outstanding indebtedness guaranteed by the SBA, which had a weighted average annualized interest cost of approximately 5.7% (exclusive of deferred financing costs) for the year ended December 31, 2006. 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 Main Street Mezzanine Fund 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
    (26.6)%       (16.3)%        (5.9)%       4.4%       14.7%  
 
 
(1) Assumes $89.4 million in total assets, $45.1 million in debt outstanding, $43.3 million in members’ equity and partners’ capital, and an average cost of funds of 5.7%. Actual interest payments may be different.
 
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, or by borrowing from banks, or insurance companies, and there can be no assurance that such additional leverage can in fact be achieved.
 
SBA regulations limit the outstanding dollar amount of SBA-guaranteed debentures that may be issued by an SBIC or group of SBICs under common control.
 
The SBA 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 $127.2 million (which amount is subject to increase on an annual basis based on cost of living increases). Because of our and our investment team’s affiliations with Main Street Capital II, a separate SBIC which commenced investment operations in January 2006, Main Street Mezzanine Fund and Main Street Capital II may be deemed to be a group of SBICs under common control. Thus, the dollar amount of SBA-guaranteed debentures that can be issued collectively by Main Street Mezzanine Fund and Main Street Capital II may be limited to $127.2 million, absent relief from the SBA. Currently, we, through Main Street Mezzanine Fund, do not intend to issue SBA-guaranteed debentures in excess of $55.0 million based upon Main Street Mezzanine Fund’s existing equity capital.


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Main Street Mezzanine Fund’s current status as an SBIC does not automatically assure that it will continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon Main Street Mezzanine Fund continuing to be in compliance with SBA regulations and policies. Moreover, the amount of SBA 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 Main Street Mezzanine Fund.
 
Our ability to enter into and exit investment transactions with our affiliates will be restricted.
 
Except in those instances where we have received prior exemptive relief from the SEC, we will be prohibited under the 1940 Act from knowingly participating in certain investment transactions with our affiliates. Since January 2006, Main Street Mezzanine Fund has co-invested with Main Street Capital II in a number of lower middle market companies. Each co-investment was made at the same time and on the same terms. In connection with our election to be regulated as a business development company, neither we nor Main Street Mezzanine Fund will be permitted to co-invest with Main Street Capital II in certain types of negotiated investment transactions unless we receive an order from the SEC permitting us to do so. Moreover, we may be limited in our ability to make follow-on investments or liquidate our existing equity investments in such companies. Although we intend to apply to the SEC for exemptive relief to permit such co-investment and liquidity transactions, subject to certain conditions, we cannot be certain that our application for such relief will be granted or what conditions will be placed on such relief.
 
There are significant potential conflicts of interest which could impact our investment returns.
 
The members of our investment team serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Messrs. Foster, Reppert, Hartman, Hyzak and Magdol, each of whom are members of our investment team, are and, following this offering, will continue to have responsibilities for and an economic interest in Main Street Capital II, a separate SBIC which commenced investment operations in January 2006. Importantly, Main Street Capital II has overlapping investment objectives with those of Main Street and, accordingly, makes loans to, and invests in, companies similar to those targeted by Main Street. As a result of their responsibilities for and economic interest in Main Street Capital II, the members of our investment team will face conflicts in the allocation of investment opportunities to Main Street Capital II. Although the members of our investment team will endeavor to allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in certain investments made by Main Street Capital II. Pending receipt of exemptive relief from the SEC to permit co-investment as described above, the members of our investment team will be forced to choose whether we or Main Street Capital II should make the investment when they identify an investment opportunity.
 
We may experience fluctuations in our quarterly results.
 
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 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 may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
 
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


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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. Moreover, we will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from this offering in ways with which investors may not agree or for purposes other than those contemplated at the time of this offering.
 
We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code.
 
To obtain and maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements.
 
  •  The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90.0% 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 4.0% nondeductible federal excise tax, however, to the extent that we do not satisfy certain additional minimum distribution requirements on a calendar-year basis. See “Material U.S. Federal Income Tax Considerations.” Because we use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and may in the future become subject to certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
 
  •  The income source requirement will be satisfied if we obtain at least 90.0% of our income for each year from distributions, interest, gains from the sale of stock or securities or similar sources.
 
  •  The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50.0% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other acceptable securities; and no more than 25.0% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” 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.
 
If we fail to qualify for or 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 may not be able to pay you dividends, and our dividends may not grow over time.
 
We intend to pay quarterly 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 make a specified level of cash dividends 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 in this prospectus. In addition, the inability to satisfy the asset coverage test applicable to us as a business development company can 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 business development company regulations, Main Street Mezzanine Fund’s 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.


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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
 
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 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.
 
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 obtain and 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 “Material U.S. Federal Income Tax Considerations — Taxation as a RIC.”
 
Main Street Mezzanine Fund, as an SBIC, may be unable to make distributions to us that will enable us to meet or maintain RIC status, which could result in the imposition of an entity-level tax.
 
In order for us to qualify for RIC tax treatment, we will be required to distribute on an annual basis substantially all of our taxable income, including income from our subsidiaries, which includes the income from Main Street Mezzanine Fund. We will be partially dependent on Main Street Mezzanine Fund for cash distributions to enable us to meet the RIC distribution requirements. Main Street Mezzanine Fund may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to qualify for RIC tax treatment. We may have to request a waiver of the SBA’s restrictions for Main Street Mezzanine Fund to make certain distributions to maintain our eligibility for RIC tax treatment. We cannot assure you that the SBA will grant such waiver and if Main Street Mezzanine Fund is unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us.
 
Because we intend to distribute substantially all of our income to our stockholders upon our election to be treated as a RIC, we will continue to need additional capital to finance our growth, and regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital.
 
In order to satisfy the requirements applicable to a RIC and to avoid payment of excise taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and net capital gain income except for certain net long-term capital gains recognized after we become a RIC, some or all of which we may retain, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our stockholders. As a business development company, we generally are required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200.0%. This requirement limits the amount that we may borrow. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments or sell additional shares of common stock and, depending on the nature of our leverage, to repay a portion of our indebtedness at a time when such sales may be disadvantageous. In addition, issuance of additional securities could dilute the percentage ownership of our current stockholders in us.
 
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 business development company, we generally will not be permitted to issue equity securities priced below net


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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.
 
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
 
We, Main Street Mezzanine Fund, and our portfolio companies will be subject to regulation at the local, state and federal level. 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 and, therefore, our competitive advantage over 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 in this prospectus 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.
 
Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.
 
Upon completion of our initial public offering, we will be subject to the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC. Under current SEC rules, beginning with our fiscal year ending December 31, 2008, our management will be required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder. We will be required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. As a result, we expect to incur significant additional expenses in the near term, which may negatively impact our financial performance and our ability to make distributions. This process also will result in a diversion of management’s time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. There can be no assurance that we will successfully identify and resolve all issues required to be disclosed prior to becoming a public company or that our quarterly reviews will not identify additional material weaknesses. In the event that we are unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.
 
Risks Related to Our Investments
 
Our investments in portfolio companies may be risky, and we could lose all or part of our investment.
 
Investing in lower middle market companies involves a number of significant risks. Among other things, these companies:
 
  •  may have limited financial resources and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investment, as well as a corresponding decrease in the value of the equity components of our investments;
 
  •  may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;


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  •  are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;
 
  •  generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and
 
  •  generally have less publicly available information about their businesses, operations and financial condition. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose all or part of our investment.
 
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.
 
The lack of liquidity in our investments may adversely affect our business.
 
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.
 
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.
 
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
 
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


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debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
 
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
 
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, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. 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.
 
Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
 
Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the 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.
 
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
 
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy.
 
As a business development company, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70.0% of our total assets are qualifying assets. See “Regulation.”
 
We believe that substantially all of our investments will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position).


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We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.
 
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the 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 generally will not control our portfolio companies.
 
We do not, and do not expect to, control most 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 may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may 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 could decrease the value of our portfolio holdings.
 
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
 
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
 
Defaults by our portfolio companies will harm our operating results.
 
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to 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.
 
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
 
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.


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Changes in interest rates may affect our cost of capital and net investment income.
 
Most of our debt investments will bear interest at fixed rates and the value of these investments could be negatively affected by increases 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 both reduce the value of our portfolio investments and increase our cost of capital, which would reduce our net investment income. 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.
 
We may not realize gains from our equity investments.
 
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we make direct equity investments in 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 this Offering and Our Common Stock
 
We may be unable to invest a significant portion of the net proceeds of this offering on acceptable terms in the timeframe contemplated by this prospectus.
 
Delays in investing the net proceeds of this offering may cause our performance to be worse than that of other fully invested business development companies 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 this offering 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, it may take us up to 18 months to invest substantially all of the net proceeds of this offering in securities meeting our investment objective. During this period, we will invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, 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 this 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 this offering 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.
 
Shares of closed-end investment companies, including business development companies, may trade at a discount to their net asset value.
 
Shares of closed-end investment companies, including business development companies, may trade at a discount from net asset value. This characteristic of closed-end investment companies and business development companies 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.


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Investing in our common stock may involve an above average degree of risk.
 
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 may be highly speculative, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.
 
Investors in this offering are likely to incur immediate dilution upon the closing of this offering.
 
In connection with the formation transactions, we will issue common stock equal to approximately $40.9 million, which represents the net asset value of Main Street Mezzanine Fund as of December 31, 2006, as reduced for certain cash distributions made to its partners in January 2007 related to realized gains, to the Limited Partners in exchange for their respective interests, as described in the formation transactions section. However, the offering and the formation transactions will not take place until the closing of the initial public offering. On the date of the offering, the actual net asset value of Main Street Mezzanine Fund may be greater or less than the net asset value of Main Street Mezzanine Fund, as of December 31, 2006, used to determine the number of shares of common stock that the Limited Partners receive in connection with the formation transactions. If, at the time of this offering, the net asset value of Main Street Mezzanine Fund has decreased from its value as of December 31, 2006, the Limited Partners will receive more shares of common stock than they would have if the net asset value was determined closer to the time of this offering.
 
Furthermore, after giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $      per share, and after deducting estimated underwriting discounts and estimated offering expenses payable by us, our as-adjusted pro forma net asset value as of December 31, 2006, would have been approximately $      million, or $      per share. This represents an immediate increase in our net asset value per share of $      to Limited Partners, the members of the General Partner and the members of the Investment Adviser and dilution in net asset value per share of $      to new investors who purchase shares in this offering. See “Dilution” for more information.
 
We have not identified specific investments in which to invest all of the proceeds of this offering.
 
As of the date of this prospectus, we have not entered into definitive agreements for any specific investments in which to invest the net proceeds of this offering. Although we are and will continue to evaluate and seek new investment opportunities, you will not be able to evaluate prior to your purchase of common stock in this offering the manner in which we will invest the net proceeds of this offering, or the economic merits of any new investment.
 
The market price of our common stock may fluctuate significantly.
 
The market price and liquidity of the market for shares of 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:
 
  •  significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies;
 
  •  changes in regulatory policies or tax guidelines, particularly with respect to RICs, business development companies or SBICs;
 
  •  inability to obtain certain exemptive relief from the SEC;
 
  •  loss of RIC status or Main Street Mezzanine Fund’s status as an SBIC;
 
  •  changes in earnings or variations in operating results;
 
  •  changes in the value of our portfolio of investments;


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  •  any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
 
  •  departure of our key personnel; and
 
  •  general economic trends and other external factors.
 
Prior to this offering, there has been no public market for our common stock, and we cannot assure you that the market price of our shares will not decline following the offering.
 
Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price of our common stock was determined through negotiations among us and the underwriters. We cannot assure you that a trading market will develop for our common stock after this offering or, if one develops, that such trading market can be sustained. Initially, the market for our common stock will be extremely limited. Following this offering, sales of substantial amounts of our common stock or the availability of such shares for sale, could adversely affect the prevailing market prices for our common stock.
 
In connection with the formation transactions, the former Limited Partners and members of the General Partner and the Investment Adviser will receive restricted common stock in consideration for their respective equity interests in such entities. See “Formation; Business Development Company and Regulated Investment Company Elections-Formation Transactions.” This stock may be transferred subject to certain terms and limitations under Rule 144 (a non-exclusive resale exemption under the Securities Act of 1933) following the first anniversary of issuance. Moreover, we have agreed to use reasonable best efforts to register the resale of this restricted stock as soon as practicable following the first anniversary of the closing of this offering. Thus, this restricted stock represents a significant “overhang,” and significant sales of this stock, once it becomes tradable following the first anniversary of the closing, could have an adverse affect on the price of our shares. Any such adverse effects upon our share price could impair our ability to raise additional capital through the sale of equity securities should we desire to do so.
 
Provisions of the Maryland General Corporation Law and our articles of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
 
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. We will be covered by the Business Combination Act of the Maryland General Corporation Law to the extent that such statute is not superseded by applicable requirements of the 1940 Act. However, our Board of Directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any person to the extent that such business combination receives the prior approval of our Board of Directors, including a majority of our directors who are not interested persons as defined in the 1940 Act. If the applicable board resolution is repealed following such period of time or our Board of Directors does not otherwise approve a business combination, the Business Combination Act and the Control Share Acquisition Act (if we amend our bylaws to be subject to that Act) may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
 
In addition, our Board of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. See “Description of Capital Stock.” Subject to compliance with the 1940 Act, our Board of Directors may, without stockholder action, amend our articles of incorporation to increase the number of shares of stock of any class or series that we have authority to issue. 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 shares of our common stock.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements in this prospectus constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus may include statements as to:
 
  •  our future operating results;
 
  •  our business prospects and the prospects of our portfolio companies;
 
  •  the impact of the investments that we expect to make;
 
  •  the ability of our portfolio companies to achieve their objectives;
 
  •  our expected financings and investments;
 
  •  the adequacy of our cash resources and working capital; and
 
  •  the timing of cash flows, if any, from the operations of our portfolio companies.
 
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this prospectus. Other factors that could cause actual results to differ materially include:
 
  •  changes in the economy;
 
  •  risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
 
  •  future changes in laws or regulations and conditions in our operating areas.
 
We have based the forward-looking statements included in this prospectus on information available to us on the date of this prospectus, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.


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FORMATION; BUSINESS DEVELOPMENT COMPANY AND
REGULATED INVESTMENT COMPANY ELECTIONS
 
Formation Transactions
 
Prior to the closing of this offering and the transactions described below, we made investments through Main Street Mezzanine Fund, LP, a privately-held Delaware limited partnership which holds a license as an SBIC. Prior to the closing of this offering, Main Street Mezzanine Fund had 98 limited partners, and a general partner, Main Street Mezzanine Management, LLC, or the General Partner. Main Street Mezzanine Fund’s investments have been managed by Main Street Capital Partners, LLC, or the Investment Adviser, pursuant to a management services agreement between the Investment Adviser and Main Street Mezzanine Fund.
 
The Investment Adviser also serves as the manager and investment adviser for Main Street Capital II, LP, which also holds an SBIC license. We will not acquire any interest in Main Street Capital II in connection with the transactions described below but the Investment Adviser will continue to act as the manager and investment adviser to Main Street Capital II subsequent to such transactions.
 
Main Street Capital Corporation was incorporated as a Maryland corporation on March 9, 2007, for the purpose of acquiring Main Street Mezzanine Fund, the General Partner and the Investment Adviser, raising capital in this offering and thereafter operating as an internally managed business development company under the 1940 Act. Upon the closing of this offering, we will own and operate Main Street Mezzanine Fund through the corporate structure described below.
 
On May 10, 2007, we entered into acquisition agreements with Main Street Mezzanine Fund, the General Partner and the Investment Adviser to effect the following transactions. Pursuant to these acquisition agreements, at the time of the closing of this offering, we will consummate the following formation transactions to create an internally-managed operating structure which we believe will align the interests of management and stockholders and also enhance our net investment income, net cash flow from operations and dividend-paying potential:
 
  •  Pursuant to a merger agreement that has received the requisite approval of the General Partner and the limited partners of Main Street Mezzanine Fund, or the Limited Partners, we will acquire 100.0% of the limited partnership interests in Main Street Mezzanine Fund for $40.9 million (which represents the audited net asset value of Main Street Mezzanine Fund as of December 31, 2006, less cash distributed to partners in January 2007 related to realized gains). We will issue to the Limited Partners shares of common stock valued at $40.9 million in exchange for their limited partnership interests. The $40.9 million valuation represents a 54.4% premium over the total capital contributions made by the Limited Partners to Main Street Mezzanine Fund. The aggregate number of shares issuable to the Limited Partners will be determined by dividing $40.9 million by the initial public offering price per share. The shares issuable to the Limited Partners under the agreement will be allocated among the Limited Partners in proportion to the respective limited partnership interests held by the Limited Partners. In determining the fair value of investments held by Main Street Mezzanine Fund at December 31, 2006, we utilized independent valuation assistance provided by Duff & Phelps, LLC, an independent third-party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
  •  We will acquire from the members of the General Partner 100.0% of their equity interests in the General Partner and, consequently, 100.0% of the general partnership interest in Main Street Mezzanine Fund for $9.0 million. We will issue to the members of the General Partner shares of common stock valued at $9.0 million in exchange for their equity interests in the General Partner. The aggregate number of shares issuable to the members of the General Partner will be determined by dividing $9.0 million by the initial public offering price per share. Under the current agreement of limited partnership, or partnership agreement, of Main Street Mezzanine Fund, the General Partner is entitled to 20.0% of Main Street Mezzanine Fund’s profits and distributions. We refer to the General Partner’s right to receive such profits and distributions as “carried interest.” The consideration being received by the members of the General Partner is based largely on the estimated present value of the 20.0% carried interest in Main Street


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  Mezzanine Fund and comparable public market transactions, and was determined using industry standard valuation methodologies that we believe are reasonable and supportable. We also received valuation assistance from Duff & Phelps, LLC, an independent third party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
In addition to serving as the general partner of Main Street Mezzanine Fund, the General Partner holds partnership interests in Main Street Mezzanine Fund equaling 0.7% of the total partnership interests.
 
  •  We will acquire from the members of the Investment Adviser 100.0% of their equity interests in the Investment Adviser for $18.0 million. We will issue to the members of the Investment Adviser shares of common stock valued at $18.0 million in exchange for their equity interests in the Investment Adviser. The aggregate number of shares issuable to the members of the Investment Adviser will be determined by dividing $18.0 million by the initial public offering price per share. The consideration payable to the members of the Investment Adviser is based on the estimated present value of net distributable income related to the management fees to which the Investment Advisor is entitled to receive pursuant to certain agreements and comparable public market transactions, and was determined using industry standard valuation methodologies that we believe are reasonable and supportable. We also received valuation assistance provided by Duff & Phelps, LLC, an independent third party valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
Under two separate management services agreements with Main Street Mezzanine Fund and Main Street Capital II, the Investment Adviser receives management fees from both Main Street Mezzanine Fund and Main Street Capital II. Until September 30, 2007, the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Mezzanine Fund equal to 0.625% (2.5% annualized) of the sum of (i) the amount of qualifying private capital contributed or committed to Main Street Mezzanine Fund, (ii) any SBA permitted return of capital distributions made by Main Street Mezzanine Fund to its limited partners and (iii) an amount equal to two times qualifying private capital, representing the SBIC leverage available to Main Street Mezzanine Fund. After September 30, 2007, the Investment Adviser is entitled to receive a quarterly management fee from Main Street Mezzanine Fund equal to 0.625% (2.5% annualized) of the sum of (i) the amount of private capital contributed to Main Street Mezzanine Fund and (ii) the actual outstanding SBIC leverage of Main Street Mezzanine Fund.
 
From January 1, 2006 until December 31, 2010 (or an earlier date if Main Street Capital II receives 80.0% or greater of its combined private funding and SBIC leverage), the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Capital II equal to 0.5% (2.0% annualized) of the sum of (i) the amount of qualifying private capital contributed or committed to Main Street Capital II, (ii) any SBA permitted return of capital distributions made by Main Street Capital II to its limited partners and (iii) an amount equal to two times qualifying private capital, SBIC leverage available to Main Street Capital II. Thereafter, the Investment Adviser is entitled to receive a quarterly management fee, paid in advance, from Main Street Capital II equal to 0.5% (2.0% annualized) of the total cost of all active portfolio investments of Main Street Capital II.
 
Pursuant to the applicable management fee provisions discussed above and the existing capital committed to both funds, the Investment Adviser is entitled to receive management fees of approximately $2 million and $3 million from Main Street Mezzanine Fund and Main Street Capital II, respectively, for the year ending December 31, 2007.


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The following diagram depicts our organizational structure upon completion of this offering and the formation transactions described elsewhere in this prospectus:
 
(FLOW CHART)
 
 
(1) Based on      shares of common stock to be outstanding after this offering and completion of the formation transactions described elsewhere in this prospectus. Does not include      shares of common stock issuable pursuant to the underwriters’ over-allotment option.
 
Because the SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or issuances or transfers that would result in any person (or group of persons acting in concert) owning 10.0% or more of a class of stock of an SBIC, the formation transactions described above and this offering require the written consent of the SBA. Main Street Mezzanine Fund has formally requested the SBA’s written approval to these transactions and this offering. Main Street Mezzanine Fund intends to continue to hold its SBIC license upon the closing of this offering and be subject to the rules and regulations of the SBIC Program.
 
The consummation of the formation transactions is subject only to the receipt of the SBA approval described above and the closing of the offering.
 
Business Development Company and Regulated Investment Company Elections
 
In connection with this offering, we will file an election to be regulated as a business development company under the 1940 Act. In addition, we intend to elect to be treated as a RIC under Subchapter M of the


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Code, effective as of the date of our formation. Our election to be regulated as a business development company and our election to be treated as a RIC will have a significant impact on our future operations. Some of the most important effects on our future operations of our election to be regulated as a business development company and our election to be treated as a RIC are outlined below.
 
We will report our investments at market value or fair value with changes in value reported through our statement of operations.
 
In accordance with the requirements of Article 6 of Regulation S-X, we will report all of our investments, including debt investments, at market value or, for investments that do not have a readily available market value, at their fair value as determined by our Board of Directors. Changes in these values will be reported through our statement of operations under the caption entitled “total net change in unrealized appreciation (depreciation) from investments.” See “Business — Valuation Process and Determination of Net Asset Value.”
 
Our ability to enter into and exit investment transactions with Main Street Capital II may be restricted.
 
Since January 2006, Main Street Mezzanine Fund has co-invested with Main Street Capital II in lower middle market companies. Each such investment was made at the same time and on the same terms. In connection with our election to be regulated as a business development company, neither we nor Main Street Mezzanine Fund will be permitted to co-invest with Main Street Capital II in certain types of negotiated investment transactions unless we receive an order from the SEC permitting us to do so. Moreover, we may be limited in our ability to make follow-on investments or liquidate our existing investments in such companies. Although we intend to apply to the SEC for exemptive relief to permit such co-investment and liquidity transactions, subject to certain conditions, we cannot be certain that our application for such relief will be granted or what conditions will be placed on such relief.
 
We generally will be required to pay income taxes only on the portion of our taxable income we do not distribute to stockholders (actually or constructively).
 
As a RIC, so long as we meet certain minimum distribution, source-of-income and asset diversification requirements, we generally will be required to pay income taxes only on the portion of our taxable income and gains we do not distribute (actually or constructively) and certain built-in gains, if any.
 
Our ability to use leverage as a means of financing our portfolio of investments will be limited.
 
As a business development company, we will be required to meet a coverage ratio of total assets to total senior securities of at least 200.0%. For this purpose, senior securities include all borrowings and any preferred stock we may issue in the future. Additionally, our ability to continue to utilize leverage as a means of financing our portfolio of investments will be limited by this asset coverage test. In connection with this offering and our intended election to be regulated as a business development company, we expect to file a request with the SEC for exemptive relief to allow us to exclude any indebtedness guaranteed by the SBA and issued by Main Street Mezzanine Fund from the 200.0% asset coverage requirements applicable to us. While the SEC has granted exemptive relief in substantially similar circumstances in the past, no assurance can be given that an exemptive order will be granted.
 
We intend to distribute substantially all of our income to our stockholders.
 
As a RIC, we intend to distribute to our stockholders substantially all of our income, except possibly for certain net long-term capital gains. We may make deemed distributions to our stockholders of some or all of our retained net long-term capital gains. If this happens, you will be treated as if you had received an actual distribution of the capital gains and reinvested the net after-tax proceeds in us. In general, you also would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the deemed distribution. See “Material U.S. Federal Income Tax Considerations.”


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USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering will be approximately $     million, or approximately $     million if the underwriters fully exercise their over-allotment option, in each case assuming an initial public offering price of $      per share, after deducting the underwriting discount and estimated offering expenses of approximately $2 million.
 
We intend to use all of the net proceeds from this offering to make investments in lower middle market companies in accordance with our investment objective and strategies described in this prospectus, pay our operating expenses and dividends to our stockholders, and for general corporate purposes. Based on current market conditions, we anticipate that it may take up to 18 months to fully invest the net proceeds we receive in connection with this offering, depending on the availability of investment opportunities that are consistent with our investment objective and strategies. However, if market conditions change, it may take us longer than 18 months to fully invest the net proceeds from this offering. Pending such use, we will invest the net proceeds primarily in short-term securities consistent with our business development company election and our election to be taxed as a RIC. See “Regulation — Temporary Investments.”


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DIVIDENDS
 
We intend to pay quarterly dividends to our stockholders following our election to be taxed as a RIC, which we intend will be effective as of the date of our formation. Our quarterly dividends, if any, will be determined by our Board of Directors.
 
To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90.0% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98.0% of our net ordinary income for the calendar year, (2) 98.0% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and net capital gains for preceding years that were not distributed during such years. 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, you will be treated as if you had received an actual distribution of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. In general, you also would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. Please refer to “Material U.S. Federal Income Tax Considerations” for further information regarding the consequences of our retention of net capital gains. 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 will 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. See “Regulation” and “Material U.S. Federal Income Tax Considerations.”
 
We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. See “Dividend Reinvestment Plan.”


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CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2006:
 
  •  on an actual basis; and
 
  •  on a pro forma as adjusted basis to reflect the issuance by us of shares of common stock in the formation transactions and the sale by us of      shares of common stock in this offering at an assumed initial public offering price of $      per share, after deducting the estimated underwriting discounts and estimated offering expenses payable by us.
 
This table assumes no exercise of the underwriters’ over-allotment option of shares. You should read this table together with “Use of Proceeds” and our balance sheet included elsewhere in this prospectus.
 
                 
    As of December 31, 2006  
          Pro Forma
 
    Actual     As Adjusted  
    (dollars in thousands)  
 
Cash and cash equivalents
  $ 13,769     $  
                 
Borrowings (SBA-guaranteed debentures payable)
  $ 45,100     $    
Equity:
               
Members’ equity and partners’ capital
    43,272          
Common stock, $0.01 par value per share; no shares authorized, no shares issued and outstanding, actual (     shares authorized;     shares issued and outstanding, as adjusted)
             
Additional paid-in capital
                  
                 
Total members’ equity and partners’ capital/stockholders’ equity
    43,272          
                 
Total capitalization
  $ 88,372     $  
                 


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PRO FORMA AS ADJUSTED BALANCE SHEET
 
The following unaudited pro forma as adjusted balance sheet is based on the historical combined balance sheet of Main Street Mezzanine Fund and the General Partner as of December 31, 2006, included elsewhere in this prospectus and pro forma as adjusted to give effect to the completion of the formation transactions and the initial public offering discussed in this prospectus.
 
                                         
    Main Street
                         
    Mezzanine Fund
          Pro Forma
          Pro Forma
 
    and General
          Main Street
          Main Street
 
    Partner Historical
          Mezzanine
          Mezzanine Fund
 
    Balance Sheet
    Adjustments
    Fund and
    Initial Public
    and General
 
    as of
    for Formation
    General
    Offering
    Partner
 
    December 31, 2006     Transactions(1)(2)     Partner(2)     Adjustments(3)     As Adjusted(4)  
    (dollars in thousands)  
 
Assets:
                                       
Investments at fair value
  $ 76,209     $     $ 76,209     $   —     $    
Investment — affiliate operating company
          18,000       18,000                
Accumulated unearned income
    (2,498 )           (2,498 )              
                                         
Total investments net of accumulated unearned income
    73,711       18,000       91,711                
Cash and cash equivalents
    13,769             13,769                  
Deferred financing costs, net
    1,333             1,333                
Interest receivable and other assets
    630             630                
                                         
Total Assets
  $ 89,443     $ 18,000     $ 107,443     $       $  
                                         
Liabilities and Members’ Equity and Partners’ Capital:
                                       
                                         
SBIC debentures
  $ 45,100     $     $ 45,100     $     $    
Interest payable
    855             855                
Accounts payable and other liabilities
    216             216                    
                                         
Total Liabilities
    46,171             46,171                
Members’ equity (General Partner) and partners’ capital contributions
    43,272       (43,272 )                    
Common stock, $0.01 par value per share;      shares authorized; and      shares issued and outstanding, for pro forma and pro forma as adjusted, respectively
                                 
Additional paid-in capital
          61,272       61,272                  
Accumulated undistributed gains / retained earnings
                               
                                         
Total members’ equity and partners’ capital / stockholders’ equity
    43,272       18,000       61,272                  
                                         
Total liabilities and members’ equity and partners’ capital /stockholders’ equity
  $ 89,443     $ 18,000     $ 107,443     $       $  
                                         
Shares outstanding
                                       
                                         
Net asset value per share
                                       
                                         
 
(1) The formation transactions consist of (i) the issuance of      shares of common stock representing $40.9 million in total value to the Limited Partners for all of their limited partnership interests, (ii) the issuance of      shares of common stock, representing $9.0 million in total value, to the members of the General Partner for all of their equity interests in the General Partner and (iii) the issuance of      shares of common stock, representing $18.0 million in total value, to the members of the Investment Adviser for all of their equity interests in the Investment Adviser.
 
(2) The acquisition of the Investment Adviser pursuant to the formation transactions is reflected in the pro forma balance sheet as an investment in affiliate operating company. The management activities of the Investment Adviser include investment management activities for both Main Street Mezzanine Fund and for Main Street Capital II. Therefore, the Investment Adviser does not conduct substantially all of its investment management activities for Main Street Mezzanine Fund.
 
(3) The “Initial Public Offering Adjustments” consist of the sale of      shares of common stock at $      per share in an initial public offering, net of underwriting discounts and offering expenses.
 
(4) “Pro Forma Main Street Mezzanine Fund and General Partner As Adjusted” reflects the historical combined balance sheet of Main Street Mezzanine Fund and the General Partner as of December 31, 2006, as adjusted for the completion of the formation transactions and the initial public offering.


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as-adjusted pro forma net asset value per share of our common stock immediately after the completion of this offering.
 
Our net asset value as of December 31, 2006, was $43.3 million. Our as-adjusted net asset value, as of December 31, 2006, would have been $      per share. We determined our as-adjusted net asset value per share before this offering by dividing the net asset value (total assets less total liabilities) as of December 31, 2006, by the number of shares of common stock outstanding as of December 31, 2006, after giving effect to the formation transactions occurring concurrently with this offering. See “Formation; Business Development Company and Regulated Investment Company Elections — Formation Transactions.”
 
After giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $      per share, the application of the net proceeds from this offering as set forth in “Use of Proceeds” and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as-adjusted pro forma net asset value as of           would have been approximately $     million, or $      per share. This represents an immediate increase in our net asset value per share of $      to existing stockholders and dilution in net asset value per share of $      to new investors who purchase shares in this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price per share
          $          
As-adjusted net asset value per share after giving effect to the formation transactions
  $            
Increase (decrease) in net asset value per share attributable to new investors in this offering
  $                  
                 
As-adjusted pro forma net asset value per share after this offering
          $          
                 
Dilution per share to new investors(1)
          $          
                 
 
 
(1) To the extent the underwriters’ over-allotment option is exercised, there will be further dilution to new investors.
 
The following table summarizes, as of December 31, 2006, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering assuming an initial public offering price of $      per share, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                                 
    Shares Purchased     Total Consideration     Average Price
       
    Number     Percent     Amount     Percent     per Share        
 
Existing stockholders(1)
                          %   $                       %   $                     
New investors
                                  $            
                                                 
Total
                    %   $                       %                
                                                 
 
 
(1) Reflects the formation transactions that we expect to occur concurrently with the closing of this offering.


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SELECTED FINANCIAL AND OTHER DATA
 
The selected financial and other data below reflects the combined operations of Main Street Mezzanine Fund and the General Partner. The selected financial data at December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006, have been derived from combined financial statements that have been audited by Grant Thornton LLP, an independent registered public accounting firm. The selected financial data at December 31, 2002, 2003 and 2004 and for the years ended December 31, 2002 and 2003 have been derived from unaudited combined financial statements. 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 notes thereto.
 
                                         
    Years Ended December 31,  
    2002(1)     2003     2004     2005     2006  
    (Unaudited)     (Unaudited)                    
    (dollars in thousands)  
 
Income statement data:
                                       
Investment income:
                                       
Total interest, fee and dividend income
  $ 431     $ 3,397     $ 4,452     $ 7,338     $ 9,013  
Interest from idle funds and other
    5       7       9       222       749  
                                         
Total investment income
    436       3,404       4,461       7,560       9,762  
                                         
Expenses:
                                       
Management fees to affiliate
    439       1,722       1,916       1,929       1,942  
Interest
          113       869       2,064       2,717  
Organizational expenses
    237                          
General and administrative
    42       135       184       197       198  
                                         
Total expenses
    718       1,970       2,969       4,190       4,857  
                                         
Net investment income
    (282 )     1,434       1,492       3,370       4,905  
Total net realized gain (loss) from investments
          (225 )     1,171       1,488       2,430  
                                         
Net realized income
    (282 )     1,209       2,663       4,858       7,335  
Total net change in unrealized appreciation (depreciation) from investments
          300       1,764       3,032       8,488  
                                         
Net increase (decrease) in members’ equity and partners’ capital resulting from operations
  $ (282 )   $ 1,509     $ 4,427     $ 7,890     $ 15,823  
                                         
 
                                         
    As of December 31,  
    2002     2003     2004     2005     2006  
    (Unaudited)     (Unaudited)     (Unaudited)              
    (dollars in thousands)  
 
Balance sheet data:
                                       
Assets:
                                       
Total investments at fair value
  $ 7,265     $ 19,920     $ 40,733     $ 53,795     $ 76,209  
Accumulated unearned income
    (1,500 )     (1,972 )     (2,761 )     (2,603 )     (2,498 )
                                         
Total investments net of accumulated unearned income
    5,765       17,948       37,972       51,192       73,711  
Cash and cash equivalents
    4,300       1,537       796       26,261       13,769  
Deferred financing costs, net of accumulated amortization
          416       984       1,442       1,333  
Interest receivable and other assets
    70       266       262       439       630  
                                         
Total assets
  $ 10,135     $ 20,167     $ 40,014     $ 79,334     $ 89,443  
                                         
Liabilities and members’ equity and partners’ capital:
                                       
SBIC debentures
  $     $ 5,000     $ 22,000     $ 45,100     $ 45,100  
Interest payable
          60       354       771       855  
Accounts payable and other liabilities
    59       139       422       194       216  
                                         
Total liabilities
    59       5,199       22,776       46,065       46,171  
Total members’ equity and partners’ capital
    10,076       14,968       17,238       33,269       43,272  
                                         
Total liabilities and members’ equity and partners’ capital
  $ 10,135     $ 20,167     $ 40,014     $ 79,334     $ 89,443  
                                         
Other data:
                                       
Weighted average effective yield on debt investments(2)
    18.9 %     16.2 %     15.3 %     15.3 %     15.0 %
Number of portfolio companies
    2       8       14       19       24  
Expense ratios (as percentage of average net assets):
                                       
Operating expenses
    14.2 %     12.3 %     13.7 %     9.0 %     5.5 %
Interest expense
          0.7 %     5.7 %     8.8 %     7.0 %
 
(1)  Represents the period from inception (June 30, 2002) through December 31, 2002.
 
(2)  Weighted average effective yield is calculated based upon our debt investments at the end of each period and includes amortization of deferred debt origination fees.
 


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this prospectus.
 
Overview
 
We are a specialty investment company focused on providing customized debt and equity financing to lower middle market companies that operate in diverse industries. Since 2002, we have funded approximately $96 million of debt and equity investments. See the “Portfolio Companies” section for further information on our current investments. We seek to fill the current financing gap for lower middle market businesses, which have limited access to financing from commercial banks and other traditional sources. The underserved nature of the lower middle market creates the opportunity for us to meet the financing requirements of lower middle market companies while also negotiating favorable transaction terms and equity participations.
 
Since commencing investment operations in 2002, our business has been conducted through Main Street Mezzanine Fund, which has invested primarily in secured debt instruments, equity investments, warrants and other securities of lower middle market companies based in the United States. Main Street Mezzanine Fund is licensed as an SBIC by the SBA. Main Street Mezzanine Management, LLC, or the General Partner, has been the general partner of Main Street Mezzanine Fund since its inception and Main Street Capital Partners, LLC, or the Investment Adviser, has acted as Main Street Mezzanine Fund’s manager and investment adviser. The Investment Adviser also acts as the manager and investment adviser to Main Street Capital II, LP, a separate SBIC which commenced its investment operations in January 2006. The Investment Adviser receives a management fee pursuant to separate management service agreements with both Main Street Mezzanine Fund and Main Street Capital II. Simultaneously with the consummation of this offering, we will acquire all of the outstanding equity interests of Main Street Mezzanine Fund, the General Partner and the Investment Adviser through the formation transactions. We will not acquire any interest in Main Street Capital II in connection with such transactions, but the Investment Adviser will continue to act as the manager and investment adviser to Main Street Capital II. For the year ending December 31, 2007, the Investment Advisor will be entitled to receive management fees from Main Street Capital II of approximately $3 million.
 
Our financial statements reflect the combined operations of Main Street Mezzanine Fund and the General Partner prior to the formation transactions described elsewhere in this prospectus.
 
Critical Accounting Policies
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions affecting amounts reported in the financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
 
Investment Valuation
 
The most significant estimate inherent in the preparation of our combined financial statements is the valuation of our investments and the related amounts of unrealized appreciation and depreciation. We are required to report our investments at fair value.


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As of December 31, 2006, approximately 85% of our total assets represented investments in portfolio companies valued at fair value. We base the fair value of our investments on the enterprise value of the portfolio companies in which we invest. The enterprise value is the 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 EBITDA, cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for determining enterprise value and 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 determining the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. We also generally prepare and analyze discounted cash flow models based on its projections of the future free cash flows of the business and industry derived capital costs. We review external events, including private mergers and acquisitions, and include these events in the enterprise valuation process.
 
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 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 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.
 
If there is adequate enterprise value to support the repayment of the debt, the fair value of our loan or debt security normally corresponds to cost plus accumulated unearned income unless the borrower’s condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including revenues, EBITDA and cash flow from operations of the portfolio company and other pertinent factors such as recent offers to purchase a portfolio company’s securities, financing events or other liquidation events.
 
In connection with the determination of the fair value of substantially all of our investments at December 31, 2006, we received valuation assistance from Duff & Phelps, LLC, an independent valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
Revenue Recognition
 
Interest and Dividend Income
 
Interest income, adjusted for amortization of premium and accretion of original issue discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments and write off any previously accrued and uncollected interest when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.
 
Fee Income
 
We may periodically provide services, including structuring and advisory services, to our portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions completed. We also receive upfront debt origination or closing fees in connection with our debt investments. Such upfront debt origination and closing fees are capitalized as unearned income on our balance sheet and amortized as additional interest income over the life of the debt investment.
 
Payment-in-Kind Interest (PIK)
 
While not significant to our total debt investment portfolio, we currently hold two loans in our portfolio that contain a PIK interest provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain RIC tax treatment, this non-cash source of income will need to be paid out to stockholders in the form of distributions,


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even though we have not yet collected the cash. We will stop accruing PIK interest and write off any accrued and uncollected interest when it is determined that PIK interest is no longer collectable.
 
Portfolio Composition
 
Investments principally consist of secured debt, equity warrants and direct equity investments in privately-held companies. The 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 original investment.
 
Summaries of the composition of our investment portfolio at cost and fair value as a percentage of total investments are shown in following table:
 
                 
    December 31,  
Cost:
  2005     2006  
 
First lien debt
    69.9 %     77.1 %
Second lien debt
    20.4       11.8  
Equity
    5.2       7.6  
Equity warrants
    4.5       3.5  
                 
      100.0 %     100.0 %
                 
 
                 
    December 31,  
Fair Value:
  2005     2006  
 
First lien debt
    62.7 %     63.9 %
Second lien debt
    18.5       9.7  
Equity
    6.8       12.6  
Equity warrants
    12.0       13.8  
                 
      100.0 %     100.0 %
                 
 
The following table shows the portfolio composition by geographic region at cost and fair value as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
 
                 
    December 31,  
Cost:
  2005     2006  
 
Southwest
    66.6 %     39.9 %
West
    14.3       24.8  
Northeast
    19.1       14.7  
Southeast
          13.8  
Midwest
          6.8  
                 
      100.0 %     100.0 %
                 
 
                 
    December 31,  
Fair value:
  2005     2006  
 
Southwest
    69.0 %     47.2 %
West
    12.7       20.8  
Northeast
    18.3       11.1  
Southeast
          13.1  
Midwest
          7.8  
                 
      100.0 %     100.0 %
                 


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Set forth below are tables showing the industry composition of our portfolio at cost and fair value as of December 31, 2005 and 2006 (excluding unearned income):
 
                 
    December 31,  
Cost:
  2005     2006  
 
Manufacturing
    %     18.4 %
Construction/industrial minerals
    8.8       11.7  
Distribution
    5.6       11.6  
Health care products
    11.5       8.2  
Transportation/logistics
    8.9       6.3  
Custom wood products
    8.5       6.3  
Restaurant
    7.7       5.3  
Electronics manufacturing
    6.3       5.2  
Health care services
    6.4       5.0  
Professional services
    5.9       4.8  
Retail
          4.3  
Building products
    5.2       3.9  
Consumer products
    4.1       3.2  
Equipment rental
    10.9       2.9  
Information services
    5.3       2.4  
Industrial services
    4.9       0.5  
                 
Total
    100.0 %     100.0 %
                 
 
                 
    December 31,  
Fair Value:
  2005     2006  
 
Manufacturing
    %     18.2 %
Construction/industrial minerals
    11.1       15.9  
Distribution
    5.1       12.3  
Health care products
    11.8       8.3  
Transportation/logistics
    9.8       5.6  
Restaurant
    8.1       5.3  
Custom wood products
    7.7       5.2  
Electronics manufacturing
    6.6       4.9  
Professional services
    4.0       4.4  
Health care services
    5.8       4.1  
Retail
          3.6  
Building products
    5.2       3.2  
Consumer products
    3.7       2.5  
Industrial services
    6.5       2.4  
Equipment rental
    9.8       2.3  
Information services
    4.8       1.8  
                 
Total
    100.0 %     100.0 %
                 
 
Our investments carry a number of risks including, but not limited to: (1) investing in lower middle market companies which have a limited operating history and financial resources; (2) 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, smaller companies.


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Portfolio Asset Quality
 
We utilize an investment rating system for our entire portfolio of investments. Investment Rating 1 is used for investments that have exceeded expectations and with respect to which return of capital invested, collection of all interest, and a substantial capital gain are expected. Investment Rating 2 is used for investments that are performing in accordance with or above expectations and with respect to which the equity component, if any, has the potential to realize capital gain. Investment Rating 3 is used for investments that are generally performing in accordance with expectations and with respect to which a full return of original capital invested and collection of all interest is expected, but no capital gain can currently be foreseen. Investment Rating 4 is used for investments that are underperforming, have the potential for a realized loss and require closer monitoring. Investment Rating 5 is used for investments performing significantly below expectations and where we expect a loss.
 
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December 31, 2005 and December 31, 2006:
 
                                 
    December 31, 2005     December 31, 2006  
    Investments at
    Percentage of
    Investments at
    Percentage of
 
Investment Rating
  Fair Value     Total Portfolio     Fair Value     Total Portfolio  
    (dollars in thousands)  
 
1
  $ 4,475       8.3 %   $ 31,686       41.6 %
2
    27,256       50.7       23,581       30.9  
3
    21,420       39.8       15,094       19.8  
4
    100       0.2       5,848       7.7  
5
    543       1.0              
                                 
Totals
  $ 53,794       100.0 %   $ 76,209       100.0 %
                                 
 
Based upon our investment rating system, the weighted average rating of our portfolio as of December 31, 2005 and December 31, 2006 was approximately 2.3 and 1.9, respectively. As of December 31, 2005 and 2006, other than one investment that had been impaired as of December 31, 2005, we had no debt investments that were delinquent on interest payments or which were otherwise on non-accrual status.
 
Discussion and Analysis of Results of Operations
 
Comparison of fiscal years ended December 31, 2006 and December 31, 2005
 
Investment Income
 
For the twelve months ended December 31, 2006, total investment income was $9.8 million, a $2.2 million, or 29.1%, increase over the $7.6 million of total investment income for the twelve months ended December 31, 2005. The increase was attributable to a $1.7 million increase in interest, fee and dividend income from investments and a $0.5 million increase in interest from idle funds. The increase in interest, fee and dividend income is primarily attributable to (i) higher average levels of outstanding debt investments, which was principally due to the closing of eight new debt investments totaling $24.7 million during 2006, partially offset by debt repayments in 2006, (ii) higher levels of fee income attributable to greater investment activity and (iii) the fact that several portfolio companies began paying dividends on our equity investments during the year. The increase in interest income from idle funds during 2006 was attributable to higher cash balances as a result of the final capital call by Main Street Mezzanine Fund from the Limited Partners in September 2005.
 
Expenses
 
For the twelve months ended December 31, 2006, total expenses increased by approximately $0.7 million, or 15.9%, to approximately $4.9 million from $4.2 million for the twelve months ended December 31, 2005. The increase in total expenses was primarily attributable to a $0.7 million increase in interest expense as a result of $45.1 million of SBIC Debentures being outstanding for the full year of 2006. The management fees


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paid to the Investment Adviser and other general and administrative expenses did not significantly change between 2006 and 2005.
 
Net Investment Income
 
As a result of the $2.2 million increase in total investment income as compared to the $0.7 million increase in total expenses, net investment income for the twelve months ended December 31, 2006, was $4.9 million, or a 45.5% increase, compared to net investment income of $3.4 million during the twelve months ended December 31, 2005.
 
Net Realized Income and Net Increase in Members’ Equity and Partners’ Capital Resulting From Operations
 
For the twelve months ended December 31, 2006, net realized gains from investments were $2.4 million, or a 63.3% increase over the $1.5 million of net realized gains during the twelve months ended December 31, 2005. The higher level of net realized gains during 2006 principally related to greater gains on the sale or redemption of equity investments in five portfolio companies, partially offset by the write off of one portfolio company investment.
 
The higher net realized gains in 2006 coupled with the higher net investment income during 2006 resulted in a $2.5 million, or 51.0%, increase, in the net realized income for the twelve months ended December 31, 2006 compared with the twelve months ended December 31, 2005.
 
During the twelve months ended December 31, 2006, we recorded a net change in unrealized appreciation in the amount of $8.5 million, or a 179.9% increase over the $3.0 million in net change in unrealized appreciation for the twelve months ended December 31, 2005. The higher 2006 unrealized appreciation included unrealized appreciation on 13 equity investments in portfolio companies partially offset by unrealized depreciation on four equity investments. The higher unrealized appreciation for 2006 was generally attributable to better economic performance by our portfolio companies, as adjusted for reclassification of prior year unrealized appreciation and depreciation into realized gains or losses on certain investments that were exited during 2006.
 
As a result of these events, our net increase in members’ equity and partners’ capital resulting from operations during the year ended December 31, 2006, was $15.8 million, or a 100.5% increase compared to a net increase in members’ equity and partners’ capital resulting from operations of $7.9 million during the year ended December 31, 2005.
 
Comparison of fiscal years ended December 31, 2005 and December 31, 2004
 
Investment Income
 
For the twelve months ended December 31, 2005, total investment income was $7.6 million, a $3.1 million, or 69.4%, increase over the $4.5 million of total investment income for the twelve months ended December 31, 2004. The increase was attributable to a $2.9 million increase in interest, fee and dividend income from investments and approximately a $0.2 million increase in interest from idle funds. The increase in interest, fee and dividend income is primarily attributable to (i) higher average levels of outstanding debt investments due to the closing of seven new debt investments in 2005 totaling $15.7 million, partially offset by debt repayments in 2005, (ii) higher levels of fee income attributable to greater investment activity and (iii) the fact that one portfolio company began paying dividends on our equity investment during the year 2005. The increase in interest income from idle funds during 2005 was attributable to higher cash balances as a result of the final capital call by Main Street Mezzanine Fund from the Limited Partners in September 2005.
 
Expenses
 
For the twelve months ended December 31, 2005, total expenses increased by approximately $1.2 million, or 41.1%, to approximately $4.2 million from $3.0 million for the twelve months ended December 31, 2004. The increase in total expenses was primarily attributable to a $1.2 million increase in interest expense as a


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result of $23.1 million of SBIC debenture borrowings drawn during 2005 in order to support new investment activities. The management fees paid to the Investment Adviser and other general and administrative expenses did not significantly change between 2005 and 2004.
 
Net Investment Income
 
As a result of the $3.1 million year-over-year increase in total investment income as compared to the $1.2 million year-over-year increase in total expenses, net investment income for the twelve months ended December 31, 2005, was $3.4 million, or a 125.9% increase, compared to net investment income of $1.5 million during the twelve months ended December 31, 2004.
 
Net Realized Income and Net Increase in Members’ Equity and Partners’ Capital Resulting From Operations
 
For the twelve months ended December 31, 2005, net realized gains from investments were $1.5 million, or a 27.1% increase over the $1.2 million of net realized gains during the twelve months ended December 31, 2004. The higher level of net realized gains during 2005 principally related to gains from the sale or redemption of equity investments in four portfolio companies.
 
The higher net realized gains in 2005 coupled with the higher net investment income during 2005 resulted in a $2.2 million or 82.5% increase in the net realized income for the twelve months ended December 31, 2005 compared with the twelve months ended December 31, 2004.
 
During the twelve months ended December 31, 2005, we recorded a net change in unrealized appreciation in the amount of $3.0 million, or a 71.8% increase over the $1.8 million net change in unrealized appreciation for the twelve months ended December 31, 2004. The higher 2005 unrealized appreciation included unrealized appreciation on eight equity investments in portfolio companies partially offset by unrealized depreciation on three equity investments. The higher unrealized appreciation for 2005 was generally attributable to better economic performance by our portfolio companies, as adjusted for reclassification of prior year unrealized appreciation and depreciation into realized gains or losses on certain investments that were exited during 2005.
 
As a result of these events, our net increase in members’ equity and partners’ capital resulting from operations during the year ended December 31, 2005, was $7.9 million, or a 78.2% increase compared to a net increase in members’ equity and partners’ capital resulting from operations of $4.4 million during the year ended December 31, 2004.
 
Liquidity and Capital Resources
 
Cash Flows
 
For the twelve months ended December 31, 2006, we experienced a net decrease in cash and cash equivalents in the amount of $12.5 million. During that period, we generated $4.2 million of cash from our operating activities primarily from net investment income. During 2006, we used $10.9 million in cash for investing activities. The 2006 net cash used for investing activities included the funding of new or follow on investments for a total of $28.1 million of invested capital, partially offset by $12.2 million in cash proceeds from repayments of debt investments and $5.0 million of cash proceeds from the redemption or sale of several equity investments. During 2006, we used $5.9 million in cash for financing activities which principally consisted of $6.2 million of cash distributions to partners (including a $0.5 million return of capital distribution) partially offset by additional partner contributions.
 
For the twelve months ended December 31, 2005, we experienced a net increase in cash and cash equivalents in the amount of $25.5 million. During that period, we generated $3.0 million of cash from our operating activities primarily from net investment income. During 2005, we used $8.2 million in cash for investing activities. The 2005 net cash used for investing activities principally included the funding of new or follow on investments for a total of $19.7 million of invested capital, partially offset by $10.3 million in cash proceeds from repayment of debt investments and $1.1 million of cash proceeds from the redemption and sale of several equity investments. During 2005, we generated $30.7 million in cash from financing activities,


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which principally consisted of the net proceeds from $23.1 million in additional SBIC debenture borrowings and $11.0 million in additional partner capital contributions, partially offset by $2.9 million of cash distributions to partners. The additional SBIC debenture borrowings and additional partner capital contributions during 2005 were used to support our investment activities.
 
For the twelve months ended December 31, 2004, we experienced a net decrease in cash and cash equivalents in the amount of $0.7 million. During that period, we generated $1.8 of cash from our operating activities primarily from net investment income. During 2004, we used $16.8 million in cash for investing activities. The 2004 net cash used for investing activities principally included the funding of new and follow on investments for a total of $22.2 million of invested capital, partially offset by $1.5 million in cash proceeds from repayment of debt investments and $3.9 million of cash proceeds from the redemption and sale of several equity investments and related derivative transactions. During 2004, we generated $14.2 million in cash from financing activities which principally consisted of the net proceeds from $17.0 million in additional SBIC debenture borrowings, partially offset by $2.3 million of cash distributions to partners. The additional SBIC debenture borrowings during 2004 were used to support our investment activities.
 
Capital Resources
 
As of December 31, 2006, we had approximately $13.8 million in cash and cash equivalents, and our net assets totaled $43.3 million.
 
We intend to generate additional cash primarily from net proceeds of this offering and any future offerings of securities, future borrowings as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock.
 
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders substantially all of our income except for certain net capital gains. In addition, as a business development company, we generally will be required to meet a coverage ratio of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200.0%. This requirement will limit the amount that we may borrow. Upon the receipt of the net proceeds from this offering, we will be in compliance with the asset coverage ratio under the 1940 Act.
 
We anticipate that we will continue to fund our investment activities through a combination of debt and additional equity capital. Due to Main Street Mezzanine Fund’s status as a licensed SBIC, it has the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which generally is the amount raised from private investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by the SBA issued by a single SBIC or group of SBICs under common control as of December 31, 2006, was $127.2 million (which amount is subject to increase on an annual basis based on cost of living index increases).
 
Because of our and our investment team’s affiliations with Main Street Capital II, a separate SBIC which commenced investment operations in January 2006, Main Street Mezzanine Fund and Main Street Capital II may be deemed to be a group of SBICs under common control. Thus, the dollar amount of SBA-guaranteed debentures that can be issued collectively by Main Street Mezzanine Fund and Main Street Capital II may be limited to $127.2 million, absent relief from the SBA. Currently, we, through Main Street Mezzanine Fund, do not intend to borrow SBA-guaranteed indebtedness in excess of $55.0 million based upon Main Street Mezzanine Fund’s existing equity capital.
 
Debentures guaranteed by the SBA have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a 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.


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Those pre-payment penalties no longer apply to debentures issued after September 1, 2006. On December 31, 2006, Main Street Mezzanine Fund had $45.1 million of outstanding indebtedness guaranteed by the SBA, which carried an average fixed interest rate of 5.7%. Main Street Mezzanine Fund also had conditional commitments from the SBA for an additional $9.9 million of debentures as of December 31, 2006, which it drew down in the first quarter of 2007.
 
Recently Issued Accounting Standards
 
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) Share Based Payment (SFAS 123R). Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted SFAS 123R effective January 1, 2006 and there was no impact on our combined financial statements.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method of reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement did not have a material effect on our combined financial statements.
 
In September 2006, The FASB issued SFAS No. 157, Fair Value Measurements. FASB Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addressed how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. FASB Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided that financial statements for that fiscal year, including any interim periods within that fiscal year, have not been issued. We are currently evaluating the impact, if any, that the implementation of SFAS No. 157 will have on our results of operations or financial condition.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108, which became effective beginning on January 1, 2007, provides guidance on the consideration of the effects of prior periods misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires an entity to evaluate the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on current year financial statements. If a misstatement is material to the current year financial statements, the prior year financial statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current period filings. Management has evaluated the impact of adopting SAB 108. The adoption of SAB 108 did not have a material impact on our combined financial statements.
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of


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assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. SFAS 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the combined balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS 157. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. At this time, we are evaluating the implications of SFAS 159, and its impact on our financial statements has not yet been determined.
 
Off-Balance Sheet Arrangements
 
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 credit risk in excess of the amount recognized in the balance sheet. However, as of December 31, 2006, we had no unused firm commitments to extend credit to our portfolio companies, which would not be reflected on our balance sheet.
 
Contractual Obligations
 
As of December 31, 2006, our future fixed commitments for cash payments on contractual obligations for each of the next five years and thereafter are as follows:
 
                                                         
                                        2012 and
 
    Total     2007     2008     2009     2010     2011     Thereafter  
    (dollars in thousands)  
 
SBIC debentures payable
  $ 45,100     $     $     $     $     $     $ 45,100  
Interest due on SBIC debentures
    21,337       2,558       2,565       2,558       2,558       2,558       8,540  
                                                         
Total
  $ 66,437     $ 2,558     $ 2,565     $ 2,558     $ 2,558     $ 2,558     $ 53,640  
                                                         
 
Main Street Mezzanine Fund is obligated for payments under the management services agreement with the Investment Adviser as more fully described in “Formation; Business Development Company and Regulated Investment Company Elections” and in the Notes to Combined Financial Statements elsewhere in this prospectus. The management fees payable under such management services agreement are approximately $2 million for the year ending December 31, 2007. Upon consummation of the formation transactions described in this prospectus, the Investment Adviser will become our wholly-owned subsidiary.
 
Quantitative and Qualitative Disclosure about Market Risk
 
We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the valuation of our investment portfolio. 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 and limits by means of reliable administrative and information systems and other policies and programs. 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, 2006, approximately 4.6% of our debt investment portfolio (at cost) bore interest at floating rates. All of our current outstanding indebtedness is subject to fixed interest rates for the 10-year life of such debt. At December 31, 2006 and 2005, based on our applicable levels of floating-rate debt investments, a 1.0% change in interest rates would not have a material effect on our level of interest income from debt investments.


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Related Party Transactions
 
Main Street Mezzanine Fund co-invested with Main Street Capital II in several investments during 2006. Main Street Capital II and Main Street Mezzanine Fund are both managed by the Investment Adviser and the general partners for Main Street Mezzanine Fund and Main Street Capital II are under common control. Main Street Capital II is an SBIC with similar investment objectives to Main Street Mezzanine Fund and which began its investment operations in January 2006. The co-investments among the two funds were made at the same time and on the same terms and conditions. The co-investments were made in accordance with the Investment Adviser’s conflicts policy and in accordance with the applicable SBIC conflict of interest regulations.
 
Main Street Mezzanine Fund paid $1.9 million in management fees to the Investment Adviser for each of the years ended December 31, 2004, 2005 and 2006. The Investment Adviser is an affiliate of Main Street Mezzanine Fund as it is commonly controlled by principals who also control the General Partner.
 
The principals of the General Partner, management of the Investment Adviser, and their affiliates, collectively have invested $3.6 million in the limited partnership interests of Main Street Mezzanine Fund, representing approximately 13.5% of such limited partner interests.


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SENIOR SECURITIES
 
Information about our senior securities is shown in the following table as of December 31 for the years indicated in the table, unless otherwise noted. Grant Thornton LLP’s report on the senior securities table as of December 31, 2006, is attached as an exhibit to the registration statement of which this prospectus is a part.
 
                                 
    Total Amount
                   
    Outstanding
          Involuntary
       
    Exclusive of
    Asset
    Liquidating
    Average
 
    Treasury
    Coverage
    Preference
    Market Value
 
Class and Year
  Securities(1)     per Unit(2)     per Unit(3)     per Unit(4)  
    (dollars in thousands)                    
 
SBIC debentures payable
                               
2003
  $ 5,000     $ 3,994             N/A  
2004
    22,000       1,784             N/A  
2005
    45,100       1,738             N/A  
2006
    45,100       1,959             N/A  
 
 
(1) Total amount of each class of senior securities outstanding at the end of the period presented.
 
(2) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
 
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “—” indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities.
 
(4) Not applicable because senior securities are not registered for public trading.


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BUSINESS
 
General
 
Main Street
 
We are a specialty investment company focused on providing customized financing solutions to lower middle market companies, which we define as companies with annual revenues between $10.0 million and $100.0 million. Our 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-related investments. Our investments generally range in size from $2.0 million to $15.0 million. For larger investments in this range, we have generally secured co-investments from other institutional investors due to our historical regulatory size limits. Since 2002, we have funded approximately $96 million in debt and equity investments. 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 typically seek to partner 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) taking first priority liens on assets; and (iii) providing equity incentives for management teams of our portfolio companies. We seek to avoid competing with other capital providers for transactions because we believe competitive transactions often have execution risks and can result in potential conflicts among creditors and lower returns due to more aggressive valuation multiples and higher leverage ratios. In that regard, based upon information provided to us by our portfolio companies (which we have not independently verified), our portfolio had a total debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio of approximately 3.6 to 1.0 and a total EBITDA to interest expense ratio of 2.4 to 1.0. In calculating these ratios, we included all portfolio company debt as of December 31, 2006, including debt junior to our debt investments. If we excluded debt junior to our debt investments in calculating these ratios, the ratios would be 3.2 to 1.0 and 2.6 to 1.0, respectively. In addition, over 85.0% of our debt investments at cost were secured by first priority liens on the assets of our portfolio companies as of December 31, 2006. At December 31, 2006, our average fully diluted ownership in portfolio companies where we have an equity warrant and/or direct equity investment was approximately 24%.
 
As of December 31, 2006, we had debt and equity investments in 24 portfolio companies with an aggregate fair market value of $76.2 million and the weighted average effective yield on all of our debt investments was approximately 15%. Weighted effective average yields are computed using the effective interest rates for all debt investments at December 31, 2006, including amortization of deferred debt origination fees and original issue discount. For the year ended December 31, 2006, the weighted average effective yield on all of our outstanding debt investments was 14.1%, excluding the impact of the deferred debt origination fee amortization.
 
As of April 30, 2007, we have received executed non-binding term sheets for approximately $10.1 million of investment commitments in prospective portfolio companies. These proposed investments are subject to the completion of our due diligence and approval process as well as negotiation of definitive agreements with the prospective portfolio companies and, as a result, may not result in completed investments.
 
Why We Are Going Public
 
In 2002, Main Street Mezzanine Fund raised its initial capital, obtained its license to operate as an SBIC and began investing its capital. While we intend to continue to operate Main Street Mezzanine Fund as an SBIC, subject to SBA approval, and to utilize lower cost capital we can access through the SBA’s SBIC Debenture Program, which we refer to as SBA leverage, to partially fund our investment portfolio, we believe


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that being a public company will offer certain key advantages for our business that would not be available to us if we continue to operate as a private SBIC. These key advantages include:
 
  •  Permanent Capital Base and Longer Investment Horizon.  Unlike traditional private investment vehicles such as SBICs, which typically are finite-life limited partnerships with a limited investment horizon, we will operate as a corporation with a perpetual life and no requirement to return capital to investors. We believe raising separate pools of capital with finite investment terms unreasonably diverts management’s time from its basic investment activities. We believe that our new structure will allow us to make investments with a longer investment horizon and to better control the timing and method of exiting our investments, which we believe will enhance our returns.
 
  •  Investment Efficiency.  SBICs are subject to a number of regulatory restrictions on their investment activities, including limits on the size of individual investments and the size and types of companies in which they are permitted to invest. Subsequent to the consummation of this offering, we may make investments through Main Street Capital Corporation without these restrictions, allowing us to pursue certain attractive investment opportunities that we previously were required to forgo. In addition, as a public company with more capital available, we will not be required to secure co-investments from non-affiliated investors for investments exceeding our historical regulatory size limits.
 
  •  Greater Access to Capital.  As a public company, we expect to have access to greater amounts and types of capital that we can use to grow our investment portfolio. In addition, we should be able to obtain additional capital in a more efficient and cost effective manner than if we were to remain a private entity. We will also have the ability to spread our overhead and operating costs over a larger capital base.
 
  •  Key Personnel Retention.  Retaining and providing proper incentives to key personnel over longer periods of time is critical to the success of our operations. As a public company, we will have the ability to provide competitive rates of compensation, including equity incentives to current and future employees, to further align their economic interests with our stockholders.
 
Market Opportunity
 
Our business is to provide customized financing solutions to lower middle market companies, which we define as companies with annual revenues between $10.0 million and $100.0 million. Based on a search of the Dun and Bradstreet database completed on April 17, 2007, we believe there are approximately 68,000 companies in the United States with revenues between $10.0 million and $100.0 million. We believe many lower middle market companies are unable to obtain sufficient financing from traditional financing sources. Due to evolving market trends, traditional lenders and other sources of private investment capital have focused their efforts on larger companies and transactions. We believe this dynamic is attributable to several factors, including the consolidation of commercial banks and the aggregation of private investment funds into larger pools of capital that are focused on larger investments. In addition, many current funding sources do not have relevant experience in dealing with some of the unique business issues facing lower middle market companies. Consequently, we believe that the market for lower middle market investments, particularly those investments of less than $10.0 million, is currently underserved and less competitive. This market situation creates the opportunity for us to meet the financing requirements of the lower middle market companies while also negotiating favorable transaction terms and equity participations.
 
Business Strategy
 
Our 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-related investments. We have adopted the following business strategies to achieve our investment objective:
 
  •  Delivering Customized Financing Solutions.  We believe our ability to provide a broad range of customized financing solutions to lower middle market companies sets us apart from other capital providers that focus on providing a limited number of financing solutions. We offer to our portfolio


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  companies customized debt financing solutions with equity components that are tailored to the facts and circumstances of each situation. Our ability to invest across a company’s capital structure, from senior secured loans to subordinated debt to equity securities, allows us to offer our portfolio companies a comprehensive suite of financing solutions, or “one-stop” financing.
 
  •  Focusing on Established Companies in the Lower Middle Market.  We generally invest in companies with established market positions, experienced management teams and proven revenue streams. Those companies generally possess better risk-adjusted return profiles than newer companies that are building management or are in the early stages of building a revenue base. In addition, established lower middle market companies generally provide opportunities for capital appreciation.
 
  •  Leveraging the Skills and Experience of Our Investment Team.  Our investment team has over 35 years of combined experience in lending to and investing in lower middle market companies. The members of our investment team have broad investment backgrounds, with prior experience at private investment funds, investment banks and other financial services companies, and currently include five certified public accountants and one chartered financial analyst. The expertise of our investment team in analyzing, valuing, structuring, negotiating and closing transactions should provide us with competitive advantages by allowing us to consider customized financing solutions and non-traditional and complex structures.
 
  •  Maintaining Portfolio Diversification.  We seek to maintain a portfolio of investments that is appropriately diversified among various companies, industries, geographic regions and end markets. This portfolio diversity is intended to mitigate the potential effects of negative economic events for particular companies, regions and industries.
 
  •  Capitalizing on Strong Transaction Sourcing Network.  Our investment team seeks to leverage its extensive network of referral sources for investments in lower middle market companies developed over the last ten years. Since 2002, we have originated and been the lead investor in over 25 principal investment transactions and have developed a reputation in our marketplace as a responsive, efficient and reliable source of financing, which has created growing proprietary deal flow for us.
 
  •  Benefiting from Lower Cost of Capital.  Main Street Mezzanine Fund’s SBIC license has allowed us to issue SBA-guaranteed debentures. SBA-guaranteed debentures carry long-term fixed rates that are generally lower than rates on comparable bank and public debt. Because lower cost SBA leverage is, and will continue to be, a significant part of a capital base, our relative cost of debt capital should be lower than many of our competitors.
 
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 opportunities for us. However, not all of these criteria were, or will be, met in connection with each of our investments.
 
  •  Proven Management Team with Meaningful Financial Commitment.  We look for operationally-oriented management with direct industry experience and a successful track record. In addition, we expect the management team of each portfolio company to have meaningful equity ownership in the portfolio company to better align our respective economic interests. We believe management teams with these attributes are more likely to manage the companies in a manner that protects our debt investment and enhances the value of our equity investment.
 
  •  Established Companies with Positive Cash Flow.  We generally seek to invest in established companies with sound historical financial performance. We typically focus on companies that have historically generated EBITDA of greater than $1.0 million and commensurate levels of free cash flow. We generally do not intend to invest in start-up companies or companies with speculative business plans.


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  •  Defensible Competitive Advantages/Favorable Industry Position.  We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers to entry, which may help to protect their market position and profitability.
 
  •  Exit Alternatives.  We expect that the primary means by which we exit our debt investments will be through the repayment of our investment from internally generated cash flow and/or refinancing. In addition, we seek to invest in companies whose business models and expected future cash flows may provide alternate methods of repaying our investment, such as through a strategic acquisition by other industry participants or a recapitalization.
 
Investments
 
Debt Investments
 
Historically, we have made our 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 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 between 12.0% and 14.0% per annum, payable currently in cash. In some instances, we have provided floating interest rates for a small portion of a single tranche debt security. In addition, certain 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 PIK interest. We typically structure our 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 debt investment will be collateralized by a first lien on substantially all the assets of the portfolio company. As of December 31, 2006, over 85.0% of our debt investments were secured by first priority liens on the assets of the portfolio company and the rest of our debt investments were secured on a second lien basis.
 
While we will continue to focus on single tranche debt investments, we also anticipate structuring some of our future 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. Also, in some cases, our mezzanine loans may be collateralized by a subordinated lien on some or all of the assets of the borrower. Typically, our mezzanine loans will have maturities of three to five years. We will generally target fixed interest rates of 12.0% to 14.0%, payable currently in cash for our mezzanine loan investments with higher targeted total returns from equity warrants, direct equity investments or PIK interest.
 
In addition to seeking a senior lien position in the capital structure of our portfolio companies, we seek to limit the downside potential of our investments by negotiating covenants that are designed to protect our investments while affording our portfolio companies as much flexibility in managing their businesses as possible. 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, equity pledges, personal guaranties, where appropriate, and put rights. In addition, we typically seek board seats or observation rights in all of our portfolio companies.
 
Warrants
 
In connection with our debt investments, we have historically received equity warrants to establish or increase a minority equity interest in the portfolio company. Warrants we receive in connection with a debt investment typically require only a nominal cost to exercise, and thus, as a 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


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unsecured put rights, or rights to sell such securities back to the 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.
 
Direct Equity Investments
 
We also will seek to make direct equity investments in situations where appropriate to align our interests with key management and stockholders, and to allow for some participation in the appreciation in enterprise values of our 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 portfolio companies. We seek to maintain fully-diluted equity positions in our portfolio companies of 5.0% to 50.0%, and may have controlling 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 Messrs. Foster and Reppert. Our investment strategy involves a “team” approach whereby potential transactions are screened by members of our investment team before being presented to the investment committee. Our investment committee meets at least once a week but also meets on an as needed basis depending on transaction volume. Our investment committee generally categorizes our investment process into seven distinct stages:
 
Deal Generation/Origination
 
Deal generation and origination is maximized through long-standing and extensive relationships with industry references, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and accountants, as well as current and former portfolio companies and investors. Our investment team has focused its investment efforts in prior investment funds on lower middle market companies. We have developed a reputation as a knowledgeable, reliable and active source of capital and assistance in this sector. This focus and level of historical deal activity in the lower middle market has led to deal flow momentum for our investment activities. In addition, we anticipate that we will obtain leads from our greater visibility as a public company.
 
Screening
 
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 factors:
 
  •  A comprehensive financial model based on quantitative analysis of historical financial performance, projections and pro forma adjustments to determine the estimated internal rate of return.
 
  •  A brief industry and market analysis; importing direct industry expertise from other portfolio companies or investors.
 
  •  Preliminary qualitative analysis of the management team’s competencies and backgrounds.
 
  •  Potential investment structures and pricing terms.
 
  •  Regulatory compliance.
 
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.


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Term Sheet
 
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, it generally does require an expense deposit to be paid 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 and underwriting process.
 
Due Diligence
 
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:
 
  •  Initial or additional site visits with management and key personnel;
 
  •  Detailed review of historical and projected financial statements;
 
  •  Operational reviews and analysis;
 
  •  Interviews with customers and suppliers;
 
  •  Detailed evaluation of company management, including background checks;
 
  •  Review of material contracts;
 
  •  In-depth industry, market, and strategy analysis;
 
  •  Review by legal, environmental or other consultants, if applicable; and
 
  •  Financial sponsor diligence, if applicable, including portfolio company and other reference checks.
 
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.
 
Document and Close
 
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:
 
  •  Company history and overview;
 
  •  Transaction overview, history and rationale, including an analysis of transaction strengths and risks;
 
  •  Analysis of key customers and suppliers and key contracts;
 
  •  A working capital analysis;
 
  •  An analysis of the company’s business strategy;
 
  •  A management background check and assessment;
 
  •  Third party accounting, legal, environmental or other due diligence findings;
 
  •  Investment structure and expected returns;
 
  •  Anticipated sources of repayment and potential exit strategies;
 
  •  Pro forma capitalization and ownership;
 
  •  An analysis of historical financial results and key financial ratios;


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  •  Sensitivities to management’s financial projections; and
 
  •  Detailed reconciliations of historical to pro forma results.
 
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 unanimous vote of the members of the investment committee. Upon receipt of transaction approval, we will re-confirm regulatory company compliance, process and finalize all required legal documents, and fund the investment.
 
Post-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 its 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 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 investment rating system to characterize and monitor our expected level of returns on each of our investments.
 
  •  Investment Rating 1 is used for investments that exceed expectations and with respect to which return of capital invested, collection of all interest, and a substantial capital gain are expected.
 
  •  Investment Rating 2 is used for investments that are performing in accordance with or above expectations and with respect to which the equity component, if any, has the potential to realize capital gain.
 
  •  Investment Rating 3 is used for investments that are generally performing in accordance with expectations and with respect to which a full return of original capital invested and collection of all interest is expected, but no capital gain can currently be foreseen.
 
  •  Investment Rating 4 is used for investments that are underperforming, have the potential for a realized loss and require closer monitoring.
 
  •  Investment Rating 5 is used for investments performing significantly below expectations and where we expect a loss.
 
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December 31, 2005 and December 31, 2006:
 
                                 
    December 31, 2005     December 31, 2006  
    Investments at
    Percentage of
    Investments at
    Percentage of
 
Investment Rating
  Fair Value     Total Portfolio     Fair Value     Total Portfolio  
    (dollars in thousands)  
 
1
  $ 4,475       8.3 %   $ 31,686       41.6 %
2
    27,256       50.7       23,581       30.9  
3
    21,420       39.8       15,094       19.8  
4
    100       0.2       5,848       7.7  
5
    543       1.0              
                                 
Totals
  $ 53,794       100.0 %   $ 76,209       100.0 %
                                 


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Based upon our investment rating system, the weighted average rating of our portfolio as of December 31, 2005 and December 31, 2006 was approximately 2.3 and 1.9, respectively. As of December 31, 2005 and 2006, other than one investment that had been impaired as of December 31, 2005, we had no debt investments that were delinquent on interest payments or which were otherwise on non-accrual status.
 
Exit Strategies/Refinancing
 
While we generally exit from most investments through the successful refinancing or repayment of our debt and redemption of our equity positions, we typically assist our portfolio companies in developing and planning refinancing or 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 or refinancing.
 
Determination of Net Asset Value and Valuation Process
 
We will determine the net asset value per share of our common stock on a quarterly basis. The net asset value per share is equal to the fair value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding.
 
Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value as is determined in good faith by the Board of Directors. Our business plan calls for us to invest primarily in illiquid securities issued by private companies and/or thinly-traded public companies. These investments may be subject to restrictions on resale and generally have no established trading market. As a result, we will value substantially all of our portfolio investments at fair value as determined in good faith by our Board of Directors pursuant to a valuation policy and a consistently applied valuation process. We base the fair value of our investments on the enterprise value of the portfolio companies in which we invest. The enterprise value is the 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 EBITDA, cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for determining enterprise value and 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 determining the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. We also generally prepare and analyze discounted cash flow models based on its projections of the future free cash flows of the business and industry derived capital costs. We review external events, including private mergers and acquisitions, and include these events in the enterprise valuation process.
 
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 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 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.
 
If there is adequate enterprise value to support the repayment of the debt, the fair value of our loan or debt security normally corresponds to cost plus accumulated unearned income unless the borrower’s condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including revenues, EBITDA and cash flow from operations of the portfolio company and other pertinent factors such as recent offers to purchase a portfolio company’s securities, financing events or other liquidation events.
 
Our Board of Directors will undertake a multi-step valuation process each quarter in connection with determining the fair value of our investments:
 
  •  Our quarterly valuation process will begin with each portfolio company or investment being initially valued by the deal team responsible for the portfolio investment;
 
  •  Preliminary valuation conclusions will then be reviewed and discussed with senior management;


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  •  An independent valuation firm engaged by the Board of Directors will review these preliminary valuations on a selected basis;
 
  •  The Audit Committee of our Board of Directors will review the preliminary valuations, and the deal team and the independent valuation firm will respond and supplement the preliminary valuation to reflect any comments provided by the Audit Committee; and
 
  •  The Board of Directors will discuss valuations and will determine the fair value of each investment in our portfolio in good faith.
 
In connection with our valuations of investments as of December 31, 2006, we received valuation assistance from Duff & Phelps, LLC, an independent valuation firm, which consisted of agreed upon procedures that we identified and asked them to perform.
 
Determination of fair values 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.
 
Managerial Assistance
 
As a business development company, we will offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance will typically involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services.
 
Competition
 
We compete for investments with a number of business development companies and investment funds (including private equity funds, mezzanine funds and other SBICs), as well as traditional financial services companies such as commercial banks and other sources of financing. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including making investments in lower middle market companies. As a result of these new entrants, competition for investment opportunities in lower middle market companies may intensify. 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 willingness to make smaller investments, 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.”


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Employees
 
As of December 31, 2006, we had 10 employees, including investment and portfolio management professionals, operations professionals and administrative staff. Upon the completion of this offering, we intend to hire additional investment professionals as well as additional administrative personnel.
 
Properties
 
Our executive office is located at 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056. We believe that our current office facilities are adequate for our business as we intend to conduct it.
 
Legal Proceedings
 
Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.


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PORTFOLIO COMPANIES
 
The following table sets forth certain information as of December 31, 2006, for each portfolio company in which we had a debt or equity investment. Other than these investments, our only formal relationships with our portfolio companies are the managerial assistance ancillary to our investments and the board observer or participation rights we may receive.
 
                             
            Percentage
           
            of Fully
        Fair
 
Name and Address
  Nature of
  Title of Securities
  Diluted
  Cost of
    Value of
 
of Portfolio Company
 
Principal Business
 
Held by Us
  Equity Held   Investment(1)     Investment  
 
All Hose & Specialty, LLC
5425 US Highway 90 East
Broussard, LA 70518
  Distributor of industrial hoses   11% Secured Debt
11% Note Receivable
LLC Interests
 

15%
  $ 2,600,000
34,821
80,357
    $ 2,600,000
441,000
1,600,000
 
                             
                $ 2,715,178     $ 4,641,000  
 
 
American Sensor Technologies, Inc.
450 Clark Drive
Mt. Olive, NJ 07828
  Manufacturer of commercial/industrial sensors   9% Secured Debt
13% Secured Debt
Warrants to Purchase
Common Stock
 


20%
  $ 200,000
3,000,000

50,000
    $ 200,000
3,000,000

575,000
 
                             
                $ 3,250,000     $ 3,775,000  
 
 
Café Brazil, LLC
202 W Main Street,
Suite No. 100
Allen, Texas 75002
  Casual restaurant chain   12% Secured Debt
Warrants to Purchase
LLC Interests
 

41%
  $ 3,150,000

41,837
    $ 3,150,000

900,000
 
                             
                $ 3,191,837     $ 4,050,000  
 
 
Carlton Global Resources, LLC
20021 Valley Blvd.
Suite B
Tehachapi, CA 93561
  Industrial minerals   13% Secured Debt
LLC Interests
 
8.5%
  $ 3,600,000
400,000
    $ 3,600,000
400,000
 
                             
                $ 4,000,000     $ 4,000,000  
 
 
CBT Nuggets, LLC
44 Club Rd Suite 150
Eugene, OR 97401
  Produces and sells IT certification training videos   Prime Plus 2% Debt
14% Secured Debt
LLC Interests
Warrants to Purchase
LLC Interests
 

29.1%

10.5%
  $ 660,000
1,860,000
432,000

72,000
    $ 660,000
1,860,000
610,000

200,000
 
                             
                $ 3,024,000     $ 3,330,000  
 
 
East Teak Fine Hardwoods, Inc.
4950 Westgrove
Suite 100
Dallas, TX 75248
  Exotic hardwood
products
  13% Current/5.5% PIK
Secured Debt
Common Stock
 

3.3%
 
$
4,394,763
130,000
   
$
4,394,763
335,000
 
                             
                $ 4,524,763     $ 4,729,763  
 
 
Hawthorne Customs & Dispatch
Services, LLC
9370 Wallisville Road
Houston, Texas 77013
  Provides “one stop”
logistics services
  13% Secured Debt
LLC Interests
Warrants to Purchase
LLC Interests
 
27.8%

16.5%
  $ 1,650,000
375,000

37,500
    $ 1,650,000
950,000

500,000
 
                             
                $ 2,062,500     $ 3,100,000  
 
 
Hayden Acquisition, LLC
7801 Tangerine Road
Rillito, AZ 85654
  Manufacturer of utility structures   12% Secured Debt     $ 2,420,000     $ 2,420,000  
 
 
Houston Plating & Coatings, LLC
1315 Georgia
South Houston, TX 77587
  Plating and industrial
coating services
  Prime Plus 2% Secured
Debt
LLC Interests
 

11.8%
 
$
100,000
$210,000
   
$
100,000
$1,710,000
 
                             
                $ 310,000     $ 1,810,000  
 
 


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            Percentage
           
            of Fully
        Fair
 
Name and Address
  Nature of
  Title of Securities
  Diluted
  Cost of
    Value of
 
of Portfolio Company
 
Principal Business
 
Held by Us
  Equity Held   Investment(1)     Investment  
 
Jensen Jewelers of Idaho, LLC
130 2nd Avenue North
Twin Falls, ID 83301
  Retail jewelry   Prime Plus 2% Secured
Debt
13% Current/6% PIK
Secured Debt
LLC Interests
 



25.1%
 
$
1,340,000

$1,008,000
$376,000
   
$
1,340,000

$1,008,000
$376,000
 
                             
                $ 2,724,000     $ 2,724,000  
 
 
KBK Industries, LLC
East Highway 96
Rush Center, KS 67575
  Specialty manufacturer
of oilfield and
industrial products
  14% Secured Debt
LLC Interests
Warrants to Purchase
LLC Interests(2)
 
11.9%

25.7%
  $ 3,937,500
$187,500

$150,000
    $ 3,937,500
$625,000

$1,372,500
 
                             
                $ 4,275,000     $ 5,935,000  
 
 
Laurus Healthcare, LP
10000 Memorial Drive
Suite 540
Houston, TX 77024
  Healthcare facilities   13% Secured Debt
Warrants to Purchase
LP Interests
 

18.2%
  $ 3,010,000

$105,000
    $ 3,010,000

$105,000
 
                             
                $ 3,115,000     $ 3,115,000  
 
 
Magna Card, Inc.
35 New Plant Court
Owings Mills, MD 21117
  Wholesale/consumer magnetic products   12% Secured Debt
Warrants Purchase
Common Stock
 

35.8%
  $ 1,900,000

$100,000
    $ 1,900,000

 
                             
                $ 2,000,000     $ 1,900,000  
 
 
National Trench Safety, LLC
15955 W. Hardy Road
Suite 100
Houston, TX 77060
  Trench and traffic safety equipment   LLC Interests   15.8%   $ 1,792,308     $ 1,792,308  
 
 
Pulse Systems, LLC
4090 J Nelson
Concord, CA 94520
  Manufacturer of components for medical devices   14% Secured Debt
Warrants to Purchase
LLC Interests
 

6.6%
  $ 2,747,271

$118,000
    $ 2,747,271

$400,000
 
                             
                $ 2,865,271     $ 3,147,271  
 
 
Quest Design & Production, LLC
10323 Greenland Ct.
Stafford, TX 77477
  Design and fabrication of custom displays   12% Secured Debt
Warrants to Purchase
LLC Interests
 

20%
  $ 3,900,000

$40,000
    $ 3,900,000

$40,000
 
                             
                $ 3,940,000     $ 3,940,000  
 
 
TA Acquisition Group, LP
18601 F.M. 969
Manor, TX 78653
  Processor of construction aggregates   12% Secured Debt
LP Interest
Warrants to Purchase
LP Interests
 
18.3%

18.3%
  $ 2,860,000
$357,500

$82,500
    $ 2,860,000
$2,630,000

$2,650,000
 
                             
                $ 3,300,000     $ 8,140,000  
 
 
Technical Innovations, LLC
20714 Highway 36
Brazoria, Texas 77422
  Manufacturer of specialty cutting tools and punches   12% Secured Debt
LLC Interests
Warrants to Purchase
LLC Interests
 
1.6%

57%
  $ 1,850,000
$15,000

$400,000
    $ 1,850,000
$35,000

$1,285,000
 
                             
                $ 2,265,000     $ 3,170,000  
 
 
Transportation General, Inc.
65 Industry Drive
West Haven, CT 06516
  Taxicab/transportation services   13% Secured Debt
Warrants to Purchase
Common Stock
 

24%
  $ 3,900,000

$70,000
    $ 3,900,000

$395,000
 
                             
                $ 3,970,000     $ 4,295,000  
 
 
Turbine Air Systems, Ltd.
4300 Dixie Drive
Houston TX 77021
  Commercial/industrial chilling systems   12% Secured Debt
Warrant to Purchase
Equity Interests
 

5%
  $ 1,000,000

96,666
    $ 1,000,000

$96,666
 
                             
                $ 1,096,666     $ 1,096,666  
 
 

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            Percentage
           
            of Fully
        Fair
 
Name and Address
  Nature of
  Title of Securities
  Diluted
  Cost of
    Value of
 
of Portfolio Company
 
Principal Business
 
Held by Us
  Equity Held   Investment(1)     Investment  
 
Wicks ’N More, LLC
7615 Byronwood Dr.
Houston, TX 77055
  Manufacturer of high-end candles   12% Secured Debt
LLC Interests
Warrants to Purchase
LLC Interests
 
6.2%

24%
  $ 3,720,000
$180,000

$210,000
      3,720,000


 
                             
                $ 4,110,000     $ 3,720,000  
 
 
WorldCall, Inc.
1250 S. Capitol of Texas
Highway Building 2, Suite 235
Austin, TX 78746
  Telecommunication/
information services
  13% Secured Debt
Common Stock
Warrants to Purchase
Common Stock
 
6.2%

13.4%
  $ 820,000
$169,173

$75,000
    $ 820,000
$180,000

$150,000
 
                             
                $ 1,064,173     $ 1,150,000  
 
 
Other Investments(3)
              $ 608,252       228,420  
                             
 
 
Total
              $ 62,623,948     $ 76,209,428  
                             
 
 
(1) Net of prepayments but before accumulated unearned income allocations.
 
(2) On January 31, 2007, KBK Industries, LLC redeemed this warrant. See “Recent Developments” below.
 
(3) Includes our investments in Barton Springs Grill LP and Digital Music Group, Inc., which were insignificant investments as of December 31, 2006.
 
Subsequent to December 31, 2006, KBK Industries, LLC redeemed a warrant we held to purchase approximately 26% of its outstanding limited liability company membership interests. The redemption price was approximately $1.4 million, representing a gain of approximately $1.2 million on our warrant investment. KBK Industries paid 50.0% of the redemption price in cash and the remainder in the form of a note payable due on or before January 30, 2008, which accrues interest at prime rate plus 2.0%.
 
In addition, on February 5, 2007, we made a $2.4 million secured debt investment in Advantage Millwork Company, Inc., a premier designer and manufacturer of high quality wood, decorative metal and wrought iron entry doors. We also received a warrant to purchase approximately 10% of the outstanding shares of common stock of Advantage Millwork Company.
 
During the first quarter of 2007, Main Street Mezzanine Fund issued $9.9 million of additional SBA-guaranteed debentures. As of May 10, 2007, Main Street Mezzanine Fund had $55.0 million of outstanding indebtedness guaranteed by the SBA.
 
Description of Portfolio Companies
 
Set forth below is a brief description of each of our current portfolio companies.
 
  •  Advantage Millwork Company is a premier designer and manufacturer of high quality wood, decorative metal and wrought iron entry doors.
 
  •  All Hose & Specialty, LLC is a leading distributor of industrial hose, high pressure hose, hydraulic hose and other specialty items used in the industrial and oilfield service industries.
 
  •  American Sensor Technologies, Inc. designs, develops, manufactures and markets state-of-the-art, high performance commercial and industrial sensors.
 
  •  Café Brazil, LLC owns and operates eight full service restaurant/coffee houses in the Dallas/Fort Worth Metroplex. Cafe Brazil also operates a wholesale bakery production facility which provides fresh baked goods to each of its restaurants.
 
  •  Carlton Global Resources, LLC is a leading producer and processor of various industrial minerals for use in the manufacturing, construction and building materials industry.

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  •  CBT Nuggets, LLC produces and sells original content IT certification training videos. CBT Nuggets, LLC’s training videos provide comprehensive training for certification exams from Microsoft®, CompTIA®, Cisco®, Citrix® and many other professional certification vendors.
 
  •  East Teak Fine Hardwoods, Inc. is a leading provider of teak lumber, exotic hardwoods and hardwood products.
 
  •  Hawthorne Customs & Dispatch Services, LLC provides “one stop” logistics services to its customers in order to facilitate the import and export of various products to and from the United States.
 
  •  Hayden Acquisition, LLC is a leading manufacturer and supplier of precast concrete underground utility structures to the construction industry.
 
  •  Houston Plating & Coatings, LLC is a provider of nickel plating and industrial coating services primarily serving the oil field services industry.
 
  •  Jensen Jewelers of Idaho, LLC is the largest privately owned jewelry chain in the Rocky Mountains with 14 stores in 5 states, including Idaho, Montana, Nevada, South Dakota and Wyoming.
 
  •  KBK Industries, LLC is a manufacturer of standard and customized fiberglass tanks and related products primarily for use in oil and gas production, chemical production and agriculture applications.
 
  •  Laurus Healthcare, LP develops, acquires and manages single or multi-specialty health care centers through physician partnerships that provide various surgical, diagnostic and interventional services.
 
  •  Magna Card, Inc. is a niche designer, packager, marketer and distributor of flexible “peel & stick” magnets that are used to display business cards, photographs and small craft items.
 
  •  National Trench Safety, LLC engages in the rental and sale of underground equipment and trench safety products, including trench shielding, trench shoring, road plates, pipe lasers, pipe plugs and confined space equipment.
 
  •  Pulse Systems, LLC manufactures a wide variety of medical devices used for minimally-invasive surgery, primarily in the endovascular field.
 
  •  Quest Design & Production, LLC is engaged in the design, fabrication and installation of graphic presentation materials and associated custom display fixtures used in sales and information center environments.
 
  •  TA Acquisition Group, LP mines, processes and sells sand and gravel products that are utilized in various construction activities in the Austin, Texas area.
 
  •  Technical Innovations, LLC designs and manufactures manual, semiautomatic, pneumatic and computer numerically controlled machines and tools used primarily by medical device manufacturers to place access holes in catheters.
 
  •  Transportation General, Inc. is a provider of transportation and taxi cab services in the greater New Haven, Connecticut market.
 
  •  Turbine Air Systems, Ltd. is an industry-leading manufacturer of proprietary, packaged, commercial and industrial chilling systems, serving both domestic and international customers.
 
  •  Wicks N’ More, LLC manufactures high-quality, long-burning, fragrant candles.
 
  •  WorldCall, Inc. is a holding company which owns both regulated and unregulated communications and information service providers.


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MANAGEMENT
 
Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors appoints our officers, who serve at the discretion of the Board of Directors. The responsibilities of the Board of Directors include, among other things, the oversight of our investment activities, the quarterly valuation of our assets, oversight of our financing arrangements and corporate governance activities. The Board of Directors has an Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, and may establish additional committees from time to time as necessary.
 
Board of Directors and Executive Officers
 
Upon consummation of this offering, our Board of Directors will consist of at least five members, three of whom are expected to be classified under applicable Nasdaq listing standards as “independent” directors and under Section 2(a)(19) of the 1940 Act as non-interested persons. Pursuant to our articles of incorporation, each member of our Board of Directors will serve a one year term, with each current director serving until the 2008 annual meeting of stockholders and until his respective successor is duly qualified and elected. Our articles of incorporation give our Board of Directors sole authority to appoint directors to fill vacancies that are created either through an increase in the number of directors or due to the resignation, removal or death of any director.
 
Directors
 
Information regarding our Board of Directors is set forth below. We have divided the directors into two groups — independent directors and interested directors. Interested directors are “interested persons” of Main Street Capital Corporation as defined in Section 2(a)(19) of the 1940 Act. The address for each director is c/o Main Street Capital Corporation, 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
 
Independent Directors
 
                         
          Director
    Expiration
 
Name
  Age     Since     of Term  
 
Arthur L. French
    67       2007       2008  
                         
                         
 
Interested Directors
 
                         
          Director
    Expiration
 
Name
  Age     Since     of Term  
 
Vincent D. Foster
    50       2007       2008  
Todd A. Reppert
    37       2007       2008  
 
Executive Officers
 
The following persons serve as our executive officers in the following capacities:
 
             
        Position(s) Held
Name
 
Age
 
with the Company
 
Vincent D. Foster
  50   Director and Chief Executive Officer
Todd A. Reppert
  37   Director, President and Chief Financial Officer
Rodger A. Stout
  55   Secretary, Chief Accounting Officer and
Chief Compliance Officer
Curtis L. Hartman
  34   Senior Vice President
Dwayne L. Hyzak
  34   Senior Vice President
David L. Magdol
  37   Senior Vice President


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The address for each executive officer is c/o Main Street Capital Corporation 1300 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
 
Biographical Information
 
Independent Directors
 
Arthur L. French has been a member of our Board of Directors since April 2007. Since September 2003. Mr. French has been a member of the Advisory Board of the Investment Adviser and Limited Partner of Main Street Mezzanine Fund. Mr. French began his private investment activities in January 2000; he has served as a director of FabTech Industries, a $200 million steel fabricator, since November 2000, as a director of Houston Plating and Coatings, Inc., an industrial plating company, since January 2003, and as a director of Rawson, Inc., a distributor of industrial instrumentation products, since May 2003.
 
Prior to this, Mr. French served as Chairman and Chief Executive Officer of Metals USA from 1996-1999, where he managed the process of founders acquisition, assembled the management team and took the company through a successful IPO in July 1997. From 1989-1996. Mr. French served as Executive Vice President and Director of Keystone International, Inc. After serving as a helicopter pilot in the United States Army, Captain-Corps of Engineer from 1963-1966, Mr. French began his career as a Sales Engineer for Fisher Controls International, Inc., in 1966. During his 23 year career at Fisher Controls, from 1966-1989, Mr. French held various titles, and ended his career at Fisher Controls as President and Chief Operating Officer.
 
Interested Directors
 
Vincent D. Foster has been a member of our Board of Directors since April 2007. He is our chief executive officer and a member of our investment committee. Since 2002, Mr. Foster has been a senior managing director of the General Partner and the Investment Adviser. Mr. Foster has also been the senior managing director of the general partner for Main Street Capital II, an SBIC he co-founded, since January 2006. From 2000 to 2002, Mr. Foster was the senior managing director of the predecessor entity of Main Street Mezzanine Fund. Prior to that, Mr. Foster co-founded Main Street Merchant Partners, a merchant-banking firm. Mr. Foster currently serves as a director of Quanta Services, Inc. (NYSE: PWR), an electrical and telecommunications contracting company, Carriage Services, Inc. (NYSE: CSV), a death-care company, and Team, Inc. (NASDAQ-GS: TISI), a provider of specialty industrial services. In addition, Mr. Foster serves as a director, officer and founder of the Houston/Austin/San Antonio Chapter of the National Association of Corporate Directors. From 1998 to May 2002, he served as the non-executive chairman of Quanta Services, Inc. He has also served as director and the non-executive chairman of U.S. Concrete, Inc. (NASDAQ-GM: RMIX) since 1999.
 
Prior to his private investment activities, Mr. Foster was a partner of Andersen Worldwide and Arthur Andersen LLP from 1988-1997. Mr. Foster was the director of Andersen’s Corporate Finance and Mergers and Acquisitions practices for the Southwest United States and specialized in working with companies involved in consolidating their respective industries.
 
Todd A. Reppert has been a member of our Board of Directors since April of 2007. He is our president and chief financial officer and is a member of our investment committee. Since 2002, Mr. Reppert has been a senior managing director of the General Partner and the Investment Adviser. Mr. Reppert has been a senior managing director of the general partner for Main Street Capital II, an SBIC he co-founded, since January 2006. From 2000 to 2002, Mr. Reppert was a senior managing director of the predecessor entity of Main Street Mezzanine Fund. Prior to that, Mr. Reppert was a principal of Sterling City Capital, LLC, a private investment group focused on small to middle-market companies. Prior to joining Sterling City in 1997, Mr. Reppert was with Arthur Andersen LLP. At Arthur Andersen LLP, Mr. Reppert assisted in several industry consolidation initiatives, as well as numerous corporate finance and merger/acquisition initiatives. Mr. Reppert is a member of the board of directors for the Houston Chapter of the Association for Corporate Growth.


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Non-Director Executive Officers
 
Rodger A. Stout serves as our chief accounting officer, chief compliance officer and secretary. Mr. Stout has been the chief financial officer of the General Partner, the Investment Adviser and the general partner of Main Street Capital II, an SBIC, since 2006. From 2000 to 2006, Mr. Stout was senior vice president and chief financial officer for FabTech Industries, Inc., a consolidation of nine steel fabricators located principally in the Southeastern United States. From 1985 to 2000, Mr. Stout was a senior financial executive for Jerold B. Katz Interests. Mr. Stout held numerous positions over his fifteen year tenure with this national scope financial services conglomerate. The positions he held included director, executive vice president, senior financial officer and investment officer. Prior to 1985, Mr. Stout was an international tax executive in the oil and gas service industry.
 
Curtis L. Hartman serves as one of our senior vice presidents. Mr. Hartman has been a managing director of the General Partner and the Investment Adviser since 2002 and a managing director of the general partner for Main Street Capital II, an SBIC, since January 2006. From 2000 to 2002, Mr. Hartman was a director of the predecessor entity of Main Street Mezzanine Fund. From 1999 to 2000, Mr. Hartman was an investment adviser for Sterling City Capital, LLC. Concurrently with joining Sterling City, Mr. Hartman joined United Glass Corporation, a Sterling City portfolio company, as director of corporate development. Prior to joining Sterling City, Mr. Hartman was a manager with PricewaterhouseCoopers (“PwC”) in its M&A/Transaction Services group. Prior to joining PwC, Mr. Hartman was employed by Deloitte & Touche where he served as a senior auditor for a Fortune 500 public company as well as other public and private companies.
 
Dwayne L. Hyzak serves as one of our senior vice presidents. Since 2002, Mr. Hyzak has been a managing director of the General Partner and the Investment Adviser. Mr. Hyzak has also been a managing director of the general partner for Main Street Capital II, an SBIC, since January 2006. From 2000 to 2002, Mr. Hyzak was a director of accounting integration with Quanta Services, Inc. (NYSE: PWR), an electrical and telecommunications contracting company, where he was principally focused on the company’s mergers and acquisitions and corporate finance activities. Prior to joining Quanta Services, Inc., Mr. Hyzak was a manager with Arthur Andersen LLP in the firm’s Transaction Advisory Services group.
 
David L. Magdol serves as one of our senior vice presidents. Mr. Magdol has been a managing director of the General Partner and the Investment Adviser since 2002 and a managing director of the general partner for Main Street Capital II, an SBIC, since January 2006. From 2000 to 2002, Mr. Magdol worked for Lazard Freres & Co. LLC where he was a vice president in the M&A Advisory Group. From 1996 to 2000, Mr. Magdol served as a vice president of McMullen Group, a private equity investment firm capitalized by Dr. John J. McMullen. From 1993 to 1995, Mr. Magdol worked in the Structured Finance Services Group of Chemical Bank (now JPMorgan Chase) as a management associate.
 
Committees of the Board of Directors
 
Our Board of Directors has the following committees:
 
Audit Committee
 
The Audit Committee is responsible for selecting, engaging and discharging our independent accountants, reviewing the plans, scope and results of the audit engagement with our independent accountants, approving professional services provided by our independent accountants (including compensation therefor), reviewing the independence of our independent accountants and reviewing the adequacy of our internal control over financial reporting. In addition, the Audit Committee is responsible for reviewing and approving for submission to our Board of Directors, in good faith, the fair value of debt and equity securities that are not publicly traded or for which current market values are not readily available. The members of the Audit Committee are          ,           and          , each of whom is independent for purposes of the 1940 Act and the Nasdaq Global Market corporate governance listing standards. serves as the chairman of the Audit Committee. Our Board of Directors has determined that           is an “Audit Committee financial expert” as defined under SEC rules.


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Compensation Committee
 
The Compensation Committee determines the compensation for our executive officers and the amount of salary and bonus to be included in the compensation package for each of our executive officers. The members of the Compensation Committee are Messrs.           ,           and          , each of whom is independent for purposes of the 1940 Act and the Nasdaq Global Market corporate governance listing standards.          serves as the chairman of the Compensation Committee.
 
Nominating and Corporate Governance Committee
 
The Nominating and Corporate Governance Committee is responsible for determining criteria for service on the board, identifying, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on our Board of Directors or a committee of the board, developing and recommending to the Board of Directors a set of corporate governance principles and overseeing the self-evaluation of the Board of Directors and its committees and evaluation of our management. The Nominating and Corporate Governance Committee considers nominees properly recommended by our stockholders. The members of the Nominating and Corporate Governance Committee are          ,           and          , each of whom is independent for purposes of the 1940 Act and the Nasdaq Global Market corporate governance listing standards.          serves as the chairman of the Nominating and Corporate Governance Committee.
 
Additional Portfolio Management Information
 
Our investment committee, currently consisting of Messrs. Foster and Reppert, reviews and approves our investments. All such actions must be approved by each member of our investment committee at a meeting at which each member of our investment committee is present. The compensation of each executive officer on the investment committee will be set by the Compensation Committee of our Board of Directors. The executive officers on the investment committee will be compensated in the form of annual salaries, annual cash bonuses and stock options. See “Management — Executive Officer Compensation” and “Management — Employment Agreements.” The members of our investment committee serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. See “Risk Factors — There are significant potential conflicts of interest which could impact our investment returns.”
 
Compensation Discussion and Analysis
 
Overview
 
We are a newly-organized corporation that after consummation of this offering will be an internally managed business development company. We were organized to continue the investment business of Main Street Mezzanine Fund and, with the capital of this offering, make new equity and debt investments in lower middle market companies. Our senior management team consists of Messrs. Foster, Reppert, Stout, Hartman, Hyzak and Magdol. In conjunction with the consummation of this offering, each of these executive officers will enter into employment agreements with us and will be compensated according to the terms of such agreements, which are described below. We refer to these six officers as the named executive officers, or NEOs.
 
Our executive compensation program is designed to encourage our executive officers to think and act like our stockholders. The structure of the NEOs’ employment agreements and our incentive compensation programs will be designed to encourage and reward the following, among other things:
 
  •  sourcing and pursuing attractively priced investment opportunities in all types of securities of lower middle market companies;
 
  •  accomplishing our investment objectives;
 
  •  ensuring we allocate capital in the most effective manner possible; and
 
  •  creating shareholder value.
 
Our Compensation Committee has reviewed and approved all of our compensation policies.


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Executive Compensation Policy
 
Overview.  Our performance-driven compensation policy consists of the following three components:
 
  •  Base salary;
 
  •  Annual cash bonuses; and
 
  •  Long-term compensation pursuant to our Equity Incentive Plan.
 
We intend to carefully design each NEO’s compensation package to appropriately reward the NEO for his or her contribution to us. This is not a mechanical process, and our Compensation Committee will use its judgment and experience, working in conjunction with our chief executive officer, to determine the appropriate mix of compensation for each individual. Cash compensation consisting of base salary and discretionary bonuses tied to achievement of individual performance goals set by the Compensation Committee are intended to incentivize NEOs to remain with us in their roles and work hard to achieve our goals. Stock-based compensation in the form of stock options may be awarded based on performance expectations set by the Compensation Committee for each individual and, over time, on his performance against those expectations. The mix of short-term and long-term compensation may sometimes be adjusted to reflect an individual’s need for current cash compensation and desire to retain his or her services.
 
Base salary.  Base salary will be used to recognize particularly the experience, skills, knowledge and responsibilities required of the executive officers in their roles. In connection with establishing the 2007 base salaries of the NEOs, the Compensation Committee and management considered a number of factors including the seniority of the individual, the functional role of the position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual prior to our formation, the assistance of each NEO in this initial public offering process and the number of well-qualified candidates available in our area. In addition, we informally considered the base salaries paid to comparably situated executive officers and other competitive market practices. We did not use compensation consultants in connection with fixing base salaries or for any other purpose prior to the consummation of this offering.
 
The salaries of the NEOs will be reviewed on an annual basis, as well as at the time of promotion or other changes in responsibilities. The leading factors in determining increases in salary level are expected to be relative performance, relative cost of living and competitive pressures.
 
Annual cash bonuses.  Annual cash bonuses are intended to reward individual performance during the year and can therefore be highly variable from year to year. Currently, these bonuses are determined on a discretionary basis by the Compensation Committee. Cash bonuses in amounts up to 100.0% of a NEO’s annual salary may be given in the discretion of the Compensation Committee to each NEO if such individual achieves individual performance and service goals set by our Compensation Committee, with our management’s input.
 
Long-Term Incentive Awards.
 
Generally.  We have adopted an Equity Incentive Plan to provide stock-based awards as incentive compensation to our employees.
 
We expect to use stock-based awards to (i) attract and retain key employees, (ii) motivate our employees by means of performance-related incentives to achieve long-range performance goals, (iii) enable our employees to participate in our long-term growth and (iv) link our employees compensation to the long-term interests of our stockholders. The Compensation Committee has exclusive authority to select the persons to receive stock-based awards. At the time of each award, the Compensation Committee will determine the terms of the award in its sole discretion, including any performance period (or periods) and any performance objectives relating to the award.


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Options.  The Compensation Committee may in its sole discretion grant options to purchase our common stock (including incentive stock options and non-qualified stock options). We expect that options granted by our Compensation Committee will represent a fixed number of shares of our common stock, will have an exercise, or strike, price equal to the fair market value of our common stock on the date of such grant, and will be exercisable, or “vested,” at some later time after grant. The “fair market value” will be defined as either (i) the closing sales price of the common stock on the Nasdaq Global Market, or any other such exchange on which our common stock is traded, on such date, or in the absence of reported sales on such date or (ii) in the event there is no public market for our common stock on such date, current net asset value of our common stock. Some stock options granted by our Compensation Committee may vest simply by the holder remaining with us for a period of time, and some may vest based on our attaining certain performance levels.
 
Restricted Stock.  Generally business development companies, such as us, may not grant shares of their stock for services without an exemptive order from the SEC. Our Equity Incentive Plan allows our Compensation Committee to grant shares of restricted stock, but our Compensation Committee will not grant restricted stock unless and until we obtain from the SEC an exemptive order permitting such practice. Subsequent to the consummation of this offering, we intend to apply for an exemptive order from the SEC to permit us to issue restricted shares of our common stock as part of the compensation packages for certain of our employees and executive officers. If exemptive relief is obtained, the Compensation Committee may award shares of restricted stock to plan participants in such amounts and on such terms as the Compensation Committee, in its sole discretion, determines and consistent with any exemptive order the SEC may issue. The SEC is not obligated to grant an exemptive order to allow this practice and will do so only if it determines that such practice is consistent with stockholder interests and does not involve overreaching by management or our Board of Directors. Each restricted stock grant will be for a fixed number of shares as set forth in an award agreement between the grantee and us. Award agreements will set forth time and/or performance vesting schedules and other appropriate terms and/or restrictions with respect to awards, including rights to dividends and voting rights.
 
Competitive Market Review
 
We will informally consider competitive market practices with respect to the salaries and total compensation of our NEOs. We will review the market practices by speaking to other financial professionals and reviewing annual reports on Form 10-K or similar information of other internally managed business development companies.
 
Change in Control and Severance
 
Upon termination of employment after a change of control, the NEOs may receive severance payments under their employment agreements, and equity-based awards under our Equity Incentive Plan may vest and/or become immediately exercisable or salable.
 
Equity Incentive Plan.  Upon specified covered transactions involving a change of control (as defined in the Equity Incentive Plan), all outstanding awards under the Equity Incentive Plan may either be assumed or substituted for by the surviving entity. If the surviving entity does not assume or substitute similar awards, the awards held by the participants will be accelerated in full and then terminated to the extent not exercised prior to the covered transaction.
 
Severance.  Under specified covered transactions involving a change in control (as defined in each NEO’s employment agreement), if an NEO terminates his employment with us within two years following such change in control, or if we terminate or fail to renew the NEO’s employment agreement within the two years commencing with a change in control, he will receive a severance package beginning on the date of termination. The severance package will include monthly payments equal to one-twelfth of (i) the NEO’s annual salary at that time, plus (ii) the NEO’s bonus compensation as described in the employment agreement and (iii) we will continue to provide the NEO with all of the benefits provided to him immediately prior to the termination as described in the employment agreement. The severance package will continue to be in effect for either thirty-six months or eighteen months, depending upon the NEO’s position.


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In the event the NEO’s employment is terminated as a result of death or disability, or in the event that we terminate the NEO’s employment outside of the two-year period after a specified covered transaction involving a change in control, the same severance package referenced in the immediately preceding paragraph herein will be provided to the NEO, except that the severance package will only continue to be in effect for either twenty-four months or twelve months, depending upon the NEO’s position.
 
Finally, if we fail to renew any NEO’s employment agreement outside of the two-year period after a specified covered transaction involving a change in control, any severance payment or benefit will be payable at the absolute discretion of the Compensation Committee.
 
The rationale behind providing a severance package in certain events is to attract talented executives who are assured that they will not be financially injured if they physically relocate and/or leave another job to join us but are forced out through no fault of their own and to ensure that our business is operated and governed for our stockholders by a management team, and under the direction of a board of directors, who are not financially motivated to frustrate the execution of a change in control transaction. For more discussion regarding executive compensation in the event of a termination or change in control, please see the table entitled “2007 Potential Payments Upon Termination or Change in Control Table.”
 
Conclusion
 
Our compensation policies are designed to retain and motivate our NEOs and to ultimately reward them for outstanding performance. The retention and motivation of our NEOs should enable us to grow strategically and position ourselves competitively in our market.
 
Executive Officer Compensation
 
After consummation of the formation transactions and the completion of the offering, our executive officers will receive the salaries and be entitled to bonus compensation pursuant to their employment agreements as described above and the combined respective annual salaries of the executive officers will be as follows:
 
     
   
2007 Base Salary
 
Vincent D. Foster
   
Todd A. Reppert
   
Rodger A. Stout
   
Curtis A. Hartman
   
Dwayne L. Hyzak
   
David L. Magdol
   
 
In addition, the NEOs will be eligible to receive discretionary bonuses as may be declared from time to time by the Compensation Committee, which bonuses will be based on individualized performance and service goals, and may not exceed 100.0% of base salary.


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Under their employment agreements, each NEO is entitled to certain payments upon termination of employment or in the event of a change in control. The following table sets forth those potential payments with respect to each named executive officer:
 
2007 Potential Payments upon Termination or Change in Control Table
 
                             
            Within Two Years
              Thirteenth Month
        Outside of
  After Change
  Voluntary
          After Change
        Two Years
  in Control;
  Termination
          in Control;
        After Change
  Termination
  Outside of
          Termination
        in Control;
  w/o Cause
  Two Years
          w/o Cause
        Termination
  or for
  After Change
          or w/o
Name
  Benefit   w/o Cause   Good Reason   in Control   Death   Disability   Good Reason
 
Vincent D. Foster
                           
Todd A. Reppert
                           
Rodger A. Stout
                           
Curtis A. Hartman
                           
Dwayne L. Hyzak
                           
David L. Magdol
                           
 
Director Compensation
 
Each of our directors who is not one of our employees or an employee of our subsidiaries will receive an annual fee of $      for services as a director, payable quarterly. Independent directors will receive a fee of $      for each board meeting attended in person and $      for each board meeting attended by conference telephone or similar communications equipment. Independent directors will receive a fee of $      for each committee meeting attended, except that committee chairmen will receive an additional $      for attendance at each meeting of the committee for which they serve as chair. We will reimburse our independent directors for all reasonable expenses incurred in connection with their service on the board. Directors who are also our employees or employees of our subsidiaries will not receive compensation for their services as directors.
 
Employment Agreements
 
In conjunction with the consummation of this offering, we will enter into employment agreements with Messrs. Foster, Reppert, Stout, Hartman, Hyzak and Magdol that provide for a two year term, effective upon consummation of this offering. Our Board of Directors will have the right to increase the base salary of each of our executive officers during the term of the employment agreements and also to decrease it if certain conditions are satisfied.
 
In addition, each executive officer will be entitled to receive an annual bonus of up to a maximum of 100.0% of the executive officer’s then current base salary for achieving certain performance objectives. The Compensation Committee of the Board of Directors will establish such performance objectives, as well as the bonus awarded to each executive officer, annually.
 
Compensation Plans
 
Equity Incentive Plan
 
Our Board of Directors and current stockholders have approved our Equity Incentive Plan, to be effective upon consummation of this offering, for the purpose of attracting and retaining the services of executive officers, directors and other key employees. Under our Equity Incentive Plan, our Compensation Committee may award stock options, restricted stock, or other stock-based incentive awards to our executive officers, employees and directors.
 
Our Compensation Committee will administer the Equity Incentive Plan and has the authority, subject to the provisions of the Equity Incentive Plan, to determine who will receive awards under the Equity Incentive Plan and


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the terms of such awards. Our Compensation Committee will be required to adjust the number of shares available for awards, the number of shares subject to outstanding awards and the exercise price for awards following the occurrence of certain specified events such as stock splits, dividends, distributions and recapitalizations.
 
Upon specified covered transactions (as defined in the Equity Incentive Plan), all outstanding awards under the Equity Incentive Plan may either be assumed or substituted for by the surviving entity. If the surviving entity does not assume or substitute similar awards, the awards held by the participants will be accelerated in full and then terminated to the extent not exercised prior to the covered transaction.
 
Awards under the Equity Incentive Plan will be granted to our executive officers and other employees as determined by our Compensation Committee at the time of each issuance.
 
Under current SEC rules and regulations, business development companies may not grant options to directors who are not officers or employees of the business development company. In connection with this offering, we expect to apply for exemptive relief from the SEC to permit us to grant options to purchase shares of our common stock to our independent directors as a portion of their compensation for service on our Board of Directors. Similarly, under the 1940 Act, business development companies cannot issue stock for services. In connection with this offering, we expect to apply for exemptive relief from the SEC to permit us to grant restricted stock or other non-option stock-based compensation in exchange for or in recognition of services. We cannot provide any assurance that we will receive the exemptive relief from the SEC in either case.
 
401(k) Plan
 
We intend to maintain a 401(k) plan in which all full-time employees who are at least 21 years of age and have three months of service will be eligible to participate. Eligible employees will have the opportunity to contribute their compensation on a pretax salary basis into the 401(k) plan up to $     annually for the 2007 plan year, and to direct the investment of these contributions. Plan participants who reach the age of           prior to or during the 2007 plan year will be eligible to defer an additional $      during 2007.
 
CERTAIN RELATIONSHIPS AND TRANSACTIONS
 
As discussed herein, concurrently with this offering, it is contemplated that we will acquire from the members of the General Partner 100.0% of their equity interests in the General Partner in exchange for the issuance of $9.0 million of common stock of Main Street Capital Corporation. See “Formation Transactions; Business Development Company and Regulated Investment Company Elections.” In addition, it is contemplated that we will acquire from the members of the Investment Adviser 100.0% of their equity interests in the Investment Adviser in exchange for the issuance of $18.0 million of common stock of Main Street Capital Corporation. See “Formation Transactions; Business Development Company and Regulated Investment Company Elections.” Members of our management, including Vincent D. Foster, Todd A. Reppert, Curtis L. Hartman, Dwayne L. Hyzak and David L. Magdol, control the General Partner and the Investment Adviser.
 
Because members of our management currently control the General Partner, the Investment Adviser and (through their control of the General Partner) Main Street Mezzanine Fund, the amount of consideration to be received by the Limited Partners and the members of the General Partner and of the Investment Adviser in the formation transactions has not been determined through arms-length negotiations. In addition, certain members of our management and their affiliates have invested $3.6 million in limited partnership interests in Main Street Mezzanine Fund, and represent approximately 13.5% of the total limited partnership interests in Main Street Mezzanine Fund.
 
Main Street Mezzanine Fund co-invested with Main Street Capital II in several investments during 2006. Main Street Capital II and Main Street Mezzanine Fund are both managed by the Investment Adviser and the general partners for Main Street Mezzanine Fund and Main Street Capital II are under common control. Main Street Capital II is an SBIC with similar investment objectives to Main Street Mezzanine Fund and which began its investment operations in January 2006. The co-investments among the two funds were made at the same time and on the same terms and conditions. The co-investments were made in accordance with the Investment Adviser’s conflicts policy and in accordance with the applicable SBIC conflict of interest regulations.


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Main Street Mezzanine Fund paid $1.9 million in management fees to the Investment Adviser for each of the years ended December 31, 2004, 2005 and 2006. The Investment Adviser is an affiliate of Main Street Mezzanine Fund as it is commonly controlled by principals who also control the General Partner.
 
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
 
After this offering, no person will be deemed to control us, as such term is defined in the 1940 Act. The following table sets forth, as of          , 2007, information with respect to the beneficial ownership of our common stock by:
 
  •  each person known to us to beneficially own more than 5.0% of the outstanding shares of our common stock;
 
  •  each of our directors and each executive officers; and
 
  •  all of our directors and executive officers as a group.
 
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Common stock subject to options that are currently exercisable or exercisable within 60 days of          , 2007, are deemed to be outstanding and beneficially owned by the person holding such options. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of beneficial ownership is based on      shares of common stock outstanding as of          , 2007.
 
                                 
    Shares Beneficially
    Shares Beneficially
 
    Owned Immediately
    Owned Immediately
 
    Prior to this Offering     After this Offering  
Name
  Number     Percentage     Number     Percentage  
 
Executive Officers:
                               
Vincent D. Foster
                               
Todd A. Reppert
                               
Rodger A. Stout
                               
Curtis L. Hartman
                               
Dwayne L. Hyzak
                               
David L. Magdol
                               
Independent Directors:
                               
Arthur L. French
                               
                                 
                                 
                                 
All Directors and Officers as a Group (   persons)
                               


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The following table sets forth, as of the date of the completion of this offering, the dollar range of our equity securities that is expected to be beneficially owned by each of our directors.
 
         
    Dollar Range of Equity
 
    Securities Beneficially
 
    Owned(1)(2)(3)  
 
Interested Directors:
       
Vincent D. Foster
       
Todd A. Reppert
       
Independent Directors:
       
Arthur L. French
       
 
 
(1) Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.
 
(2) The dollar range of equities securities beneficially owned by our directors is based on an assumed initial public offering price of $      per share.
 
(3) The dollar range of equity securities beneficially owned are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000.


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DIVIDEND REINVESTMENT PLAN
 
We have adopted a dividend reinvestment plan that provides for reinvestment of our dividends on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, if our Board of Directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends.
 
No action will be required on the part of a registered stockholder to have their cash dividends reinvested in shares of our common stock. A registered stockholder may elect to receive an entire dividend in cash by notifying          , the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for dividends to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive dividends in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not less than 10 days prior to the record date, the plan administrator will, instead of crediting shares to the participant’s account, issue a certificate registered in the participant’s name for the number of whole shares of our common stock and a check for any fractional share. Those stockholders whose shares are held by a broker or other financial intermediary may receive dividends in cash by notifying their broker or other financial intermediary of their election.
 
We intend to primarily use newly issued shares to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve the right to purchase shares in the open market in connection with our implementation of the plan. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on the Nasdaq Global Market on the dividend payment date. Market price per share on that date will be the closing price for such shares on the Nasdaq Global Market or, if no sale is reported for such day, at the average of their reported bid and asked prices. The number of shares of our common stock to be outstanding after giving effect to payment of the dividend cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.
 
There will be no brokerage charges or other charges for dividend reinvestment to stockholders who participate in the plan. We will pay the plan administrator’s fees under the plan. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $      transaction fee plus a $      per share brokerage commissions from the proceeds.
 
Stockholders who receive dividends in the form of stock generally are subject to the same federal, state and local tax consequences as are stockholders who elect to receive their dividends in cash. A stockholder’s basis for determining gain or loss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable to the stockholder. Any stock received in a dividend will have a holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholder’s account.
 
Participants may terminate their accounts under the plan by notifying the plan administrator via its website at          , by filling out the transaction request form located at the bottom of their statement and sending it to the plan administrator at           or by calling the plan administrators at          .
 
We may terminate the plan upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any dividend by us. All correspondence concerning the plan should be directed to the plan administrator by mail at           or by telephone at          .


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DESCRIPTION OF CAPITAL STOCK
 
The following description is based on relevant portions of the Maryland General Corporation Law and on our articles of incorporation and bylaws. This summary may not contain all of the information that is important to you, and we refer you to the Maryland General Corporation Law and our articles of incorporation and bylaws for a more detailed description of the provisions summarized below.
 
Capital Stock
 
Under the terms of our articles of incorporation, as amended and restated immediately prior to the completion of this offering, our authorized capital stock will consist of      shares of common stock, par value $0.01 per share, of which immediately after this offering      shares will be outstanding. Under our articles of incorporation, our Board of Directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock, and to cause the issuance of such shares, without obtaining stockholder approval. In addition, as permitted by the Maryland General Corporation Law, but subject to the 1940 Act, our articles of incorporation provide that the Board of Directors, without any action by our stockholders, may amend the articles of incorporation from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.
 
Common Stock
 
All shares of our common stock have equal voting rights and rights to earnings, assets and distributions, except as described below. When shares are issued, upon payment therefor, they will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of Directors and declared by us out of assets legally available therefore. Shares of our common stock have no conversion, exchange, preemptive or redemption rights. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock will elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.
 
Preferred Stock
 
Our articles of incorporation authorize our Board of Directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors is required by Maryland law and by our articles of incorporation to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. You should note, however, that any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50.0% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of


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any issued and outstanding preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.
 
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
 
Maryland law permits a Maryland corporation to include in its articles of incorporation a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our articles of incorporation contain such a provision that eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the 1940 Act.
 
Our articles of incorporation authorize us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in any such capacity, except with respect to any matter as to which such person shall have been finally adjudicated in any proceeding not to have acted in good faith in the reasonable belief that their action was in our best interest or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
 
Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in any such capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity, except with respect to any matter as to which such person shall have been finally adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in our best interest or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. Our bylaws also provide that, to the maximum extent permitted by Maryland law, with the approval of our Board of Directors and provided that certain conditions described in our bylaws are met, we may pay certain expenses incurred by any such indemnified person in advance of the final disposition of a proceeding upon receipt of an undertaking by or on behalf of such indemnified person to repay amounts we have so paid if it is ultimately determined that indemnification of such expenses is not authorized under our bylaws.
 
Maryland law requires a corporation (unless its articles of incorporation provide otherwise, which our articles of incorporation do not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty; (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of


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(a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
 
We expect to purchase a directors’ and officers’ insurance policy covering our directors and officers and us for any acts and omissions committed, attempted or allegedly committed by any director or officer during the policy period.
 
Provisions of the Maryland General Corporation Law and Our Articles of Incorporation and Bylaws
 
The Maryland General Corporation Law and our articles of incorporation and bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.
 
Election of Directors
 
Our bylaws currently provide that directors are elected by a plurality of the votes cast in the election of directors. Pursuant to our articles of incorporation and bylaws, our Board of Directors may amend the bylaws to alter the vote required to elect directors.
 
Number of Directors; Vacancies; Removal
 
Our articles of incorporation provide that the number of directors will be set only by the Board of Directors in accordance with our bylaws. Our bylaws provide that a majority of our entire Board of Directors may at any time increase or decrease the number of directors. However, unless the bylaws are amended, the number of directors may never be less than one or more than twelve. We have elected to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the Board of Directors. Accordingly, at such time, except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act. Our articles of incorporation provide that a director may be removed only for cause, as defined in the articles of incorporation, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.
 
Action by Stockholders
 
Under the Maryland General Corporation Law, stockholder action may be taken only at an annual or special meeting of stockholders or by unanimous consent in lieu of a meeting (unless the articles of incorporation provide for stockholder action by less than unanimous written consent, which our articles of incorporation do not). These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
 
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
 
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With


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respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board of Directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of Directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
 
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
 
Calling of Special Meeting of Stockholders
 
Our bylaws provide that special meetings of stockholders may be called by our Board of Directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders shall be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all of the votes entitled to be cast at such meeting.
 
Approval of Extraordinary Corporate Action; Amendment of Articles of Incorporation and Bylaws
 
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its articles of incorporation, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its articles of incorporation for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our articles of incorporation generally provide for approval of amendments to our articles of incorporation and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our articles of incorporation also provide that certain amendments and any proposal for our conversion, whether by merger or otherwise, from a closed-end company to an open-end company or any proposal for our liquidation or dissolution requires the approval of the stockholders entitled to cast at least 75.0% of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by at least 75.0% of our continuing directors (in addition to approval by our Board of Directors), such amendment or proposal may be approved by the stockholders entitled to cast a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in our articles of incorporation as our current directors, as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the Board of Directors.
 
Our articles of incorporation and bylaws provide that the Board of Directors will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.
 
No Appraisal Rights
 
Except with respect to appraisal rights arising in connection with the Maryland Control Share Acquisition Act, or Control Share Act, discussed below, as permitted by the Maryland General Corporation Law, our articles of incorporation provide that stockholders will not be entitled to exercise appraisal rights.


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Control Share Acquisitions
 
The Control Share Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:
 
  •  one-tenth but less than one-third;
 
  •  one-third or more but less than a majority; or
 
  •  a majority or more of all voting power.
 
The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
 
A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
 
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
 
The Control Share Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the articles of incorporation or bylaws of the corporation.
 
Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be otherwise amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Act only if the Board of Directors determines that it would be in our best interests and if the staff of the SEC does not object to our determination that our being subject to the Control Share Act does not conflict with the 1940 Act.
 
Business Combinations
 
Under the Maryland Business Combination Act, or the Business Combination Act, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in


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circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
 
  •  any person who beneficially owns 10.0% or more of the voting power of the corporation’s shares; or
 
  •  an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10.0% or more of the voting power of the then outstanding voting stock of the corporation.
 
A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which such stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
 
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
 
  •  80.0% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
 
  •  two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
 
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
 
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our Board of Directors has adopted a resolution exempting any business combination between us and any other person from the provisions of the Business Combination Act, provided that the business combination is first approved by the Board of Directors, including a majority of the directors who are not interested persons as defined in the 1940 Act. This resolution, however, may be altered or repealed in whole or in part at any time. If these resolutions are repealed, or the Board of Directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
 
Conflict with 1940 Act
 
Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, or any provision of our articles of incorporation or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.


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SHARES ELIGIBLE FOR FUTURE SALE
 
Upon the completion of this offering, we will have      shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. The      shares of common stock (assuming no exercise of the underwriters’ over-allotment option) sold in this offering will be freely tradable without restriction or limitation under the Securities Act, other than any such shares purchased by our affiliates. Any shares purchased in this offering by our affiliates will be subject to the public information, manner of sale and volume limitations of Rule 144 under the Securities Act. Our remaining      shares of common stock that will be outstanding upon the completion of this offering (including all shares issued in the formation transactions occurring concurrently with the closing of this offering) will be “restricted securities” under the meaning of Rule 144 promulgated under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. We have agreed with the former members of the General Partner and Investment Adviser, and the former Limited Partners to use our reasonable best efforts following the first anniversary of the offering to effect the registration of the shares of common stock to be received by them upon completion of the formation transactions, unless our Board of Directors decides such registration would be seriously detrimental to us. In the event our Board of Directors elects to defer such registration, we would effect such registration if and when such registration would not be detrimental. Upon such registration, all of the shares of common stock registered would be freely tradable.
 
In general, under Rule 144 as currently in effect, if one year has elapsed since the date of acquisition of restricted securities from us or any of our affiliates, the holder of such restricted securities can sell such securities; provided that the number of securities sold by such person within any three-month period cannot exceed the greater of:
 
  •  1.0% of the total number of securities then outstanding; or
 
  •  the average weekly trading volume of our securities during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.
 
Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. If two years have elapsed since the date of acquisition of restricted securities from us or any of our affiliates and the holder is not one of our affiliates at any time during the three months preceding the proposed sale, such person can sell such securities in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. No assurance can be given as to (1) the likelihood that an active market for our common stock will develop, (2) the liquidity of any such market, (3) the ability of our stockholders to sell our securities or (4) the prices that stockholders may obtain for any of our securities. No prediction can be made as to the effect, if any, that future sales of securities, or the availability of securities for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of our securities, or the perception that such sales could occur, may affect adversely prevailing market prices of the common stock. See “Risk Factors — Risks Relating to this Offering and Our Common Stock.”
 
We and certain of our executive officers and directors will be subject to agreements with the underwriters that restrict our and their ability to transfer shares of our stock for a period of up to 180 days from the date of this prospectus. After the lock-up agreements expire, an aggregate of        additional shares (assuming no exercise of the underwriters’ over-allotment option) will be eligible for sale in the public market in accordance with Rule 144, including the one-year holding period requirement thereunder. These lock-up agreements provide that these persons will not, subject to certain expectations, issue, sell, offer to sell, contract or agree to sell, hypothecate, pledge, transfer, grant any option to purchase, establish an open put equivalent position or otherwise dispose of or agree to dispose of directly or indirectly, any shares of our common stock, or any securities convertible into or exercisable or exchangeable for any shares of our common stock or any right to acquire shares of our common stock owned by them, for a period specified in the agreement without the prior written consent of Morgan Keegan & Company, Inc.


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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
 
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our shares. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service regarding this offering. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
 
A “U.S. stockholder” generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:
 
  •  A citizen or individual resident of the United States;
 
  •  A corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof;
 
  •  A trust if a court within the United States is asked to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantive decisions of the trust; or
 
  •  A trust or an estate, the income of which is subject to U.S. federal income taxation regardless of its source.
 
A “Non-U.S. stockholder” generally is a beneficial owner of shares of our common stock that is not a U.S. stockholder.
 
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a partnership holding shares of our common stock should consult his, her or its tax advisers with respect to the purchase, ownership and disposition of shares of our common stock.
 
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
 
Election to be Taxed as a RIC
 
We intend to elect, effective as of the date of our formation, to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will 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”).


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Taxation as a Regulated Investment Company
 
If we:
 
  •  qualify as a RIC; and
 
  •  satisfy the Annual Distribution Requirement,
 
then 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 4.0% 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) 98.0% of our net ordinary income for each calendar year, (2) 98.0% 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”). We generally will endeavor in each taxable year to avoid any U.S. federal excise tax on our earnings.
 
In order to qualify as a RIC for federal income tax purposes, we must, among other things:
 
  •  continue to qualify as a business development company under the 1940 Act at all times during each taxable year;
 
  •  derive in each taxable year at least 90.0% of our gross income from dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); and
 
  •  diversify our holdings so that at the end of each quarter of the taxable year:
 
  •  at least 50.0% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10.0% of the outstanding voting securities of the issuer; and
 
  •  no more than 25.0% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships” (the “Diversification Tests”).
 
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 with PIK interest or, in certain cases, increasing interest rates or 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 while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Regulation — 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


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(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.
 
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.
 
Taxation of U.S. Stockholders
 
Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions (“Qualifying Dividends”) may be eligible for a maximum tax rate of 15.0%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the 15.0% maximum rate applicable to Qualifying Dividends. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains that are currently taxable at a maximum rate of 15.0% in the case of individuals, trusts or estates, regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.
 
We may retain some or all of our realized net long-term capital gains in excess of realized net short-term capital losses, but to designate the retained net capital gain as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. Because we expect to pay tax on any retained capital gains at our regular corporate tax rate, and because that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual U.S. stockholders will be treated as having paid will exceed the tax they owe on the capital gain distribution and such excess generally may be refunded or claimed as a credit against the U.S. stockholder’s other U.S. federal income tax obligations. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder’s cost basis for his, her or its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”
 
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.
 
If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.


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A stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference between such stockholder’s adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.
 
In general, individual U.S. stockholders currently are subject to a maximum federal income tax rate of 15.0% on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses), including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the maximum 35.0% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carryback such losses for three years or carry forward such losses for five years.
 
We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year’s distributions generally will be reported to the Internal Revenue Service (including the amount of dividends, if any, eligible for the 15.0% maximum rate). Dividends paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to Qualifying Dividends because our income generally will not consist of dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder’s particular situation.
 
We may be required to withhold federal income tax (“backup withholding”) currently at a rate of 28.0% from all taxable distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s federal income tax liability, provided that proper information is provided to the IRS.
 
Taxation of Non-U.S. Stockholders
 
Whether an investment in the shares is appropriate for a Non-U.S. stockholder will depend upon that person’s particular circumstances. An investment in the shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.
 
Distributions of our “investment company taxable income” to Non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to Non-U.S. stockholders directly) will be subject to withholding of federal tax at a 30.0% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if an income tax treaty applies,


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attributable to a permanent establishment in the United States, we will not be required to withhold federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to federal income tax at the rates applicable to U.S. persons. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers.)
 
In addition, with respect to certain distributions made to Non-U.S. stockholders in our taxable years beginning before January 1, 2008, no withholding will be required and the distributions generally will not be subject to federal income tax if (i) the distributions are properly designated in a notice timely delivered to our stockholders as “interest-related dividends” or “short-term capital gain dividends,” (ii) the distributions are derived from sources specified in the Code for such dividends and (iii) certain other requirements are satisfied. Currently, we do not anticipate that any significant amount of our distributions will be designated as eligible for this exemption from withholding.
 
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to federal withholding tax and generally will not be subject to federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States.
 
If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional “branch profits tax” at a 30.0% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.
 
A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of federal tax, may be subject to information reporting and backup withholding of federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
 
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.
 
Failure to Qualify as a RIC
 
If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income eligible for the 15.0% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.


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REGULATION
 
Prior to the completion of this offering, we will elect to be regulated as a business development company under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of the directors 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 business development company 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 50.0% of our outstanding voting securities are present or represented by proxy or (ii) 50.0% of our voting securities.
 
Qualifying Assets
 
Under the 1940 Act, a business development company 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 70.0% of the company’s total assets. The principal categories of qualifying assets relevant to our business are any of the following:
 
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
 
(a) is organized under the laws of, and has its principal place of business in, the United States;
 
(b) is not an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
 
(c) satisfies any of the following:
 
(i) does not have any class of securities that is traded on a national securities exchange;
 
(ii) is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company; or
 
(iii) is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.
 
(2) Securities of any eligible portfolio company that we control.
 
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
 
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60.0% of the outstanding equity of the eligible portfolio company.
 
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.


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(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
 
In addition, a business development company 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.
 
Managerial Assistance to Portfolio Companies
 
In order to count portfolio securities as qualifying assets for the purpose of the 70.0% 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 business development company, 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.
 
Temporary Investments
 
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70.0% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25.0% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our management team will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
 
Senior Securities
 
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 200.0% immediately after each such issuance. In addition, while any senior securities remain outstanding, 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 5.0% 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 — Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital’’ and “— 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.”
 
Code of Ethics
 
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


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held by us, so long as such investments are made in accordance with the code’s requirements. For information on how to obtain a copy of the code of ethics, see “Available Information.”
 
Proxy Voting Policies and Procedures
 
We vote proxies relating to our portfolio securities in 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 may 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 disclose to our chief compliance officer any potential conflict that he or she is aware of 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.
 
Other
 
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. We intend to apply to the SEC for exemptive relief to permit us to co-invest with Main Street Capital II. Although the SEC has granted similar relief in the past, we cannot be certain that our application for such relief will be granted or what conditions will be placed on such relief.
 
We will be periodically examined by the SEC for compliance with the 1940 Act.
 
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 business development company, 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.
 
Small Business Administration Regulations
 
Main Street Mezzanine Fund is licensed by the Small Business Administration to operate as a Small Business Investment Company under Section 301(c) of the Small Business Investment Act of 1958. Upon the closing of this offering, Main Street Mezzanine Fund will be a wholly-owned subsidiary of us, and will continue to hold its SBIC license. Main Street Mezzanine Fund initially obtained its SBIC license on September 30, 2002.
 
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA 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. Main Street Mezzanine Fund has typically invested in secured debt, acquired warrants and/or made equity investments in qualifying small businesses.
 
Under present SBA regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $18.0 million and have average annual net income after federal income taxes not exceeding $6.0 million (average net income to be computed without benefit of


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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 $6.0 million and have average annual net income after federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any net carryover loss) for the two most recent fiscal years. SBA 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 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 20.0% of the SBIC’s regulatory capital in any one portfolio company.
 
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 10.0% or more of a class of capital stock of 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, 2006, we had issued $45.1 million of SBA-guaranteed debentures, which had an annual weight-averaged interest rate of approximately 5.7%. During the first quarter of 2007, Main Street Mezzanine Fund issued an additional $9.9 million of SBA-guaranteed indebtedness. SBA regulations currently limit the dollar amount of outstanding SBA-guaranteed debentures that may be issued by any one SBIC (or group of SBICs under common control) to $127.2 million (which amount is subject to increase on an annual basis based on cost of living increases). Because of our and our investment team’s affiliations with Main Street Capital II, a separate SBIC which commenced investment operations in January 2006, Main Street Mezzanine Fund and Main Street Capital II may be deemed to be a group of SBICs under common control. Thus, the dollar amount of SBA-guaranteed debentures that can be issued collectively by Main Street Mezzanine Fund and Main Street Capital II may be limited to $127.2 million, absent relief from the SBA. Currently, we, through Main Street Mezzanine Fund, do not intend to borrow SBA-guaranteed indebtedness in excess of $55.0 million based upon Main Street Mezzanine Fund’s existing equity capital.
 
SBICs must invest idle funds that are not being used to make loans in investments permitted under SBA 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 fe