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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-50398
TECHNOLOGY INVESTMENT CAPITAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 20-0188736
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
8 SOUND SHORE DRIVE
GREENWICH, CT 06830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 983-5275
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, par value
$0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2) Yes [ ] No [X].
The aggregate market value of common stock held by non-affiliates of
the Registrant on December 31, 2003, based on the closing price on that date of
$15.55 on the Nasdaq National Market, was $151,833,310. For the purposes of
calculating this amount only, all directors and executive officers of the
Registrant have been treated as affiliates. There were 10,000,100 shares of the
Registrant's common stock outstanding as of March 8, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
2004 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission, are incorporated by reference in Part III of this Annual
Report on Form 10-K as indicated herein.
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TECHNOLOGY INVESTMENT CAPITAL CORP.
FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................................. 1
Item 2. Properties........................................................................................... 19
Item 3. Legal Proceedings.................................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities......................................................................................... 20
Item 6. Selected Financial Data.............................................................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 25
Item 8. Financial Statements and Supplementary Data.......................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 35
Item 9A. Controls and Procedures.............................................................................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant................................................... 35
Item 11. Executive Compensation............................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................................... 36
Item 13. Certain Relationships and Related Transactions....................................................... 36
Item 14. Principal Accountant Fees and Services............................................................... 36
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 37
Signatures
PART I
Item 1. Business
Technology Investment Capital Corporation ("TICC" or "the Company") is a
specialty finance company that was incorporated under the General Corporation
Laws of the State of Maryland on July 21, 2003. TICC is a closed-end,
non-diversified investment company that is a business development company under
the Investment Company Act of 1940 (the "1940 Act"). We completed our initial
public offering on November 26, 2003. We seek to achieve a high level of current
income by investing in debt securities, consisting primarily of senior notes,
senior subordinated notes and junior subordinated notes, of technology-related
companies. We also seek to provide our stockholders with long-term capital
growth through the appreciation in the value of warrants or other equity
instruments that we may receive when we make loans. Our headquarters are in
Greenwich, Connecticut.
Our investment objective is to maximize our portfolio's total return,
principally by investing in the debt and/or equity securities of
technology-related companies. Technology-related companies include companies in
the following businesses: computer hardware and software, networking systems,
semiconductors, semiconductor capital equipment, diversified technology, medical
device technology, information technology infrastructure or services, Internet,
telecommunications and telecommunications equipment and media. Our primary focus
is to seek current income through investment in non-public debt and long-term
capital appreciation by acquiring accompanying warrants or other equity
securities. We may also invest in the publicly-traded debt and/or equity
securities of other technology-related companies.
As a business development company, we are required to invest at least 70% of our
total assets in "qualifying assets," which, generally, are securities of private
companies or securities of public companies whose securities are not eligible
for purchase on margin (which includes many companies with thinly traded
securities that are quoted in the "pink sheets" or the bulletin board NASD
Electronic Quotation Service). Qualifying assets may also include cash, cash
equivalents, U.S. Government securities or high-quality debt investments
maturing in one year or less from the date of investment. We may invest a
portion of the remaining 30% of our total assets in debt and/or equity
securities of companies that are not technology-related and that may be larger
than target portfolio companies. We intend to concentrate in the technology
sector and to invest, under normal circumstances, at least 80% of the value of
our net assets (including the amount of any borrowings for investment purposes)
in technology-related companies.
Our investment activities are managed by Technology Investment Management, LLC
("TIM"). TIM is an investment adviser registered under the Investment Advisers
Act of 1940 (the "Advisers Act"). TIM is owned by BDC Partners, LLC ("BDC
Partners"), its managing member, and Royce & Associates, LLC ("Royce"). Jonathan
H. Cohen, our chief executive officer, and Saul B. Rosenthal, our chief
operating officer, are the members of BDC Partners, and Charles M. Royce, our
non-executive chairman, is the president of Royce. Under the investment advisory
agreement, we have agreed to pay TIM an annual base management fee based on our
net assets as well as an incentive fee based on our performance. See "Investment
Advisory Agreement."
MARKET OPPORTUNITY
The four years since mid-2000 have seen dramatic shifts in the competitive
landscape across the technology sector. Significant declines in corporate and
consumer demand for information technology products and services have driven
vigorous price competition and spurred numerous corporate reorganizations in
technology-related industries. Many companies have merged with competitors,
scaled-back their operations or simply closed down in response to these
difficult business conditions, and we expect to see further consolidation in
these industries. At the same time, technology-related companies with strong
balance sheets, stable revenues and efficient operating structures are
benefiting from the consolidation or elimination of competitors in their
markets.
LARGE, UNDERSERVED MARKET FOR PRODUCT
In this environment, we believe that many well-positioned technology-related
companies could benefit from improved access to capital and that a significant
opportunity exists to provide them with capital through debt and equity
investments. The compression of valuations of technology-related companies in
the public equity markets, together with a steep decline in the number of
successful initial public offerings, have limited the availability of public
equity financing. These developments
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have also impeded new funding by private sources of equity capital, such as
private equity and venture capital funds, to the extent they have been unable to
execute successful exit strategies with respect to their portfolio holdings. At
the same time, many technology-related companies have had difficulty raising
alternative forms of capital. Historically, technology-related companies have
generally relied upon equity rather than debt financing. As a result, the market
for debt financing of technology-related companies is generally less developed
than the debt markets serving other types of businesses. In spite of the large
number of technology-related companies in the United States today, we believe
that these companies are significantly underserved by traditional lenders such
as banks, savings and loan institutions and finance companies for the following
reasons:
Non-traditional Financial Profiles
The balance sheet of a technology-related company often includes a
disproportionately large amount of intellectual property assets as compared to
the balance sheets of basic industrial and service companies. This makes these
companies difficult to evaluate using traditional lending criteria and, to the
extent that creditors seek collateral, makes the process of perfecting liens on,
and foreclosing on, collateral more difficult than would be the case with loans
to industrial companies. In terms of the income statement profile, the high
revenue growth rates characteristic of technology-related companies often render
them difficult to evaluate from a credit perspective. Moreover,
technology-related companies often incur relatively high expenditures for
research and development, utilize unorthodox sales and marketing techniques and
selling structures, and experience rapid shifts in technology, consumer demand
and market share. These attributes can make it difficult for traditional lenders
to analyze technology-related companies using traditional analytical methods.
Industry Scale, Concentration and Regulation
Many companies in technology-related industries lack the size, and the markets
in which they operate lack the concentration, necessary to justify large loans
by traditional lenders. A portfolio of numerous small loans to smaller companies
typically entails greater management oversight and has associated with it
greater monitoring costs than a portfolio consisting of a few large loans to
larger companies. As a result, small loans are less attractive for large
institutions burdened by sizable administrative overhead. In the banking
industry, in particular, consolidation over the last decade has increased the
size, and reduced the number, of surviving banks. The surviving institutions
have sought to limit their credit exposure to, and the monitoring costs
associated with loans to, smaller businesses. In addition, traditional lending
institutions operate in a regulatory environment that favors lending to large,
established businesses. Over time, many traditional lending institutions have
developed loan approval processes in response to such regulation that conflict
with the entrepreneurial culture of smaller technology-related companies.
For the reasons outlined above, we believe that many viable technology-related
companies have either not been able, or have elected not, to obtain financing
from traditional lending institutions. We believe that these factors are likely
to continue, given the ongoing consolidation in the financial services industry,
and we seek to take advantage of this perceived opportunity to invest profitably
in technology-related companies by purchasing their debt and equity securities.
COMPLEMENTING PRIVATE EQUITY AND VENTURE CAPITAL FUNDS
We believe that our investment approach complements other sources of capital
available to technology-related companies. For example, although we may compete
with private equity and venture capital funds as a source of capital for such
businesses, those types of investors typically invest solely in equity
securities. We believe that the nature of our investments in debt securities
will be viewed by such entities as an attractive alternative source of capital.
Private equity and venture capital funds often base their investments on
anticipated annual internal rates of return that are substantially higher than
the annual internal rates of return that we have set as our operating target.
Moreover, private equity and venture capital funds often demand a significantly
greater percentage of equity ownership interests than we would require. However,
private equity and venture capital investments typically entail considerably
more risk than the debt and equity investments that we expect to make, as they
are usually uncollateralized and rank lower in priority in the capital structure
of the portfolio companies. We believe the prospect of obtaining additional
capital without incurring substantial incremental dilution will make us
attractive to owner-managers as a prospective source of capital.
In addition, in many cases, we expect that private equity and venture capital
funds will welcome an investment by us in their portfolio companies. After
making an initial investment, these funds often seek to stabilize or reduce
their financial exposure to their portfolio companies, a goal that financing
from us could accomplish by providing non-equity capital. In the current
2
investment climate, it is possible that we will offer the only viable
alternative source of capital for a target technology-related company other than
incremental equity investments by the company's existing financial sponsors. As
such, we will provide target technology-related companies and their financial
sponsors with an opportunity to diversify the company's capital sources. In
addition to enabling incremental growth, this should facilitate access to other
alternative sources of capital in the future.
Senior management currently maintains relationships with more than 100 private
equity and venture capital funds. In addition, to strengthen these relationships
and cultivate new ones, management maintains active communication with these and
other private equity and venture capital funds. Through these relationships and
contacts, we anticipate that we will develop other valuable referral
relationships in the future.
COMPETITIVE ADVANTAGES
We believe that we are well positioned to provide financing to target
technology-related companies for the following reasons:
o Technology focus;
o Management expertise;
o Flexible investment approach;
o Longer investment horizon; and
o Established deal sourcing network.
TECHNOLOGY FOCUS
We intend to concentrate our investments in companies in technology-related
industries. We believe that this focus, together with our management's
experience in analyzing, investing in and financing such companies, will enable
us to develop a sustainable competitive advantage. In particular, we have and
expect to gain additional expertise in assessing the value of intellectual
property assets, and in evaluating the operating characteristics of target
technology-related companies. As we gain expertise in appraising the assets of
target technology-related companies for purposes of taking collateral, we should
develop a competitive advantage over less specialized lenders, particularly over
lenders with limited experience in lending to such companies. We believe that
our specialization in financing companies in particular industries within the
technology sector will enable us to identify investment opportunities and to
advise our target technology-related companies on consolidation and exit
financing opportunities more rapidly and effectively than less specialized
lenders.
MANAGEMENT EXPERTISE
We believe that our management's strong combination of experience and contacts
in the technology sector should attract well-positioned prospective portfolio
companies.
o Jonathan H. Cohen, the chief executive officer and president
of TICC, has more than 15 years of experience in
technology-related equity research and investment. He was
named to Institutional Investor's "All-American" research team
in 1996, 1997 and 1998. During his career, Mr. Cohen has
managed technology research groups covering computer software
and hardware companies, telecommunication companies and
semiconductor companies at several firms, including Wit
SoundView, Merrill Lynch & Co., UBS Securities and Salomon
Smith Barney. Mr. Cohen is currently the portfolio manager of
Royce Technology Value Fund, a technology-focused mutual fund.
o Saul B. Rosenthal, the chief operating officer of TICC, has
five years of experience in the capital markets, with a focus
on small to middle-market transactions in the technology
sector. Mr. Rosenthal previously served as president of Privet
Financial Securities, LLC, a broker-dealer providing advisory
services to technology companies, and previously led the
private financing/public company effort at SoundView
Technology Group, where he co-founded SoundView's Private
Equity Group. He was a vice-president and co-founder of the
Private Equity Group at Wit Capital from 1998 to 2000. Prior
to joining Wit Capital, Mr. Rosenthal was an attorney at the
law firm of Shearman & Sterling LLP.
3
o Lee D. Stern, executive vice president of TICC, has more than
20 years of financial and investment experience in leveraged
finance and in financing technology companies. Prior to
joining TICC, Mr. Stern was a senior professional at Hill
Street Capital, and prior to that, he was a partner of Thomas
Weisel Partners and its predecessor, NationsBanc Montgomery,
where he focused on leveraged transactions relating to
acquisition finance and leveraged buyouts, including private
and public mezzanine finance. Mr. Stern was also previously a
managing director at Nomura Securities International, Inc.,
where he played a key role in building that firm's merchant
banking and principal debt investing business, and was a
member of Nomura Securities International's commitment and
underwriting committees.
We believe that our management team's extensive experience in researching,
analyzing and investing in technology companies affords us a relative
competitive advantage in providing financing to target technology-related
companies.
FLEXIBLE INVESTMENT APPROACH
We have significant relative flexibility in selecting and structuring our
investments. We are not subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. Also, we have fairly
broad latitude as to the term and nature of our investments. We recognize that
technology-related companies regularly make corporate development decisions that
impact their financial performance, valuation and risk profile. In some cases,
these decisions can favorably impact long-term enterprise value at the expense
of short-term financial performance. We seek to structure our investments so as
to take into account the uncertain and potentially variable financial
performance of our portfolio companies. This should enable our portfolio
companies to retain access to committed capital at different stages in their
development and eliminate some of the uncertainty surrounding their capital
allocation decisions. We calculate rates of return on invested capital based on
a combination of up-front commitment fees, current and deferred interest rates
and residual values, which may take the form of common stock, warrants, equity
appreciation rights or future contract payments. We believe that this flexible
approach to structuring investments will facilitate positive, long-term
relationships with our portfolio companies and enable us to become a preferred
source of capital to them. We also believe our approach should enable debt
financing to develop into a viable alternative capital source for funding the
growth of target technology-related companies that wish to avoid the dilutive
effects of equity financings for existing equity holders.
LONGER INVESTMENT HORIZON
We will not be subject to periodic capital return requirements. Such
requirements, which are standard for most private equity and venture capital
funds, typically require that such funds return to investors the initial capital
investment after a pre-agreed time, together with any capital gains on such
capital investment. These provisions often force such funds to seek the return
of their investments in portfolio companies through mergers, public equity
offerings or other liquidity events more quickly than they otherwise might,
which can result in a lower overall return to investors and adversely affect the
ultimate viability of the affected portfolio companies. Because we may invest in
the same portfolio companies as these funds, we are subject to these risks if
these funds demand a return on their investments in the portfolio companies. We
believe that our flexibility to take a longer-term view should help us to
maximize returns on our invested capital while still meeting the needs of our
portfolio companies.
ESTABLISHED DEAL SOURCING NETWORK
We believe that, through the senior management of TIM and our directors, we have
extensive contacts and sources from which to generate investment opportunities.
These contacts and sources include public and private companies, private equity
and venture capital funds, investment bankers, attorneys and commercial bankers.
Senior management currently maintains relationships with more than 100 private
equity and venture capital funds. We believe that senior management has
developed a strong reputation within the investment community over their years
in the investment banking, investment management and equity research businesses.
We intend to utilize these relationships and the reputations of senior
management to identify significant investment opportunities. In addition, we
believe that senior management will provide substantial management advisory
capabilities that will add value to our portfolio companies. Toward this end, we
intend to enter into additional informal relationships with private equity and
venture capital funds to seek out investment opportunities. However, there can
be no assurance that we will be able to enter into any such relationships or, if
we do, that such relationships will lead to the origination of debt or other
investments.
4
INVESTMENT PROCESS
PROSPECTIVE PORTFOLIO COMPANY CHARACTERISTICS
We have identified several criteria that we believe are important in seeking our
investment objective with respect to target technology-related companies. These
criteria provide general guidelines for our investment decisions; however, not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management
We generally require that our portfolio companies have an experienced management
team. We also require the portfolio companies to have in place proper incentives
to induce management to succeed and to act in concert with our interests as
investors, including having significant equity interests.
Significant Financial or Strategic Sponsor
We intend to invest in target technology-related companies in which established
private equity or venture capital funds or other financial or strategic sponsors
have previously invested and make an ongoing contribution to the management of
the business.
Strong Competitive Position in Industry
We seek to invest in target technology-related companies that have developed a
strong competitive position within their respective sector or niche of a
technology-related industry.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations
We focus on target technology-related companies that are profitable or nearly
profitable on an operating cash flow basis. Typically, we would not expect to
invest in start-up companies.
Potential for Future Growth
We generally require that a prospective target technology-related company, in
addition to generating sufficient cash flow to cover its operating costs and
service its debt, demonstrate an ability to increase its revenues and operating
cash flow over time. The anticipated growth rate of a prospective target
technology-related company will be a key factor in determining the value that we
ascribe to any warrants or other equity securities that we may acquire in
connection with an investment in debt securities.
Exit Strategy
Prior to making an investment in debt securities that is accompanied by an
equity-based security in a portfolio company, we analyze the potential for that
company to increase the liquidity of its common equity through a future event
that would enable us to realize appreciation, if any, in the value of our equity
interest. Liquidity events may include an initial public offering, a private
sale of our equity interest to a third party, a merger or an acquisition of the
company or a purchase of our equity position by the company or one of its
stockholders.
Liquidation Value of Assets
Although we do not intend to operate as an asset-based lender, the prospective
liquidation value of the assets, if any, collateralizing the debt securities
that we hold is an important factor in our credit analysis. We emphasize both
tangible assets, such as accounts receivable, inventory and equipment, and
intangible assets, such as intellectual property, customer lists, networks and
databases.
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DUE DILIGENCE
If a target technology-related company generally meets the characteristics
described above, we perform initial due diligence, including company and
technology assessments, market analysis, competitive analysis, evaluation of
management, risk analysis and transaction size, pricing and structure analysis.
The criteria delineated below provide general parameters for our investment
decisions, although not all of such criteria will be followed in each instance.
Upon successful completion of this preliminary evaluation, we will decide
whether to deliver a non-binding letter of intent and move forward towards the
completion of a transaction.
Management Team and Financial Sponsor
o Interviews with management and significant stockholders,
including any financial or strategic sponsor;
o Review of financing history;
o Review of management's track record with respect to product
development and marketing, mergers and acquisitions,
alliances, collaborations, research and development
outsourcing and other strategic activities;
o Assessment of competition; and
o Review of exit strategies.
Financial Condition
o Evaluation of future financing needs and plans;
o Detailed analysis of financial performance;
o Development of pro forma financial projections; and
o Review of assets and liabilities, including contingent
liabilities, if any, and legal and regulatory risks.
Technology Assessment
o Evaluation of intellectual property position;
o Review of research and development milestones;
o Analysis of core technology under development;
o Assessment of collaborations and other technology validations;
and
o Assessment of market and growth potential.
Upon completion of, or concurrent with, these analyses, we will conduct on-site
visits with the portfolio company's senior management team.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
MONITORING
We will continuously monitor our portfolio companies in order to determine
whether they are meeting our financing criteria and their respective business
plans. We may decline to make additional investments in portfolio companies that
do not continue to meet our financing criteria. However, we may choose to make
additional investments in portfolio companies that do not do so, but that we
believe will nevertheless perform well in the future.
6
We will monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team will closely monitor the status and performance of
each individual company on at least a quarterly and, in some cases, a monthly
basis.
We have several methods of evaluating and monitoring the performance of our debt
and equity positions, including but not limited to the following:
o Assessment of business development success, including product
development, financings, profitability and the portfolio
company's overall adherence to its business plan;
o Periodic and regular contact with portfolio company management
to discuss financial position, requirements and
accomplishments;
o Periodic and regular formal update interviews with portfolio
company management and, if appropriate, the financial or
strategic sponsor;
o Attendance at and participation in board meetings; and
o Review of monthly and quarterly financial statements and
financial projections for portfolio companies.
PORTFOLIO COMPANIES
On January 28, 2004, we made a senior subordinated loan of $8.0 million to
Questia Media Inc., a leading provider of on-line educational, technical, and
professional publications. The loan carries an interest rate of 12% as well as a
pay-in-kind (PIK) feature of an additional 6% of the invested amount. The loan
matures on January 28, 2009 and is secured by the assets of Questia Media. The
transaction also provides for TICC to purchase an additional $2 million of
senior notes as Questia Media achieves certain milestones. Questia Media has
developed a fully searchable electronic database of academic information
content, consisting of books and academic journal articles. Questia Media makes
this database available on a subscription basis, primarily for student use.
At the time of our initial public offering, we had entered into four non-binding
commitments to lend up to $35 million to prospective portfolio companies,
including Questia Media, as discussed above. Of the remaining three prospective
portfolio companies, we remain in discussions with one, another is in the
process of being sold (prior to the opportunity for us to complete our proposed
transaction), and we have discontinued negotiations with the third. We currently
have several additional non-binding commitments to make loans to other
prospective portfolio companies. We are actively pursuing these opportunities
and others.
With respect to each of these non-binding commitments, we will only agree to
provide the loan if, among other things, the results of our due diligence
investigations are satisfactory, the terms and conditions of the loan are
acceptable and all necessary consents are received. In some instances, the loans
will also require prior approval of the prospective portfolio company's other
lenders. If, for any reason, we do not desire to make one of the loans, we will
not be obligated to do so. Similarly, none of the prospective portfolio
companies is obligated to receive a loan from us. TIM's management is at various
stages of negotiations with and has initiated its due diligence investigations
of some prospective portfolio companies. However, there can be no assurance that
TIM will not discover facts in the course of completing its due diligence that
would render a particular investment imprudent or that any of these loans will
actually be made.
MANAGERIAL ASSISTANCE
As a business development company, we are required to offer, and in many cases
may provide and be paid for, significant managerial assistance to portfolio
companies. This assistance will typically involve monitoring the operations of
portfolio companies, participating in their board and management meetings,
consulting with and advising their officers and providing other organizational
and financial guidance.
7
COMPETITION
Our primary competitors to provide financing to target technology-related
companies include private equity and venture capital funds, other equity and
non-equity based investment funds and investment banks and other sources of
financing, including traditional financial services companies such as commercial
banks and specialty finance companies. Many of these entities have greater
financial and managerial resources than we will have. For additional information
concerning the competitive risks we face, see "Risk factors."
EMPLOYEES
We have no employees. Our day-to-day investment operations are managed by our
investment adviser. In addition, we reimburse BDC Partners for an allocable
portion of expenses incurred by it in performing its obligations under the
administration agreement, including a portion of the rent and the compensation
of our chief financial officer and other administrative support personnel. See
"Investment Advisory Agreement."
INVESTMENT ADVISORY AGREEMENT
MANAGEMENT SERVICES
TIM serves as our investment adviser. TIM is a recently formed investment
adviser that is registered as an investment adviser under the Advisers Act.
Subject to the overall supervision of our board of directors, TIM manages the
day-to-day operations of, and provides investment advisory services to, TICC.
Under the terms of the investment advisory agreement, TIM:
o determines the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes;
o identifies, evaluates and negotiates the structure of the
investments we make;
o closes, monitors and services the investments we make; and
o determines what securities we will purchase, retain or sell.
TIM's services under the investment advisory agreement are not exclusive, and it
is free to furnish similar services to other entities so long as its services to
us are not impaired. However, TIM has agreed that, during the term of the
investment advisory agreement, it will not serve as investment adviser to any
other public or private entity that utilizes a principal investment strategy of
providing debt financing to target technology-related companies.
MANAGEMENT FEE
We pay TIM a fee for investment advisory services consisting of two components
- -- a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 2.00%. For services
rendered under the investment advisory agreement during the period commencing
from the closing of our initial public offering through and including March 31,
2004, the base management fee is payable monthly in arrears, and is calculated
based on the initial value of our net assets upon the closing of our initial
public offering. For services rendered under the investment advisory agreement
after March 31, 2004, the base management fee will be payable quarterly in
arrears, and will be calculated based on the average value of our net assets at
the end of the two most recently completed calendar quarters, and appropriately
adjusted for any share issuances, repurchases or redemptions during the current
calendar quarter. Base management fees for any partial month or quarter will be
appropriately pro rated. The liquidation preference of any issued and
outstanding preferred stock will be included in the calculation of our net
assets for purposes of determining the base management fee, with such
liquidation preference appropriately adjusted for any share issuances,
repurchases or redemptions during the current calendar quarter. TIM has agreed
to waive voluntarily that portion of the base management fee attributable to any
outstanding preferred stock for any quarter in which our total return for such
quarter fails to exceed the dividend rate applicable to such preferred stock.
TIM has further agreed not to terminate or modify this waiver agreement without
the prior consent of our board of directors, including the separate consent of a
majority of our independent directors.
8
The incentive fee has two parts, as follows: One part is calculated and payable
quarterly in arrears based on our pre-incentive fee net investment income for
the immediately preceding calendar quarter. For this purpose, pre-incentive fee
net investment income means interest income, dividend income and any other
income earned during the calendar quarter, minus our operating expenses for the
quarter (including the base management fee and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). Pre-incentive fee net investment income includes any consulting
or other fees that we receive from portfolio companies, but does not include any
net realized capital gains. Pre-incentive fee net investment income, expressed
as a rate of return on the value of our net assets at the end of the immediately
preceding calendar quarter, will be compared to one-fourth of the applicable
annual "hurdle rate." TIM is entitled to 20.0% of the excess (if any) of our
pre-incentive fee net investment income for the quarter over one-fourth of the
applicable annual hurdle rate. The annual hurdle for the period from the closing
of our initial public offering through and including December 31, 2004 is 8.27%,
which is equal to the interest rate payable, at the beginning of the period, on
the most recently issued five-year U.S. Treasury Notes plus 5.0%. For each
calendar year commencing on or after January 1, 2005, the annual hurdle rate
will be determined as of the immediately preceding December 31st by adding 5.0%
to the interest rate then payable on the most recently issued five-year U.S.
Treasury Notes, up to a maximum annual hurdle rate of 10.0%. The calculations
will be appropriately pro rated for any period of less than three months and
adjusted for any share issuances, redemptions or repurchases during the current
quarter.
The second part of the incentive fee will be determined and payable in arrears
as of the end of each calendar year (or upon termination of the investment
advisory agreement, as of the termination date), commencing on December 31,
2004, and will equal 20.0% of our net realized capital gains for the calendar
year less any net unrealized capital losses for such year; provided that the
incentive fee as of December 31, 2004 will be calculated for a period of longer
than twelve calendar months to take into account any net realized capital gains
and net unrealized capital losses for the period ended December 31, 2003.
PAYMENT OF OUR EXPENSES
All personnel of the investment adviser when and to the extent engaged in
providing investment advisory services, and the compensation and expenses of
such personnel allocable to such services, will be provided and paid for by BDC
Partners, the investment adviser's managing member. We are responsible for all
other costs and expenses of our operations and transactions, including (without
limitation) the cost of calculating our net asset value; the cost of effecting
sales and repurchases of shares of our common stock and other securities;
investment advisory fees; fees payable to third parties relating to, or
associated with, making investments (in each case subject to approval of our
board of directors); transfer agent and custodial fees; federal and state
registration fees; any exchange listing fees; federal, state and local taxes;
independent directors' fees and expenses; brokerage commissions; costs of proxy
statements, stockholders' reports and notices; fidelity bond, directors and
officers/errors and omissions liability insurance and other insurance premiums;
direct costs such as printing, mailing, long distance telephone, staff,
independent audits and outside legal costs and all other expenses incurred by
either BDC Partners or us in connection with administering our business,
including payments under the administration agreement that will be based upon
our allocable portion of overhead and other expenses incurred by BDC Partners in
performing its obligations under the administration agreement, including a
portion of the rent and the compensation of our chief financial officer and
other administrative support personnel.
DURATION AND TERMINATION
The investment advisory agreement was initially approved by our board of
directors on August 1, 2003 and again, as amended, on October 28, 2003. Unless
terminated earlier as described below, it will continue in effect for a period
of two years from its effective date. It will remain in effect from year to year
thereafter if approved annually by our board of directors or by the affirmative
vote of the holders of a majority of our outstanding voting securities,
including, in either case, approval by a majority of our directors who are not
interested persons. The investment advisory agreement will automatically
terminate in the event of its assignment. The investment advisory agreement may
be terminated by either party without penalty upon not more than 60 days'
written notice to the other. See "Risk Factors - Risks relating to our business
and structure -- We are dependent upon TIM's key management personnel for our
future success, particularly Jonathan H. Cohen, Saul B. Rosenthal and Lee D.
Stern."
INDEMNIFICATION
The investment advisory agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
reckless disregard of its duties and obligations, TIM and its officers,
managers, agents, employees, controlling persons, members and any other person
or entity affiliated with it, including without limitation BDC Partners, are
entitled to indemnification from TICC for any damages, liabilities, costs and
expenses (including
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reasonable attorneys' fees and amounts reasonably paid in settlement) arising
from the rendering of TIM's services under the investment advisory agreement or
otherwise as an investment adviser of TICC.
ORGANIZATION OF THE INVESTMENT ADVISER
TIM is a Delaware limited liability company that is registered as an investment
adviser under the Advisers Act. BDC Partners, a Delaware limited liability
company, is its managing member and provides the investment adviser with all
personnel necessary to manage our day-to-day operations and provide the services
under the investment advisory agreement. BDC Partners has no investment advisory
operations separate from serving as the managing member of TIM. The principal
address of TIM and BDC Partners is 8 Sound Shore Drive, Greenwich, Connecticut
06830.
Royce, a Delaware limited liability company, is the investment adviser's
non-managing member. Royce has agreed to make Mr. Royce or certain other
portfolio managers available to the investment adviser to provide certain
consulting services without compensation. Royce is a wholly owned subsidiary of
Legg Mason, Inc.
INVESTMENT PERSONNEL
Our investment personnel currently consists of our executive officers, Jonathan
H. Cohen, Saul B. Rosenthal and Lee D. Stern, and three additional investment
professionals.
SUB-ADVISORY AGREEMENT
At the time of our initial public offering, Hill Street Advisors, LLC ("Hill
Street Advisors") was named as our sub-adviser. TICC, TIM, BDC Partners and Hill
Street Advisors were parties to a sub-advisory agreement, which was terminated
by mutual agreement on February 26, 2004 following the integration of our
investment team and the exclusive employment relationship TIM entered into with
its chief transaction officer, Lee D. Stern.
ADMINISTRATION AGREEMENT
Pursuant to a separate administration agreement, BDC Partners furnishes us with
office facilities, equipment and clerical, bookkeeping and record keeping
services at such facilities. Under the administration agreement, BDC Partners
also performs, or oversees the performance of, our required administrative
services, which includes being responsible for the financial records which we
are required to maintain and preparing reports to our stockholders and reports
filed with the SEC. In addition, BDC Partners assists us in determining and
publishing our net asset value, overseeing the preparation and filing of our tax
returns and the printing and dissemination of reports to our stockholders, and
generally overseeing the payment of our expenses and the performance of
administrative and professional services rendered to us by others. Payments
under the administration agreement are based upon our allocable portion of
overhead and other expenses incurred by BDC Partners in performing its
obligations under the administration agreement, including a portion of the rent
and the compensation of our chief financial officer and other administrative
support personnel. The administration agreement may be terminated by either
party without penalty upon 60 days' written notice to the other party.
The administration agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
reckless disregard of its duties and obligations, BDC Partners and its officers,
manager, agents, employees, controlling persons, members and any other person or
entity affiliated with it are entitled to indemnification from TICC for any
damages, liabilities, costs and expenses (including reasonable attorneys' fees
and amounts reasonably paid in settlement) arising from the rendering of BDC
Partners' services under the administration agreement or otherwise as
administrator for TICC.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
As a business development company, we intend to elect to be treated as a RIC
under Subchapter M of the Code, beginning with our 2003 taxable year. As a RIC,
we generally will not have to pay corporate-level federal income taxes on any
ordinary income or capital gains 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, we must distribute to our stockholders, for each taxable year, at
least 90% of our "investment company taxable income," which is generally our
ordinary income plus the excess of our net realized short-term capital gains
over our net realized long-term capital losses (the "Annual Distribution
Requirement").
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TAXATION AS A REGULATED INVESTMENT COMPANY
If we:
o qualify as a RIC; and
o satisfy the Annual Distribution Requirement;
then we will not be subject to federal income tax on the portion of our
investment company taxable income and net capital gain (i.e., net long-term
capital gains in excess of net short-term capital losses) we distribute to
stockholders. We will be subject to U.S. federal income tax at the regular
corporate rates on any income or capital gain not distributed (or deemed
distributed) to our stockholders.
We will be subject to a 4% nondeductible federal excise tax on certain
undistributed income unless we distribute in a timely manner an amount at least
equal to the sum of (1) 98% of our ordinary income for each calendar year, (2)
98% of our capital gain net income for the one-year period ending October 31 in
that calendar year and (3) any income realized, but not distributed, in
preceding years (the "Excise Tax Avoidance Requirement"). We currently intend to
make sufficient distributions each taxable year to satisfy the Excise Tax
Avoidance Requirement.
In order to qualify as a RIC for federal income tax purposes, we must, among
other things:
o qualify as a business development company under the 1940 Act
at all times during each taxable year;
o derive in each taxable year at least 90% of our gross income
from dividends, interest, payments with respect to certain
securities loans, gains from the sale of stock or other
securities, or other income derived with respect to our
business of investing in such stock or securities; and
o diversify our holdings so that at the end of each quarter of
the taxable year:
o at least 50% 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% of the value of our assets or
more than 10% of the outstanding voting securities of
the issuer; and
o no more than 25% 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 or of two or more issuers that are
controlled, as determined under applicable tax rules,
by us and that are engaged in the same or similar or
related trades or businesses.
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 payment-in-kind 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. Because any original issue discount 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.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
A business development company is regulated by the 1940 Act. A business
development company must be organized in the United States for the purpose of
investing in or lending to primarily private companies and making managerial
assistance available to them. A business development company may use capital
provided by public stockholders and from other sources to invest in long-term,
private investments in businesses. A business development company provides
stockholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in primarily
privately owned companies.
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As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
The principal categories of qualifying assets relevant to our business are:
o Securities of an eligible portfolio company that are purchased
in transactions not involving any o public offering. An
eligible portfolio company is defined under the 1940 Act to
include any issuer that:
o is organized and has its principal place of business
in the U.S.,
o is not an investment company or a company operating
pursuant to certain exemptions under the o 1940 Act,
other than a small business investment company wholly
owned by a business development company; and
o does not have any class of publicly traded securities
with respect to which a broker may extend margin
credit;
o Securities received in exchange for or distributed with
respect to securities described in the o bullet above or
pursuant to the exercise of options, warrants, or rights
relating to those securities; and
o Cash, cash items, government securities, or high quality debt
securities (as defined in the 1940 Act), maturing in one year
or less from the time of investment.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must offer to make
available to the issuer of those securities significant managerial assistance
such as providing guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. We will offer to
provide managerial assistance to portfolio companies.
We intend to concentrate in the technology sector and to invest, under normal
circumstances, at least 80% of the value of our net assets (including the amount
of any borrowings for investment purposes) in technology-related companies. This
80% policy is not a fundamental policy and therefore may be changed without the
approval of our stockholders. However, we may not change or modify this policy
unless we provide our stockholders with at least 60 days' prior notice.
As a business development company, we are required to meet a coverage ratio of
the value 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%.
We may also be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our
directors who are not interested persons and, in some cases, prior approval by
the Securities and Exchange Commission.
We will be periodically examined by the SEC for compliance with the 1940 Act.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain substantive regulatory requirements. A majority
of our directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, we are required to provide and maintain a
bond issued by a reputable fidelity insurance company to protect the business
development company. Furthermore, as a business development company, we are
prohibited from protecting any director or officer against any liability to the
company 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.
As required by the 1940 Act, we maintain a code of ethics that establishes
procedures for personal investments and restricts certain transactions by our
personnel. Our code of ethics generally does not permit investments by our
employees in securities that may be purchased or held by us.
You may read and copy the code of ethics at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-202-942-8090. In addition, the code of
ethics is available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of the
code of ethics, after paying a duplicating fee, by electronic request at the
following Email address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Section, Washington, D.C. 20549.
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We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
majority of the outstanding voting securities, as required by the 1940 Act. A
majority of the outstanding voting securities of a company is defined under the
1940 Act as the lesser of: (i) 67% or more of such company's voting securities
present at a meeting if more than 50% of the outstanding voting securities of
such company are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of such company. We do not anticipate any
substantial change in the nature of our business.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act imposes a wide variety of new regulatory requirements on
publicly-held companies and their insiders. Many of these requirements affect
us. For example:
o Our chief executive officer and chief financial officer must
certify the accuracy of the financial statements contained in
our periodic reports;
o Our periodic reports must disclose our conclusions about the
effectiveness of our disclosure controls and procedures; and
o Our periodic reports must disclose whether there were
significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies and procedures
to determine whether we comply with the Sarbanes-Oxley Act and the regulations
promulgated thereunder. We will continue to monitor our compliance with all
future regulations that are adopted under the Sarbanes-Oxley Act and will take
actions necessary to ensure that we are in compliance therewith.
FUNDAMENTAL INVESTMENT POLICIES
The restrictions identified as fundamental below, along with our investment
objective of seeking to maximize total return, are our only fundamental
policies. Fundamental policies may not be changed without the approval of the
holders of a majority of our outstanding voting securities, as defined in the
1940 Act. The percentage restrictions set forth below, other than the
restriction pertaining to the issuance of senior securities, apply at the time a
transaction is effected, and a subsequent change in a percentage resulting from
market fluctuations or any cause will not require us to dispose of portfolio
securities or to take other action to satisfy the percentage restriction.
As a matter of fundamental policy, we will not: (1) act as an underwriter of
securities of other issuers (except to the extent that we may be deemed an
"underwriter" of securities we purchase that must be registered under the
Securities Act before they may be offered or sold to the public); (2) purchase
or sell real estate or interests in real estate or real estate investment trusts
(except that we may (A) purchase and sell real estate or interests in real
estate in connection with the orderly liquidation of investments, or in
connection with foreclosure on collateral, (B) own the securities of companies
that are in the business of buying, selling or developing real estate or (C)
finance the purchase of real estate by our portfolio companies); (3) sell
securities short (except with regard to managing the risks associated with
publicly-traded securities issued by our portfolio companies); (4) purchase
securities on margin (except to the extent that we may purchase securities with
borrowed money); or (5) engage in the purchase or sale of commodities or
commodity contracts, including futures contracts (except where necessary in
working out distressed loan or investment situations or in hedging the risks
associated with interest rate fluctuations), and, in such cases, only after all
necessary registrations (or exemptions from registration) with the Commodity
Futures Trading Commission have been obtained.
We may invest up to 100% of our assets in securities acquired directly from
issuers in privately negotiated transactions. With respect to such securities,
we may, for the purpose of public resale, be deemed an "underwriter" as that
term is defined in the Securities Act. Our intention is to not write (sell) or
buy put or call options to manage risks associated with the publicly-traded
securities of our portfolio companies, except that we may enter into hedging
transactions to manage the risks associated with interest rate fluctuations,
and, in such cases, only after all necessary registrations (or exemptions from
registration) with the Commodity Futures Trading Commission have been obtained.
However, we may purchase or otherwise receive warrants to purchase the common
stock of our portfolio companies in connection with acquisition financing or
other
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investment. Similarly, in connection with an acquisition, we may acquire rights
to require the issuers of acquired securities or their affiliates to repurchase
them under certain circumstances. We also do not intend to acquire securities
issued by any investment company that exceed the limits imposed by the 1940 Act.
Under these limits, unless otherwise permitted by the 1940 Act, we currently
cannot acquire more than 3% of the voting securities of any registered
investment company, invest more than 5% of the value of our total assets in the
securities of one investment company or invest, in the aggregate, in excess of
10% of the value of our total assets in the securities of one or more investment
companies. With regard to that portion of our portfolio invested in securities
issued by investment companies, it should be noted that such investments might
subject our stockholders to additional expenses.
RISK FACTORS
An investment in our securities involves certain risks relating to our structure
and investment objectives. The risks set out below are not the only risks we
face. If any of the following risks occur, our business, financial condition and
results of operations could be materially 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
WE ARE A NEW COMPANY WITH NO OPERATING HISTORY.
We were incorporated in July 2003 and have a limited operating history. We are
subject to all of the business risks and uncertainties associated with any new
business enterprise, including the risk that we will not achieve our investment
objective and that the value of your investment in us could decline
substantially.
ANY FAILURE ON OUR PART TO MAINTAIN OUR STATUS AS A BUSINESS DEVELOPMENT COMPANY
WOULD REDUCE OUR OPERATING FLEXIBILITY.
If we do not remain a business development company, we might be regulated as a
closed-end investment company under the 1940 Act, which would decrease our
operating flexibility.
WE ARE DEPENDENT UPON TIM'S KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS,
PARTICULARLY JONATHAN H. COHEN, SAUL B. ROSENTHAL AND LEE D. STERN.
We depend on the diligence, skill and network of business contacts of the senior
management of TIM. The senior management, together with other investment
professionals, will evaluate, negotiate, structure, close, monitor and service
our investments. Our future success will depend to a significant extent on the
continued service and coordination of the senior management team, particularly
Jonathan H. Cohen, the chief executive officer and president of TIM, Saul B.
Rosenthal, the chief operating officer of TIM, and Lee D. Stern, the chief
transaction officer of TIM. Only Messrs. Rosenthal and Stern will devote
substantially all of their business time to our operations. Neither Mr.
Rosenthal nor Mr. Stern has extensive private equity investment experience, and
neither Mr. Cohen nor Mr. Rosenthal has extensive private debt investment
experience. None of these individuals is subject to an employment contract. The
departure of any of these employees could have a material adverse effect on our
ability to achieve our investment objective.
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO
MANAGE OUR FUTURE GROWTH EFFECTIVELY.
TIM is a recently formed investment adviser, and TICC is a recently organized
company. As such, each entity is subject to the business risks and uncertainties
associated with any new business enterprise, including the lack of experience in
managing or operating a business development company. Our ability to achieve our
investment objective will depend on our ability to grow, which will depend, in
turn, on our investment management team's ability to identify, analyze, invest
in and finance companies that meet our investment criteria. Accomplishing this
result on a cost-effective basis is largely a function of our management team's
structuring of the investment process, its ability to provide competent,
attentive and efficient services to us and our access to financing on acceptable
terms. As we grow, we and TIM, through its managing member, BDC Partners, will
need to hire, train, supervise and manage new employees. Failure to manage our
future growth effectively could have a material adverse effect on our business,
financial condition and results of operations.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
A large number of entities compete with us to make the types of investments that
we plan to make in target technology-related companies. We compete with a large
number of private equity and venture capital funds, other equity and non-equity
based investment funds, investment banks and other sources of financing,
including traditional financial services companies such as commercial banks and
specialty finance companies. 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
14
lower cost of funds 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, which could allow them to consider a wider variety
of investments and establish more relationships than us. Furthermore, many of
our competitors are not subject to the regulatory restrictions that the 1940 Act
imposes on us as a business development company. There can be no assurance that
the competitive pressures we face will not have a material adverse effect on our
business, financial condition and results of operations. Also, as a result of
this competition, we may not be able to take advantage of attractive investment
opportunities from time to time, and we can offer no assurance that we will be
able to identify and make investments that are consistent with our investment
objective.
OUR BUSINESS MODEL DEPENDS UPON THE DEVELOPMENT OF STRONG REFERRAL RELATIONSHIPS
WITH PRIVATE EQUITY AND VENTURE CAPITAL FUNDS AND INVESTMENT BANKING FIRMS.
Management maintains active communication with private equity and venture
capital funds and investment banking firms in order to seek out investment
opportunities. We expect that we will rely to a significant extent upon these
informal relationships to provide us with deal flow. If we fail to maintain our
relationships with key firms, or if we fail to establish strong referral
relationships with other firms or other sources of investment opportunities, we
will not be able to grow our portfolio of loans and achieve our investment
objective. In addition, persons with whom we have informal relationships are not
obligated to provide us with investment opportunities, and therefore, there is
no assurance that such relationships will lead to the origination of debt or
other investments.
WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS.
When we invest in debt securities, we generally expect to acquire warrants or
other equity securities as well. Our goal is ultimately to dispose of these
equity interests and realize gains upon our disposition of such interests. Over
time, the gains that we realize on these equity interests may offset, to some
extent, losses we experience on defaults under debt securities that we hold.
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.
BECAUSE MOST OF OUR INVESTMENTS INITIALLY WILL NOT BE IN PUBLICLY TRADED
SECURITIES, THERE WILL BE UNCERTAINTY REGARDING THE VALUE OF OUR INVESTMENTS,
WHICH COULD ADVERSELY AFFECT THE DETERMINATION OF OUR NET ASSET VALUE.
Our portfolio investments, at least initially, will not be in publicly traded
securities. As a result, the fair value of these securities will not be readily
determinable. We will value these securities at fair value as determined in good
faith by our Board of Directors based upon the recommendation of its valuation
committee. The valuation committee will utilize the services of Houlihan Lokey
Howard & Zukin ("Houlihan Lokey"), an independent valuation firm. However, the
board of directors will retain ultimate authority as to the appropriate
valuation of each investment. The types of factors that the valuation committee
may take into account in providing its fair value recommendation to the Board of
Directors may include, as relevant, the nature and value of any collateral, the
portfolio company's ability to make payments and its earnings, the markets in
which the portfolio company does business, comparison to valuations of publicly
traded companies, comparisons to recent sales of comparable companies, the
discounted value of the cash flows of the portfolio company and other relevant
factors. Because such valuations are inherently uncertain and may be based on
estimates, our determinations of fair value may differ materially from the
values that would be assessed if a ready market for these securities existed.
THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS
As stated above, at least initially, most of our investments will not be in
publicly traded securities. Substantially all of these securities will be
subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. The illiquidity of our investments may
make it difficult for us to sell such investments if the need arises. 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 have
previously recorded our investments.
In addition, since we generally intend to invest in debt securities with a term
of up to seven years and to hold our investments in debt securities and related
equity securities until maturity of the debt, we do not expect realization
events, if any, to occur in the near-term. In addition, we expect that our
holdings of equity securities may require several years to appreciate in value,
and we can offer no assurance that such appreciation will occur.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
We could experience fluctuations in our quarterly operating results due to a
number of factors, including the interest rates payable on the debt securities
we acquire, the default rate on such securities, the level of our expenses,
variations in and the
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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.
REGULATIONS GOVERNING OUR OPERATION AS A BUSINESS DEVELOPMENT COMPANY AFFECT OUR
ABILITY TO, AND THE WAY IN WHICH WE RAISE ADDITIONAL CAPITAL, WHICH MAY EXPOSE
US TO RISKS, INCLUDING THE TYPICAL RISKS ASSOCIATED WITH LEVERAGE.
Our business will require a substantial amount of capital, which we may acquire
from the following sources:
SENIOR SECURITIES AND OTHER INDEBTEDNESS
We may issue debt securities or preferred stock and/or borrow money from banks
or other financial institutions, which we refer to collectively as "senior
securities," up to the maximum amount permitted by the 1940 Act. Under the
provisions of the 1940 Act, we are permitted, as a business development company,
to issue senior securities in amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200% after each issuance of senior securities.
If we issue senior securities, including preferred stock and debt securities, we
will be exposed to typical risks associated with leverage, including an
increased risk of loss. If we incur leverage to make investments, a decrease in
the value of our investments would have a greater negative impact on the value
of our common stock. If we issue debt securities or preferred stock, it is
likely that such securities will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility. In addition, such
securities may be rated by rating agencies, and in obtaining a rating for such
securities, we may be required to abide by operating and investment guidelines
that could further restrict our operating flexibility.
Our ability to pay dividends or issue additional senior securities would be
restricted if our asset coverage ratio were not at least 200%. 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 and, depending on the
nature of our leverage, repay a portion of our indebtedness at a time when such
sales may be disadvantageous. Furthermore, any amounts that we use to service
our indebtedness would not be available for distributions to our common
stockholders.
COMMON STOCK
We are not generally able to issue and sell our common stock at a price below
net asset value per share. We may, however, sell our common stock, or warrants,
options or rights to acquire our common stock, at a price below the current net
asset value of our common stock if our board of directors determines that such
sale is in the best interests of TICC and its stockholders and our stockholders
approve such sale. In any such case, the price at which our securities are to be
issued and sold may not be less than a price which, in the determination of our
board of directors, closely approximates the market value of such securities
(less any distributing commission or discount). If we raise additional funds by
issuing more common stock or senior securities convertible into, or exchangeable
for, our common stock, the percentage ownership of our stockholders at that time
would decrease and they may experience dilution. Moreover, we can offer no
assurance that we will be able to issue and sell additional equity securities in
the future, on favorable terms or at all.
A CHANGE IN INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY.
A portion of our income will depend upon the difference between the rate at
which we borrow funds (if we do borrow) and the interest rate on the debt
securities in which we invest. We anticipate using a combination of equity and
long-term and short-term borrowings to finance our investment activities. Over
time, some of our investments in debt securities will be at fixed rates and
others at variable rates. Initially many of our investments in debt securities
may be at fixed rates. We may, but will not be required to, hedge against
interest rate fluctuations by using standard hedging instruments such as
futures, options and forward contracts, subject to applicable legal
requirements. These activities may limit our ability to participate in the
benefits of lower interest rates with respect to the hedged portfolio. Adverse
developments resulting from changes in interest rates or hedging transactions
could have a material adverse effect on our business, financial condition and
results of operations. Also, we have limited experience in entering into hedging
transactions, and we will initially have to purchase or develop such expertise.
WE WILL BE SUBJECT TO CORPORATE-LEVEL INCOME TAX IF WE ARE UNABLE TO QUALIFY AS
A RIC.
To maintain our qualification as a RIC under the Code, we must meet certain
income source, asset diversification and annual distribution requirements. The
annual distribution requirement for a RIC is satisfied if we distribute at least
90% of our ordinary income and realized net short-term capital gains in excess
of realized net long-term capital losses, if any, to our stockholders on an
annual basis. Because we may use debt financing in the future, we may be subject
to certain asset coverage ratio requirements under the 1940 Act and financial
covenants under loan and credit agreements that could, under certain
circumstances, restrict us from making distributions necessary to qualify as a
RIC. If we are unable to obtain cash
16
from other sources, we may fail to qualify for special tax treatment as a RIC
and, thus, may be subject to corporate-level income tax on all our income. To
qualify as a RIC, we must also meet certain asset diversification requirements
at the end of each calendar quarter. Failure to meet these tests 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, any such dispositions could be made at disadvantageous prices and may
result in substantial losses. If we fail to qualify as a RIC for any reason and
remain or become 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. Such a failure would have a
material adverse effect on us and our stockholders.
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 making of a loan or possibly
in other circumstances, or contracted payment-in-kind interest, which represents
contractual interest added to the loan balance and due at the end of the loan
term. 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 tax requirement to
distribute at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any, to
maintain our status as a RIC. Accordingly, we may have to sell some of our
investments at times we would not consider advantageous, raise additional debt
or equity capital or reduce new investment originations to meet these
distribution requirements. If we are not able to obtain cash from other sources,
we may fail to qualify as a RIC and thus be subject to corporate-level income
tax.
THERE ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST, WHICH COULD IMPACT OUR
INVESTMENT RETURNS.
Our executive officers and directors, and the executive officers of our
investment adviser, TIM, and its managing member, BDC Partners, serve or may
serve as officers and directors of entities who operate in the same or related
line of business as we do. 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, Jonathan H. Cohen, the chief executive
officer and president of TIM, BDC Partners and TICC, is the principal of JHC
Capital Management, LLC ("JHC Capital Management"), a registered investment
adviser. Steven P. Novak, one of our independent directors, is also the
president of Palladio Capital Management, LLC, the manager of an equity-oriented
hedge fund; Charles M. Royce, the non-executive chairman of our board of
directors, is the president and chief investment officer of Royce, the
non-managing member of our investment adviser.
In order to minimize the potential conflicts of interest that might arise, we
have adopted a policy that prohibits us from making investments in, or otherwise
knowingly doing business with, any company in which any fund or other client
account managed by JHC Capital Management, Royce, or Palladio Capital Management
holds a long or short position. The investment focus of each of these entities
tends to be different from that of the Company. Nevertheless, it is possible
that new investment opportunities that meet our investment objective may come to
the attention of one of these entities in connection with another investment
advisory client or program, and, if so, such opportunity might not be offered,
or otherwise made available, to us. Also, our investment policy precluding the
investments referenced above could cause us to miss out on some investment
opportunities. However, our executive officers, directors and investment adviser
intend to treat the Company in a fair and equitable manner over time consistent
with their applicable duties under law so that the Company will not be
disadvantaged in relation to any other particular client. Finally, we pay BDC
Partners our allocable portion of overhead and other expenses incurred by BDC
Partners in performing its obligations under the administration agreement,
including a portion of the rent and the compensation of our chief financial
officer and other administrative support personnel, which will create conflicts
of interest that our board of directors must monitor.
CHANGES IN LAWS OR REGULATIONS GOVERNING OUR OPERATIONS MAY ADVERSELY AFFECT OUR
BUSINESS.
We and our portfolio companies will be subject to regulation by laws at the
local, state and federal level. These laws and regulations, as well as their
interpretation, may be changed from time to time. Accordingly, any change in
these laws or regulations could have a material adverse effect on our business.
17
RISKS RELATED TO OUR INVESTMENTS
OUR PORTFOLIO MAY BE CONCENTRATED IN A LIMITED NUMBER OF PORTFOLIO COMPANIES IN
THE TECHNOLOGY SECTOR, WHICH WILL SUBJECT US TO A RISK OF SIGNIFICANT LOSS IF
ANY OF THESE COMPANIES DEFAULTS ON ITS OBLIGATIONS UNDER ANY OF ITS DEBT
SECURITIES THAT WE HOLD OR IF THE TECHNOLOGY SECTOR EXPERIENCES A FURTHER
DOWNTURN.
A consequence of this limited number of investments is that the aggregate
returns we realize may be significantly adversely affected if a small number of
investments perform poorly or if we need to write down the value of any one
investment. Beyond our income tax asset diversification requirements, we do not
have fixed guidelines for diversification, and our investments could be
concentrated in relatively few issuers. In addition, we intend to concentrate in
the technology sector and to invest, under normal circumstances, at least 80% of
the value of our net assets (including the amount of any borrowings for
investment purposes) in technology-related companies. As a result, a further
downturn in the technology sector could materially adversely affect us.
THE TECHNOLOGY SECTOR IS SUBJECT TO MANY RISKS, INCLUDING VOLATILITY, INTENSE
COMPETITION, DECREASING LIFE CYCLES AND PERIODIC DOWNTURNS.
We will invest in companies in the technology sector, some of which may have
relatively short operating histories. The revenues, income (or losses) and
valuations of technology-related companies can and often do fluctuate suddenly
and dramatically. Also, the technology market is generally characterized by
abrupt business cycles and intense competition. Since mid-2000, there has been
substantial excess production capacity and a significant slowdown in many
industries in the technology sector. In addition, this overcapacity, together
with a cyclical economic downturn, resulted in substantial decreases in the
market capitalization of many technology companies. While such valuations have
recovered to some extent in recent months, we can offer no assurance that such
decreases in market capitalization will not recur, or that any future decreases
in technology company valuations will be insubstantial or temporary in nature.
Therefore, our portfolio companies may face considerably more risk of loss than
companies in other industry sectors.
In addition, because of rapid technological change, historically, the average
selling prices of products and some services provided by the technology sector
have decreased over their productive lives. As a result, the average selling
prices of products and services offered by our portfolio companies may decrease
over time, which could adversely affect their operating results and their
ability to meet their obligations under their debt securities, as well as the
value of any equity securities, that we may hold. This could, in turn,
materially adversely affect our business, financial condition and results of
operations.
OUR INVESTMENTS IN THE TECHNOLOGY-RELATED COMPANIES THAT WE ARE TARGETING MAY BE
EXTREMELY RISKY AND WE COULD LOSE ALL OR PART OF OUR INVESTMENT.
Investment in the technology-related companies that we are targeting involves a
number of significant risks, including:
o these companies may have limited financial resources and may
be unable to meet their obligations under their debt
securities 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 we may have
obtained in connection with our investment;
o they typically have limited operating histories, narrower
product lines and smaller market shares than larger
businesses, which tend to render them more vulnerable to
competitors' actions and market conditions, as well as general
economic downturns;
o because they are generally privately owned, there is generally
little publicly available information about these businesses;
therefore, although TIM's agents will perform "due diligence"
investigations on these portfolio companies, their operations
and their prospects, we may not learn all of the material
information we need to know regarding these businesses;
o they 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; and
o they 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.
18
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 our portfolio
company's ability to meet its obligations under the debt securities that we
hold. We may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting portfolio company. In
addition, if a portfolio company goes bankrupt, even though we may have
structured our interest as senior debt, depending on the facts and
circumstances, including the extent to which we actually provided significant
"managerial assistance" to that portfolio company, a bankruptcy court might
recharacterize our debt holding and subordinate all or a portion of our claim to
that of other creditors.
OUR INCENTIVE FEE MAY INDUCE TIM TO MAKE SPECULATIVE INVESTMENTS.
The incentive fee payable by us to TIM may create an incentive for TIM to make
investments on our behalf that are risky or more speculative than would be the
case in the absence of such compensation arrangement. The way in which the
incentive fee payable to the investment adviser is determined, which is
calculated as a percentage of the return on invested capital, may encourage the
investment adviser to use leverage to increase the return on our investments.
Under certain circumstances, the use of leverage may increase the likelihood of
default, which would disfavor holders of our common stock. Similarly, because
the investment adviser will receive the incentive fee based, in part, upon net
capital gains realized on our investments, the investment adviser may invest
more than would otherwise be appropriate in companies whose securities are
likely to yield capital gains, as compared to income producing securities. Such
a practice could result in our investing in more speculative securities than
would otherwise be the case, which could result in higher investment losses,
particularly during cyclical economic downturns.
OUR PORTFOLIO COMPANIES MAY INCUR DEBT THAT RANKS EQUALLY WITH, OR SENIOR TO,
OUR INVESTMENTS IN SUCH COMPANIES.
We intend to invest primarily in senior debt securities, but may also invest in
subordinated debt securities, issued by our portfolio companies. In some cases
portfolio companies will be permitted to have other debt that ranks equally
with, or senior to, the debt securities in which we invest. By their terms, such
debt instruments may provide that the holders thereof are entitled to receive
payment of interest or principal on or before the dates on which we are entitled
to receive payments in respect of the debt securities 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 in respect of our investment.
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 securities in which we invest, we would have to share
on a pari passu basis any distributions with other creditors holding such debt
in the event of an insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company. In addition, the Company will not
be in a position to control any portfolio company by investing in its debt
securities. 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 companies, as representatives of the holders of their common
equity, may take risks or otherwise act in ways that do not best serve our
interests as debt investors.
ITEM 2. PROPERTIES
We do not own any real estate or other physical properties materially important
to our operation. Our headquarters are located at 8 Sound Shore Drive,
Greenwich, Connecticut, where we occupy our office space pursuant to our
administration agreement with BDC Partners. Our office facilities are suitable
and adequate for our business as it is presently conducted.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings, nor, to our
knowledge, is any material legal proceeding threatened against us. From time to
time, we may be a party to certain legal proceedings incidental to the normal
course of our business including the enforcement of our rights under contracts
with our portfolio companies. While the outcome of these legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will
have a material effect upon our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq National Market under the symbol
"TICC." We completed our initial public offering of common stock on November 26,
2003 at the price of $15.00 per share. Prior to such date there was no public
market for our common stock.
The following table reflects, by quarter, the high and low closing prices per
share of our common stock on the Nasdaq National Market for each fiscal quarter
during the last two fiscal years.
PRICE RANGE
QUARTER ENDED HIGH LOW
- ------------- ---- ---
December 31, 2003*..........................................$15.66 .$14.88
* Our stock commenced trading on the NASDAQ National Market on
November 21, 2003.
The last reported sales price for our common stock on March 8, 2004 was $15.00
per share. As of March 8, 2004, there were approximately 76 holders of record of
our common stock.
DIVIDENDS
We currently intend to distribute a minimum of 90% of our ordinary income and
short-term capital gains, if any, on a quarterly basis to our stockholders. We
did not declare a dividend for the period ended December 31, 2003. The following
table reflects the dividends per share that we have declared on our common
stock:
DATE DECLARED RECORD DATE PAYMENT DATE AMOUNT
------------- ----------- ------------ ------
February 2, 2004 March 15, 2004 April 5, 2004 $0.10
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 2003, we sold 100 shares of beneficial
interest to BDC Partners at an aggregate purchase price of $1,500 prior to our
initial public offering pursuant to an exemption from the registration
requirements of the Securities Act of 1933.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal year ended December 31,
2003 is derived from our financial statements which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The data should be read in
conjunction with our financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
PERIOD JULY 21,
2003
(INCEPTION)
THROUGH DECEMBER 31,
2003
--------------------
Total Investment Income .............................................. $ 114,282
Total Expenses ....................................................... $ 692,107
Net Investment Income (Loss) ......................................... $ (577,825)
Net Increase (Decrease) in Stockholders' Equity Resulting from
Operations ....................................................... $ (577,825)
Per Share Data:
Net Increase (Decrease) in Stockholders' Equity Resulting from
Operations:
Basic ................................................................ $ (0.25)
Diluted .............................................................. $ (0.25)
Distributions Declared per Share ..................................... $ 0.00
Balance Sheet Data:
Total Assets ......................................................... $138,324,878
Total Stockholders' Equity ........................................... $137,969,627
Other Data:
Number of Portfolio Companies at Period End .......................... None
Principal Amount of Loan Originations ................................ None
Principal Amount of Loan Repayments .................................. None
Total Return (1) ..................................................... 3.67%
Weighted Average Yield on Investments (2) ............................ 0.40%
- ------------------
(1) Total return equals the increase of the ending market value over the
beginning market value, plus distributions, divided by the beginning
market value. The return for 2003 has not been annualized.
(2) Weighted average yield on investments equals interest income on
investments divided by the average investment balance throughout the
year.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes
thereto contained elsewhere in this Form 10-K.
FORWARD-LOOKING STATEMENTS
The information contained in this section should be read in conjunction with the
Selected Financial Data and Other Data, and our Financial Statements and notes
thereto appearing elsewhere in this Annual Report. This Annual Report, including
the Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that involve substantial risks
and uncertainties. These forward-looking statements are not historical facts,
but rather are based on current expectations, estimates and projections about
our industry, our beliefs, and our assumptions. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", and "estimates" and
variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties, and other factors, some of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements including without limitation (1) economic downturns
or recessions may impair our portfolio companies' performance, (2) a contraction
of available credit and/or an inability to access the equity markets could
impair our lending and investment activities, (3) the risks associated with the
possible disruption in the Company's operations due to terrorism and (4) the
risks, uncertainties and other factors we identify from time to time in our
filings with the Securities and Exchange Commission, including our Form 10-Ks,
Form 10-Qs and Form 8-Ks. Although we believe that the assumptions on which
these forward-looking statements are based are reasonable, any of those
assumptions could prove to be inaccurate, and as a result, the forward-looking
statements based on those assumptions also could be incorrect. In light of these
and other uncertainties, the inclusion of a projection or forward-looking
statement in this Annual Report should not be regarded as a representation by us
that our plans and objectives will be achieved. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Annual Report. We undertake no obligation to update such statements to
reflect subsequent events.
OVERVIEW
We were incorporated under the General Corporation Laws of the State of Maryland
on July 21, 2003. Our investment objective is to maximize our portfolio's total
return, principally by investing in the debt and/or equity securities of
technology-related companies. Our primary focus is seeking current income
through investment in non-public debt and long-term capital appreciation by
acquiring accompanying warrants or other equity securities. We may also invest
in the publicly traded debt and/or equity securities of other technology-related
companies. We operate as a closed-end, non-diversified management investment
company, and have elected to be treated as a business development company under
the 1940 Act. We intend to elect to be treated for tax purposes as a regulated
investment company, or RIC, under the Internal Revenue Code of 1986, as amended,
beginning with our 2003 taxable year.
Our investment activities are managed by TIM, an investment adviser registered
under the Advisers Act. TIM is owned by BDC Partners, its managing member, and
Royce. Jonathan H. Cohen, our chief executive officer, and Saul B. Rosenthal,
our chief operating officer, are the members of BDC Partners, and Charles M.
Royce, our non-executive chairman, is the president of Royce. Under the
investment advisory agreement, we have agreed to pay TIM an annual base
management fee based on our net assets as well as an incentive fee based on our
performance. See "Investment Advisory Agreement."
On November 26, 2003, we closed our initial public offering and sold 8,695,653
shares of our common stock at a price to the public of $15.00 per share, less an
underwriting discount of $1.05 per share and offering expenses of $954,048.
Certain of our directors and officers and employees of BDC Partners purchased
shares at the public offering price net of the sales concession. On December 10,
2003, we issued an additional 1,304,347 shares of our common stock at the same
price pursuant to the underwriters' overallotment. The total net proceeds to the
Company from the initial public offering, including the exercise of the
overallotment, were $138,545,952.
We intend to concentrate our investments in companies having annual revenues of
less than $100 million and/or a public market capitalization of less than $200
million. We focus on companies that create products or provide services
requiring advanced technology and companies that compete in industries
characterized by such products or services, including companies in the following
businesses: computer hardware and software, networking systems, semiconductors,
22
semiconductor capital equipment, diversified technology, medical device
technology, information technology infrastructure or services, Internet,
telecommunications and telecommunications equipment and media.
While the structure of our investments will vary, we expect to invest primarily
in the debt of established target technology-related companies. We seek to
invest in entities that, as a general matter, have been operating for at least
one year prior to the date of our investment and expect that such entities will,
at the time of our investment, have employees and revenues. We expect that most
of these companies will have financial backing provided by private equity or
venture capital funds or other financial or strategic sponsors at the time we
make an investment.
In addition, as a business development company under the 1940 Act, we are
required to make available significant managerial assistance, for which we may
receive fees, to our portfolio companies. These fees are generally
non-recurring, however in some instances they may have a recurring component.
Managerial assistance means, among other things, any arrangement whereby the
business development company, through its directors, officers or employees,
provides significant guidance and counsel concerning the management, operations
or business objectives and policies of a portfolio company. We record these fees
as managerial assistance fee revenue in the period in which the fees are earned.
Prior to making an investment, we will enter into a non-binding term sheet with
the potential portfolio company. These term sheets are generally subject to a
number of conditions, including but not limited to the satisfactory completion
of our due diligence investigations of the company's business and legal
documentation for the loan. Upon execution of the non-binding term sheet, the
company may pay us a non-refundable fee for our services rendered through the
date of the term sheet. We recognize this as management fee revenue upon
execution of the non-binding term sheet. We also will seek reimbursement from
the proposed borrower for our reasonable expenses including significant legal
fees in connection with the proposed transaction. Any amounts collected, in
excess of expenses, are recognized as "other income" in the quarter in which
such reimbursement is received.
At the time of our initial public offering, we had entered into four non-binding
commitments to lend up to $35 million to prospective portfolio companies,
including Questia Media, as discussed above. Of the remaining three prospective
portfolio companies, we remain in discussions with one, another is in the
process of being sold (prior to the opportunity for us to complete our proposed
transaction), and we have discontinued negotiations with the third. We currently
have several additional non-binding commitments to make loans to other
prospective portfolio companies. These commitments remain subject to, among
other things, the satisfactory completion of our due diligence investigation of
each prospective portfolio company, acceptance of terms and structure and
necessary consents. We are actively pursuing these opportunities and others.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the periods
reported. Actual results could materially differ from those estimates. We have
identified our investment valuation process as our most critical accounting
policy.
INVESTMENT VALUATION
The most significant estimate inherent in the preparation of our financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded.
We value our investment portfolio each quarter. We have retained an outside
valuation firm, Houlihan Lokey, to assist in the valuation process. At year-end,
there were no investments which required the valuation services of Houlihan
Lokey.
We carry our investments at fair value, as determined by our Board of Directors.
Securities that are publicly traded, if any, are valued at the closing price on
the valuation date. Debt and equity securities that are not publicly traded or
for which we have various degrees of trading restrictions, are valued at fair
value as determined in good faith by our Board of Directors based upon the
recommendation of its valuation committee. The valuation committee will utilize
the services of Houlihan Lokey in arriving at the fair value of these
securities; however the Board of Directors will retain ultimate authority as to
the appropriate valuation of each investment. No single standard for determining
fair value in good faith exists since fair value
23
depends upon circumstances of each individual case. In general, fair value is
the amount that we might reasonably expect to receive upon the current sale of
the security.
In making the good faith determination of the securities, we start with the cost
basis of the security, which includes the amortized original issue discount,
stated interest and PIK interest, if any. Due to the uncertainty inherent in the
valuation process, such estimates of fair value may differ significantly from
the values that would have been obtained had a ready market for the securities
existed, and the differences could be material. Additionally, changes in the
market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these
investments to be different than the valuations currently assigned.
MANAGERIAL ASSISTANCE FEES
We make available managerial assistance to portfolio companies in connection
with our investments and may receive fees for our services. Managerial
assistance means, among other things, any arrangement whereby the business
development company, through its directors, officers or employees, provides
significant guidance and counsel concerning the management, operations or
business objectives and policies of a portfolio company. We record these fees as
managerial assistance fee revenue in the period in which the fees are earned.
RESULTS OF OPERATIONS
INVESTMENT INCOME
Investment income for the period from inception (July 21, 2003) through December
31, 2003 was approximately $114,000. This amount consisted of interest income
from our invested cash and cash equivalents (the net proceeds of our initial
public offering) from November 26, 2003 through December 31, 2003. As we invest
the net proceeds of our initial public offering in debt securities of portfolio
companies, we will begin to generate income from these debt securities, which we
anticipate will be at interest rates significantly greater than the rates that
we are currently receiving on our cash and cash equivalents. We may also receive
income from origination fees that to receive when we purchase such debt
securities. As we acquire debt securities, we expect that income from invested
cash and cash equivalents will decline as a percentage of total revenue, and
that interest income from debt securities will increase and become our
predominant source of revenue.
EXPENSES
Expenses for the period from inception through December 31, 2003 were
approximately $692,000. This amount consisted primarily of organizational
expenses, investment advisory fees, professional fees, salaries and benefits for
administrative personnel, and general and administrative expenses.
TICC is an externally managed investment company and investment advisory fees
were $259,000 for the period. See "Investment Advisory Agreement" for a
description of the investment advisory agreement. The remainder of the expenses
incurred for the period from inception through December 31, 2003 consisted of
approximately $349,000 in organization expenses, $30,000 in professional fees,
$27,000 in salaries for administrative personnel, $19,000 in general and
administrative expenses, and $8,000 for insurance. A substantial portion of
these expenses were incurred in connection with the organization of the company
and the commencement of operations.
NET INVESTMENT LOSS
As a result of the investment income and expenses described above, we incurred a
net investment loss of approximately $578,000 for the period from inception
through December 31, 2003. Based on a weighted-average of 2,348,987 shares
outstanding, our net investment loss per common share for the period from
inception through December 31, 2003 was $(0.25), basic and fully-diluted.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had no investments in portfolio securities of any
companies and had $138,324,878 in total assets. Subsequently, on January 28,
2004, we made a senior subordinated loan of $8.0 million to Questia Media Inc.,
a leading
24
provider of on-line educational, technical, and professional publications. The
loan carries an interest rate of 12% as well as a payment-in-kind (PIK) feature
of an additional 6% of the invested amount. The loan matures on January 28,
2009. The transaction also provides for TICC to purchase an additional $2
million of senior notes as Questia Media achieves certain milestones.
We currently have non-binding commitments to make loans to several other
prospective portfolio companies, which are subject to, among other things,
satisfactory results of our due diligence investigations, acceptable terms and
conditions of the loan and the receipt of all necessary consents. See
"Overview."
Net cash provided by financing activities was approximately $138,546,000 for the
period from inception through December 31, 2003. These amounts consisted of the
net proceeds from our initial public offering, which closed on November 26,
2003. Cash used by operating activities during the period , consisting primarily
of the items described in "Results of Operations," was approximately $319,000.
In order to qualify as a regulated investment company and to avoid corporate
level tax on the income we distribute to our stockholders, we are required,
under Subchapter M of the Internal Revenue Code, to distribute at least 90% of
our ordinary income and short-term capital gains in excess of long-term capital
losses to our stockholders on an annual basis. No dividend was declared for the
period from inception through December 31, 2003. On February 2, 2004 we declared
a cash dividend of $0.10 per share on our common stock, payable on April 5, 2004
to holders of record as of March 15, 2004.
We may borrow funds to obtain additional capital once the remaining net proceeds
of our initial public offering have been fully invested. We may also pursue the
issuance of additional shares of our common stock. We have no current plans to
issue additional securities.
RELATED PARTY TRANSACTIONS
TIM is owned by BDC Partners, its managing member, and Royce. Jonathan H. Cohen,
our chief executive officer, and Saul B. Rosenthal, our chief operating officer,
are the members of BDC Partners, and Charles M. Royce, our non-executive
chairman, is the president of Royce. For the period ended December 31, 2003,
TICC paid or owed to TIM investment advisory fees of $259,138, and owed to BDC
Partners $24,660 as reimbursement for compensation expenses paid by BDC Partners
to employees for administrative services rendered to TICC, pursuant to an
administration agreement. In addition, TICC reimbursed TIM and BDC Partners for
organizational and offering expenses of $332,600 which were advanced on behalf
of TICC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates.
We expect that initially many of our investments in debt securities will be at
fixed rates. Over time some of our investments may be at variable rates. We may
hedge against interest rate fluctuations by using standard hedging instruments
such as futures, options and forward contracts. To date, we have made one
investment and substantially all the remaining assets are invested in short-term
government securities, time deposits and money market instruments. While hedging
activities may insulate us against adverse fluctuations in interest rates, they
may also limit our ability to participate in the benefits of lower interest
rates with respect to our portfolio of investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Auditors
Balance Sheet as of December 31, 2003
Statement of Operations for the period July 21, 2003 (inception) through
December 31, 2003
Statement of Stockholders' Equity for the period July 21, 2003 (inception)
through December 31, 2003
Statement of Cash Flows for the period July 21, 2003 (inception) through
December 31, 2003
Notes to Financial Statements
25
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Technology Investment Capital Corp.
In our opinion, the accompanying balance sheet, and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Technology Investment Capital Corp.
(the "Company") at December 31, 2003, and the results of its operations, changes
in stockholders' equity and cash flows for the period July 21, 2003 (inception)
through December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 9, 2004
26
TECHNOLOGY INVESTMENT CAPITAL CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 2003
DECEMBER 31, 2003
-----------------
ASSETS
ASSETS
Cash and cash equivalents.................................................. $138,228,765
Interest receivable........................................................ 23,667
Prepaid assets............................................................. 72,446
-----------------
TOTAL ASSETS.................................................................... $138,324,878
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses........................................................... $335,810
Accrued offering expenses.................................................. 19,441
-----------------
Total Liabilities...................................................... 355,251
-----------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000,000 shares
authorized, and 10,000,100 issued and outstanding,
respectively........................................................... 100,001
Capital in excess of par value............................................. 138,189,832
Accumulated net investment loss............................................ (320,206)
-----------------
Total Stockholders' Equity............................................. 137,969,627
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $138,324,878
=================
SEE ACCOMPANYING NOTES.
27
TECHNOLOGY INVESTMENT CAPITAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 21, 2003 (INCEPTION) THROUGH DECEMBER 31, 2003
INVESTMENT INCOME
Interest income................................................................. $114,282
------------
Total Investment Income.......................................................... 114,282
------------
EXPENSES
Salaries and benefits............................................................ 27,119
Investment advisory fees......................................................... 259,138
Professional fees................................................................ 30,110
Insurance........................................................................ 7,920
Organizational expenses.......................................................... 349,316
General and administrative....................................................... 18,504
------------
Total Expenses................................................................... 692,107
------------
NET INVESTMENT LOSS................................................................... (577,825)
============
NET DECREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS........................ $(577,825)
============
Net decrease in stockholders' equity resulting from operations per common
share:
Basic and Diluted................................................................ $(0.25)
Weighted average shares of common stock outstanding:
Basic and Diluted................................................................ 2,348,987
SEE ACCOMPANYING NOTES.
28
TECHNOLOGY INVESTMENT CAPITAL CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 21, 2003 (INCEPTION) THROUGH DECEMBER 31, 2003
COMMON STOCK CAPITAL IN TOTAL
------------------------ EXCESS OF PAR UNDISTRIBUTED STOCKHOLDERS'
SHARES AMOUNT VALUE EARNINGS EQUITY
---------- --------- ------------- ------------- -------------
Balance at July 21, 2003
(Inception)............... 100 $ 1 $ 1,499 -- $ 1,500
Issuance of Common Stock In
Public Offering (net of
underwriting costs and
offering costs of
$11,454,048).............. 10,000,000 $100,000 138,445,952 -- 138,545,952
Net Decrease in Stockholders'
Equity Resulting from
Operations................ -- -- -- $(577,825) $(577,825)
Reclassification for permanent
book-tax difference (1)... -- -- (257,619) 257,619 --
---------- --------- ------------- ------------- -------------
Balance at December 31, 2003 10,000,100 $100,001 $138,189,832 $(320,206) $137,969,627
========== ========= ============== ============= =============
- --------------
(1) See Federal Income Tax note.
SEE ACCOMPANYING NOTES.
29
TECHNOLOGY INVESTMENT CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 21, 2003 (INCEPTION) THROUGH DECEMBER 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in stockholders' equity resulting from
operations................................................................... $(577,825)
Adjustments to reconcile net decrease in stockholders'
equity resulting from operations to net cash provided/
used by operating activities:
Increase in interest receivable......................................... (23,667)
Increase in prepaid assets.............................................. (72,446)
Increase in accrued expenses and
other liabilities............................................... 355,251
---------------
Net Cash Used by Operating Activities............................................ (318,687)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the issuance of common stock.................................. 139,500,000
Offering costs from issuance of common stock..................................... (954,048)
---------------
Net Cash Provided by Financing Activities........................................ 138,545,952
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................. 138,227,265
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 1,500
---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $138,228,765
===============
NON-CASH FINANCING ACTIVITIES......................................................... none
SEE ACCOMPANYING NOTES.
30
TECHNOLOGY INVESTMENT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1. ORGANIZATION
Technology Investment Capital Corporation ("TICC" or "Company") was incorporated
under the General Corporation Laws of the State of Maryland on July 21, 2003 as
a closed-end investment company. The Company has elected to be treated as a
business development company under the Investment Company Act of 1940, as
amended. In addition, the Company intends to elect to be treated for tax
purposes as a regulated investment company, or RIC, under the Internal Revenue
Code of 1986, as amended, beginning with its 2003 taxable year. The Company's
investment objective is to maximize its total return, principally by investing
in the debt and/or equity securities of technology-related companies.
TICC's investment activities are managed by Technology Investment Management,
LLC ("TIM" or "Adviser"), a registered investment adviser under the Investment
Advisers Act of 1940, as amended. BDC Partners, LLC ("BDC Partners") is the
managing member of the Adviser and serves as the administrator of TICC.
On November 26, 2003, the Company closed its initial public offering and sold
8,695,653 shares of its common stock at a price to the public of $15.00 per
share, less an underwriting discount of $1.05 per share and offering expenses of
$954,048. Certain of TICC's directors and officers and employees of BDC Partners
purchased shares at the public offering price net of the sales concession. On
December 10, 2003, the Company issued an additional 1,304,347 shares of its
common stock at the same price pursuant to the underwriters' overallotment. The
total net proceeds to the Company from the initial public offering, including
the exercise of the overallotment, were $138,545,952.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company. There
are no related companies and no intercompany accounts to be eliminated.
USE OF ESTIMATES
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America that require
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates.
In the normal course of business, the Company may enter into contracts that
contain a variety of representations and provide indemnifications. The Company's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Company that have not yet occurred.
However, the Company expects the risk of loss to be remote.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and highly liquid
investments with original maturities of three months or less. Cash and cash
equivalents are carried at cost or amortized cost which approximates fair value.
INVESTMENT VALUATION
The Company carries its investments at fair value, as determined in good faith
by the Board of Directors based upon the recommendation of its valuation
committee. The Company has retained an outside valuation firm to assist in the
valuation process; however the Board of Directors will retain ultimate authority
as to the appropriate valuation of each investment. At year-end, there were no
investments which required the valuation services of the outside valuation firm.
31
INTEREST INCOME RECOGNITION
Interest income is recorded on the accrual basis to the extent that such amounts
are expected to be collected.
FEDERAL INCOME TAXES
The Company intends to operate so as to qualify to be taxed as a RIC under the
Internal Revenue Code and, as such, would not be subject to federal income tax
on the portion of its taxable income and gains distributed to stockholders. To
qualify as a RIC, the Company is required, among other requirements, to
distribute at least 90% of its investment company taxable income, as defined by
the Code.
Because federal income tax regulations differ from accounting principles
generally accepted in the United States of America, distributions in accordance
with tax regulations may differ from net investment income and realized gains
recognized for financial reporting purposes. Differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts in the
financial statement to reflect their tax character. Temporary differences arise
when certain items of income, expense, gain or loss are recognized at some time
in the future. Differences in classification may also result from the treatment
of short-term gains as ordinary income for tax purposes.
During the year ended December 31, 2003, the Company reclassified $257,619 from
net investment loss to capital in excess of par value, representing the portion
of net investment loss that will not be utilizable for tax purposes.
CONCENTRATION OF CREDIT RISK
The Company places its cash and cash equivalents with financial institutions
and, at times, cash held in checking accounts may exceed the Federal Deposit
Insurance Corporation insured limit.
NOTE 3. CASH AND CASH EQUIVALENTS
At December 31, 2003, cash and cash equivalents consisted of:
MARKET VALUE
---------------
UBS Select Money Market Fund..................................................... $28,000,000
Euro Time Deposit (0.93%, due January 13, 2004).................................. 10,000,000
U.S. Treasury Bill (0.82%, due January 22, 2004)................................. 49,976,083
U.S. Treasury Bill (0.84%, due March 18, 2004) 49,910,167
---------------
Total Cash Equivalents........................................................... 137,886,250
Cash............................................................................. 342,515
---------------
Cash and Cash Equivalents........................................................ $138,228,765
===============
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net increase
(decrease) in stockholders' equity resulting from operations per share for the
period ended December 31, 2003:
Numerator for basic and diluted loss per share........................... $ (577,825)
Denominator for basic and diluted weighted average shares................ 2,348,987
Basic and diluted net decrease in stockholders' equity
resulting from operations per common share........................... $ (0.25)
32
NOTE 5. RELATED PARTY TRANSACTIONS
TICC has entered into an investment advisory agreement with the Adviser, under
which the Adviser, subject to the overall supervision of TICC's board of
directors, manages the day-to-day operations of, and provides investment
advisory services to, TICC. For providing these services, the Adviser receives a
fee from TICC, consisting of two components: a base management fee and an
incentive fee. The base management fee is calculated at an annual rate of 2.00%.
For services rendered under the investment advisory agreement during the period
commencing from the closing of the Company's public share offering through and
including March 31, 2004, the base management fee is payable monthly in arrears,
and is calculated based on the initial value of TICC's net assets upon closing
of the stock offering. For services rendered under the investment advisory
agreement after March 31, 2004, the base management fee will be payable
quarterly in arrears, and will be calculated based on the average value of
TICC's net assets at the end of the two most recently completed calendar
quarters, and appropriately adjusted for any share issuances, repurchases or
redemptions during the current calendar quarter.
The incentive fee has two parts, as follows: One part is calculated and payable
quarterly in arrears based on TICC's pre-incentive fee net investment income for
the immediately preceding calendar quarter. For this purpose, pre-incentive fee
net investment income means interest income, dividend income and any other
income earned during the calendar quarter, minus our operating expenses for the
quarter (including the base management fee and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). Pre-incentive fee net investment income includes any consulting
or other fees that we receive from portfolio companies but does not include any
net realized capital gains. Pre-incentive fee net investment income, expressed
as a rate of return on the value of our net assets at the end of the immediately
preceding calendar quarter, will be compared to one-fourth of the applicable
annual "hurdle rate." TIM will be entitled to 20.0% of the excess (if any) of
our pre-incentive fee net investment income for the quarter over one-fourth of
the applicable annual hurdle rate. The annual hurdle for the period from the
closing of our initial public offering through and including December 31, 2004
is 8.27%, which is equal to the interest rate payable, at the beginning of the
period, on the most recently issued five-year U.S. Treasury Notes plus 5.0%. For
each calendar year commencing on or after January 1, 2005, the annual hurdle
rate will be determined as of the immediately preceding December 31st by adding
5.0% to the interest rate then payable on the most recently issued five-year
U.S. Treasury Notes, up to a maximum annual hurdle rate of 10.0%. The
calculations will be appropriately pro rated for any period of less than three
months and adjusted for any share issuances, redemptions or repurchases during
the current quarter.
The second part of the incentive fee will be determined and payable in arrears
as of the end of each calendar year (or upon termination of the investment
advisory agreement, as of the termination date), commencing on December 31,
2004, and will equal 20.0% of our net realized capital gains for the calendar
year less any net unrealized capital losses for such year; provided that the
incentive fee determined as of December 31, 2004 will be calculated for a period
of longer than twelve calendar months to take into account any net realized
capital gains and net unrealized capital losses for the period ending December
31, 2003.
TICC has also entered into an administration agreement with BDC Partners under
which BDC Partners will provide administrative services for TICC. For providing
these services, facilities and personnel, TICC will reimburse BDC Partners for
TICC's allocable portion of overhead and other expenses incurred by BDC Partners
in performing its obligations under the administration agreement, including
rent.
TIM is owned by BDC Partners, its managing member, and Royce & Associates, LLC
("Royce"). Jonathan H. Cohen, TICC's chief executive officer, and Saul B.
Rosenthal, TICC's chief operating officer, are the members of BDC Partners, and
Charles M. Royce, TICC's non-executive chairman, is the president of Royce. For
the period ended December 31, 2003, investment advisory fees charged by TIM were
$259,138. In addition, the Company accrued $24,660 as reimbursement for
compensation expenses paid by BDC Partners to employees for administrative
services rendered to TICC, pursuant to an administration agreement. In addition,
TICC reimbursed TIM and BDC Partners for organizational and offering expenses of
$332,600 which were advanced on behalf of TICC.
NOTE 6. SUBSEQUENT EVENTS
On January 28, 2004, the Company announced that it had closed its first
transaction, with Questia Media, Inc. The transaction involves $8,000,000 in 12%
notes, with a payment-in-kind feature of an additional 6% of the invested
amount. The notes mature in January 2009. The transaction also provides for for
TICC to purchase an additional $2 million of senior notes as Questia Media
achieves certain milestones.
33
On February 2, 2004, the Company announced a cash dividend of $0.10 per share
payable April 5, 2004 to holders of record on March 15, 2004.
On February 27, 2004, the Company announced the engagement of Houlihan Lokey
Howard & Zukin, an independent valuation firm, and the termination of it
sub-advisory agreement with Hill Street Capital by mutual agreement.
NOTE 7. FINANCIAL HIGHLIGHTS
PERIOD JULY 21,
2003
(INCEPTION)
THROUGH
DECEMBER 31,
2003
---------------
PER SHARE DATA
Net asset value at beginning of period........................................... $ 15.00
Offering costs and underwriters discount......................................... (1.14)
Net investment loss.............................................................. (0.06)(1)
---------------
Net asset value at end of period................................................. $ 13.80
===============
Per share market value at beginning of period.................................... $ 15.00(2)
Per share market value at end of period.......................................... 15.55
Total return..................................................................... 3.67%(3)
Shares outstanding at end of period.............................................. 10,000,100
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (`000s).............................................. $ 137,970
Average net assets (`000s)....................................................... 28,703
Ratio of expenses to average net assets.......................................... 2.4%*
Ratio of net investment loss to average net assets............................... (2.0)%*
- --------------
* Not annualized.
(1) Calculated in accordance with Securities and Exchange Commission Form
N-2, Part A, item 4.1.9.
(2) Represents initial public offering price.
(3) Total return equals the increase of the ending market value over the
beginning market value, plus distributions, divided by the beginning
market value. The return for 2003 has not been annualized.
34
NOTE 8. SELECTED QUARTERLY DATA (UNAUDITED)
PERIOD ENDED
DECEMBER 31,
2003
---------------
Total Investment Income.................................... $ 114,282
Net Investment Loss........................................ (577,825)
Net Decrease in Stockholders' Equity
Resulting from Operations............................. (577,825)
Basic loss per common share................................ (0.25)
Diluted loss per common share.............................. (0.25)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures.
(a) As of December 31, 2003 (the end of the period covered by this report), we,
including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures were effective in timely alerting management,
including the Chief Executive Officer and Chief Financial Officer, of
material information about us required to be included in periodic SEC
filings. However, in evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
(b) There have not been any significant changes to our internal controls or
other factors that could significantly affect these internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART III
We will file a definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders (the "2004 Proxy Statement") with the SEC, pursuant to Regulation
14A, not later than 120 days after the end of our fiscal year. Accordingly,
certain information required by Part III has been omitted under General
Instruction G(3) to Form 10-K. Only those sections of the 2004 Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference from our
2004 Proxy Statement under the captions "Proposal I: Election of Directors,"
"--Committees of the Board of Directors" and "--Section 16(a) Beneficial
Ownership Reporting Compliance." We have adopted a code of ethics that applies
to directors, officers and employees. The code of ethics is available on our
website at http://www.ticc.com. We will report any amendments to or waivers of a
required provision of the code of ethics in a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our
2004 Proxy Statement under the caption "Compensation of Directors and Executive
Officers."
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference from our
2004 Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference from our
2004 Proxy Statement under the caption "Certain Relationships and Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by Item 14 is hereby incorporated by reference from our
2004 Proxy Statement under the captions "Proposal II: Ratification of Selection
of Independent Auditors" and "Report of the Audit Committee."
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Documents Filed as Part of this Report
1. The following financial statements are filed herewith:
Report of Independent Auditors
Balance Sheet as of December 31, 2003
Statement of Operations for the period July 21, 2003 (inception)
through December 31, 2003
Statement of Stockholders Equity for the period July 21, 2003
(inception) through December 31, 2003
Statement of Cash Flows for the period July 21, 2003 (inception)
through December 31, 2003
Notes to Financial Statements
2. Financial statement schedules
No financial statement schedules are filed herewith because (1) such schedules
are not required or (2) the information has been presented in the aforementioned
financial statements.
3. Exhibits
The following exhibits are filed as part of this report or hereby incorporated
by reference to exhibits previously filed with the SEC:
3.1 Articles of Incorporation (Incorporated by reference to the
Registrant's Registration Statement on Form N-2
(File No. 333-109055), filed on September 23, 2003).
3.2 Amended and Restated Bylaws (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-2 (File No. 333-109055), filed on November
19, 2003).
4.1 Form of Share Certificate (Incorporated by reference to the
Registrant's Registration Statement on Form N-2 (File No.
333-109055), filed on September 23, 2003).
10.1 Amended and Restated Investment Advisory Agreement between
Registrant and Technology Investment Management, LLC
(Incorporated by reference to Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-2 (File No.
333-109055), filed on November 19, 2003).
10.2 Custodian Agreement between Registrant and State Street Bank
and Trust Company (Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement on
Form N-2 (File No. 333-109055), filed on November 19, 2003).
10.3 Administration Agreement between Registrant and BDC Partners,
LLC (Incorporated by reference to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement on Form N-2 (File
No. 333-109055), filed on November 19, 2003).
10.4 Transfer Agency and Service Agreement among Registrant,
EquiServe Trust Company, N.A. and EquiServe, Inc (Incorporated
by reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 (File No.
333-109055), filed on November 19, 2003).
10.5 Dividend Reinvestment Plan (Incorporated by reference to
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-2 (File No. 333-109055), filed on November
6, 2003).
11 Computation of Per Share Earnings (included in the notes to
the audited financial statements contained in this report).
31.1 Certification of Chief Executive Officer pursuant to section
302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to section
302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to section
906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to section
906 of The Sarbanes-Oxley Act of 2002.
- ---------------------
* Filed herewith.
37
B. REPORTS ON FORM 8-K
On December 2, 2003, the Company filed a Current Report on Form 8-K to indicate
it had issued a press release announcing the appointment of its chief financial
officer.
On December 10, 2003, the Company filed a Current Report on Form 8-K announcing
that it had closed on the underwriters' over-allotment in connection with its
offering of common stock.
On January 26, 2004, the Company filed a Current Report on Form 8-K announcing
that its Chief Executive Officer, Jonathan Cohen, would be opening the NASDAQ
National Market on January 27, 2004.
On January 28, 2004, the Company filed a Current Report on Form 8-K announcing
that it had completed a transaction with Questia Media, Inc. On February 2,
2004, the Company filed a Current Report on Form 8-K to indicate it had issued a
press release announcing the declaration of the fiscal year 2004 first quarter
dividend.
On February 4, 2004, the Company filed a Current Report on Form 8-K to indicate
it had issued a press release announcing the hiring of a managing director and
senior credit analyst.
On February 10, 2004, the Company filed a Current Report on Form 8-K to indicate
it had issued a press release announcing that the chief transaction officer had
joined the Company on a full-time basis.
On February 11, 2004, the Company filed a Current Report on Form 8-K to indicate
it had issued a press release announcing that earnings for the quarter and the
year would be announced on February 17, 2004.
On February 17, 2004, the Company filed a Current Report on Form 8-K announcing
its financial results for the fiscal year and quarter ended December 31, 2003.
On March 1, 2004, the Company filed a Current Report on Form 8-K announcing the
engagement of Houlihan Lokey Howard & Zukin, an independent valuation firm, and
the termination of the sub-advisory agreement with Hill Street Advisors, LLC.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Technology Investment Capital Corp.
Date: March 12, 2004 /s/ Jonathan H. Cohen
----------------------------------
Jonathan H. Cohen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.
Date: March 12, 2004 /s/ Charles M. Royce
----------------------------------
Charles M. Royce
Chairman of the Board of Directors
Date: March 12, 2004 /s/ Jonathan H. Cohen
----------------------------------
Jonathan H. Cohen
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: March 12, 2004 /s/ Patrick F. Conroy
----------------------------------
Patrick F. Conroy
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Date: March 12, 2004 /s/ Steven P. Novak
----------------------------------
Steven P. Novak
Director
Date: March 12, 2004 /s/ G. Peter O'Brien
----------------------------------
G. Peter O'Brien
Director
Date: March 12, 2004 /s/ Tonia L. Pankopf
----------------------------------
Tonia L. Pankopf
Director