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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2004.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-50398
TECHNOLOGY INVESTMENT CAPITAL CORP.
(Exact name of registrant as specified in its charter)
MARYLAND 20-0188736
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8 SOUND SHORE DRIVE, SUITE 255
GREENWICH, CONNECTICUT 06830
(Address of principal executive office)
(203) 983-5275
(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of the
issuer's Common Stock, $0.001 par value, outstanding as of August 9, 2004 was
10,092,712.
TECHNOLOGY INVESTMENT CAPITAL CORP.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2004 and December 31, 2003
Schedule of Investments as of June 30, 2004
Statement of Operations for the three months and six months
ended June 30, 2004
Statement of Stockholders' Equity for the six months ended
June 30, 2004
Statement of Cash Flows for the six months ended June 30, 2004
Notes to financial statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Results of Operations
Liquidity and Capital Resources
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
TECHNOLOGY INVESTMENT CAPITAL CORP.
BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
(Unaudited) (Audited)
ASSETS
Investments at fair value (cost: $33,411,566
@ 6/30/04; none @ 12/31/03)............. $ 33,411,566 $ 0
Cash and cash equivalents.................... 104,130,010 138,228,765
Interest receivable ......................... 698,249 23,667
Prepaid assets............................... 45,657 72,446
------------ ------------
TOTAL ASSETS................................... $138,285,482 $138,324,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses............................... $ 878,336 335,810
Accrued offering expenses...................... 0 19,441
------------ ------------
Total Liabilities............................ 878,336 355,251
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value,
100,000,000 shares authorized, and
10,092,712 and 10,000,100 issued and outstanding,
respectively .................................. 100,927 100,001
Capital in excess of par value................. 139,502,029 138,189,832
(Overdistributed) net investment income (loss). (2,195,810) (320,206)
------------ ------------
Total Stockholders' Equity................... 137,407,146 137,969,627
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $138,285,482 $138,324,878
============ ============
SEE ACCOMPANYING NOTES.
TECHNOLOGY INVESTMENT CAPITAL CORP.
SCHEDULE OF INVESTMENTS
JUNE 30, 2004
(UNAUDITED)
COMPANY (1) INDUSTRY INVESTMENT COST FAIR VALUE(2)
- ------------------------------------------------------------------------------------------------
Questia Media, Inc. digital media senior notes(3)(4) $ 8,411,566 $8,411,566
MortgageIT, Inc. financial services senior notes 15,000,000 15,000,000
Advanced Aesthetics medical services senior notes 10,000,000 10,000,000
Institute warrants to purchase
common stock -- --
----------- -----------
Total investments $33,411,566 $33,411,566
=========== ===========
- ----------------------------------
(1) We do not "control" and are not an "affiliate" of any of our portfolio
companies, each as defined in the Investment Company Act of 1940 (the "'40
Act"). In general, under the '40 Act, we would "control" a portfolio
company if we owned 25% or more of its voting securities and would be an
"affiliate" of a portfolio company if we owned 5% or more of its voting
securities.
(2) Fair value is determined in good faith by the Board of Directors of the
Company.
(3) Investment includes payment-in-kind interest.
(4) Transaction also includes a commitment for additional notes over two years.
TECHNOLOGY INVESTMENT CAPITAL CORP.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
Three Months ended Six Months ended
June 30, 2004 June 30, 2004
INVESTMENT INCOME
Interest income................................. $ 1,163,458 $ 1,626,645
Other fees ..................................... 80,000 530,000
------------------ ----------------
Total Investment Income....................... 1,243,458 2,156,645
------------------ ----------------
EXPENSES
Salaries and benefits........................... 51,800 98,138
Investment advisory fees........................ 689,767 1,378,949
Professional fees............................... 117,588 201,894
Insurance....................................... 20,020 40,040
Directors' fees................................. 38,250 70,500
General and administrative...................... 50,974 137,662
------------------ ----------------
Total Expenses................................ 968,399 1,927,183
------------------ ----------------
NET INVESTMENT INCOME............................. $ 275,059 $ 229,462
================== ================
NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM
OPERATIONS...................................... $ 275,059 $ 229,462
================== ================
Net increase in stockholders' equity resulting from
Operations per common share:
Basic and Diluted................................ $ 0.03 $ 0.02
Weighted average shares of common stock outstanding:
Basic and Diluted................................ 10,044,459 10,022,279
SEE ACCOMPANYING NOTES.
TECHNOLOGY INVESTMENT CAPITAL CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
Common Stock Capital (Over)/Underdist. Total
------------------------ in Excess of Net Investment Stockholders
Shares Amount Par Value Income Equity
------ ------ --------- ------ ------
Balance at December 31, 2003 ...... 10,000,100 $ 100,001 $ 138,189,832 $ (320,206) $ 137,969,627
Net Increase in
Stockholders' Equity
Resulting from Operations ......... -- -- -- 229,462 229,462
Shares issued in
connection with
dividend reinvestment ............. 92,612 926 1,312,197 -- 1,313,123
Dividends declared ................ -- -- -- (2,105,066) (2,105,066)
---------------------------------------------------------------------------------
Balance at June 30, 2004 .......... 10,092,712 $ 100,927 139,502,029 (2,195,810) 137,407,146
=================================================================================
SEE ACCOMPANYING NOTES
TECHNOLOGY INVESTMENT CAPITAL CORP.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in stockholders' equity resulting from
operations....................................... $ 229,462
Adjustments to reconcile net increase in stockholders'
equity resulting from operations to net cash
provided/ used by operating activities:
Increase in interest receivable................ (674,582)
Decrease in prepaid assets..................... 26,789
Increase in investments due to PIK interest.... (411,566)
Increase in accrued expenses and
other liabilities............................ 523,085
------------
Net Cash Used by Operating Activities.............. (306,812)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments.......................... (33,000,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .................................. (791,943)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ (34,098,755)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 138,228,765
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $104,130,010
============
NON-CASH FINANCING ACTIVITIES
Shares issued in connection
with dividend reinvestment plan ................... $ 1,313,123
============
SEE ACCOMPANYING NOTES
TECHNOLOGY INVESTMENT CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim financial statements of Technology Investment Capital Corp. ("TICC" or
"Company") are prepared in accordance with generally accepted accounting
principles ("GAAP")for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements
prepared in accordance with GAAP are omitted. In the opinion of management, all
adjustments, consisting solely of normal recurring accruals, necessary for the
fair presentation of financial statements for the interim periods have been
included. The current period's results of operations are not necessarily
indicative of results that may be achieved for the year. The interim financial
statements and notes thereto should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 2003, as filed with the Securities and Exchange Commission.
NOTE 2. ORGANIZATION
TICC 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 (the "1940 Act"). In addition, the Company has
elected to be treated for tax purposes as a regulated investment company, or
RIC, under the Internal Revenue Code of 1986, as amended. 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"), a registered investment adviser under the Investment Advisers Act
of 1940, as amended. BDC Partners, LLC ("BDC") 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. The Company also
reimbursed TIM for approximately $350,000 for organizational expenses advanced
by TIM on behalf of TICC.
NOTE 3. INVESTMENT VALUATION
The Company carries its investments at fair value, as determined in good faith
by the Board of Directors. Securities that are publicly traded are valued at the
closing price on the valuation date. Debt and equity securities that are not
publicly traded are valued at fair value as determined in good faith by the
Board of Directors. Beginning in March 2004, the Company engaged an independent
valuation firm to perform independent valuations of its investments. The Board
of Directors uses the recommended valuations as prepared by the independent
valuation firm as a component of the foundation for the final fair value
determination. In making such determination, the Board of Directors values
non-convertible debt securities at cost plus amortized original issue discount
plus payment-in-kind ("PIK") interest, if any, unless factors lead to a
determination of a lesser or greater valuation. Due to the uncertainty inherent
in the valuation process, such determination of fair value may differ
significantly from the values that would have resulted 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 amounts ultimately realized on these
investments to be different from the valuation currently assigned.
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net increase
in stockholders' equity resulting from operations per share for the three months
and six months ended June 30, 2004:
Three Months ended Six Months ended
June 30, 2004 June 30, 2004
(UNAUDITED) (UNAUDITED)
------------------ ----------------
Numerator for basic and diluted
earnings per share................................. $ 275,059 $ 229,462
Denominator for basic and diluted
weighted average shares............................ 10,044,459 10,022,279
Basic and diluted net increase in stockholders'
equity resulting from operations per common share.. $ 0.03 $ 0.02
NOTE 5. RELATED PARTY TRANSACTIONS
The Company's investment activities are managed by its investment adviser,
Technology Investment Management, LLC ("TIM") pursuant to an investment advisory
agreement. TIM is owned by BDC Partners, LLC, its managing member, and Royce &
Associates, LLC. Jonathan Cohen, our chief executive officer, and Saul
Rosenthal, our chief operating officer, are the members of BDC Partners, and
Charles Royce, our non-executive chairman, is the president of Royce &
Associates. For the three months and six months ended June 30, 2004, TICC
incurred investment advisory fees of $690,000 and $1,379,000, respectively;
$690,000 was payable to TIM at the end of the quarter. Pursuant to the terms of
its administration agreement with BDC Partners, TICC incurred $51,800 and
$98,000 in compensation expenses for employees allocated to the administrative
activities of TICC and $4,054 and $5,910 for reimbursement of facility costs
allocated to TICC, for the three months and six months ended June 30, 2004,
respectively. At June 30, 2004 $9,893 and $0 remained payable to BDC Partners
for compensation expense and facility costs, respectively.
NOTE 6. DIVIDENDS
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. The amount to be paid out as a dividend is determined by the Board of
Directors each quarter and is based upon the annual earnings estimated by the
management of the Company.
On April 5, 2004, the Company paid a dividend of $0.10 per share. On June 30,
2004, the Company paid a dividend of $0.11 per share to stockholders of record
as of June 10, 2004. On August 5, 2004, the Company announced a dividend of
$0.11 per share for the third quarter.
The Company has a dividend reinvestment plan under which all net investment
income dividends and capital gain distributions are paid to stockholders in the
form of additional shares unless a stockholder elects to receive cash.
NOTE 7. NET ASSET VALUE PER SHARE
The Company's net asset value per share at June 30, 2004 was $13.61, and at
December 31, 2003 was $13.80.
NOTE 8. PAYMENT IN KIND INTEREST
The Company has loans in its portfolio which contain a payment-in-kind ("PIK")
provision. The PIK interest is added to the principal balance of the loan and
recorded as income. To maintain the Company's status as a RIC (as discussed in
Note 6, above), this non-cash source of income must be paid out to stockholders
in the form of dividends, even though the Company has not yet collected the
cash. For the three months and six months ended June 30, 2004, the Company
recorded PIK income of $243,697 and $411,566, respectively, and a corresponding
increase in the cost of the investment. The Company does not have any original
issue discount income.
NOTE 9. OTHER FEES
For the three months and six months ended June 30, 2004, other fees totaled
$80,000 and $530,000, respectively. These fees include closing fees associated
with investments in portfolio companies. Such fees are normally paid at the
closing of the Company's investments and are generally non-recurring.
The 1940 Act requires that a business development company make available
managerial assistance to its portfolio companies. The Company may receive fee
income for managerial assistance it renders to portfolio companies in connection
with its investments. For the three months and six months ended June 30, 2004,
the Company received no fee income for managerial assistance.
NOTE 10. FINANCIAL HIGHLIGHTS
Three Months ended Six Months ended
June 30, 2004 June 30, 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
Per Share Data (1)
- ------------------
Net asset value at beginning of period $ 13.69 $ 13.80
Net investment income (2) 0.03 0.02
Distributions from net investment income (0.11) (0.21)
--------------- ------------------
Net asset value at end of period $ 13.61 $ 13.61
=============== ==================
Per share market value at beginning of period $ 14.59 $ 15.55
Per share market value at end of period 13.51 13.51
Total return (3)(4) (6.6)% (11.8)%
Shares outstanding at end of period 10,092,712 10,092,712
Ratios/Supplemental Data
- ------------------------
Net assets at end of period $ 137,407,146 $ 137,407,146
Average net assets 137,860,850 137,776,019
Ratio of expenses to average net assets -
annualized 2.81% 2.80%
Ratio of net investment income to average
net assets - annualized 0.80% 0.33%
- ------------------------------------------
(1) Basic per share data.
(2) Represents per share net investment income for the period.
(3) Calculated using weighted average share method.
(4) Total return equals the decrease of the ending market value plus dividends
divided by the beginning market value.
NOTE 11. CASH AND CASH EQUIVALENTS
At June 30, 2004 and December 31, 2003, respectively, cash and cash equivalents
consisted of:
June 30, 2004 December 31, 2003
(UNAUDITED) (AUDITED)
----------- ---------
UBS Select Money Market Fund .................. $ 3,459,372 $ 28,000,000
Eurodollar Time Deposit
(due 7/8/04 and 1/31/04) ..................... 20,000,000 10,000,000
U.S. Treasury Bill (due 7/8/04 and 1/22/04) ... 49,991,347 49,976,083
U.S. Treasury Bill (due 3/18/04) .............. -- 49,910,167
Federal Home Loan Bank discount note
(due 7/21/04) ................................ 29,980,833 --
--------------- ---------------
Total Cash Equivalents ............ 103,431,552 137,886,250
Cash .............................. 698,458 342,515
--------------- ---------------
Cash and Cash Equivalents ......... $ 104,130,010 $ 138,228,765
=============== ===============
NOTE 12. COMMITMENTS
As part of the Company's investment in the senior notes of Questia Media, Inc.,
a commitment for an additional purchase of $2 million in senior notes, over the
two-year period ending January 28, 2006, was issued. The fulfillment of this
commitment is contingent on the achievement of agreed-upon financial milestones.
NOTE 13. SUBSEQUENT EVENTS
On July 26, 2004, the Company announced that it had completed a $10 million debt
transaction with The Endurance International Group. Endurance, a portfolio
company of Audax Group, is a leading provider of shared website hosting and
other online services for small and medium businesses. Endurance currently
manages a number of website hosting properties, each of which is a provider of
web services to a targeted segment of the small business community. Endurance's
business strategy has been to add to its economies of scale through the
acquisition of website hosting assets. TICC's investment in Endurance consists
of $7 million of senior secured notes with warrants and a commitment for an
additional $3 million of senior notes with warrants as Endurance achieves
certain milestones.
On August 5, 2004, the Company announced a cash dividend of $0.11 per share to
holders of record on September 10, 2004, payable on September 30, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 Quarterly Report. This Quarterly 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:
>> economic downturns or recessions may impair our portfolio companies'
performance;
>> a contraction of available credit and/or an inability to access the equity
markets could impair our lending and investment activities;
>> the risks associated with the possible disruption in the Company's
operations due to terrorism; and
>> 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 Quarterly
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 Quarterly
Report. We undertake no obligation to update such statements to reflect
subsequent events.
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 report.
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 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. 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 the 2003 taxable year.
Our investment activities are managed by Technology Investment Management, LLC
("TIM"), a registered investment adviser under the Investment Advisers Act of
1940. TIM is owned by BDC Partners, LLC, 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 fee and an incentive fee based upon our performance. Under an
administration agreement, we have agreed to pay or reimburse BDC Partners, as
administrator, for certain expenses incurred in operating the Company.
We intend to concentrate our investments in companies having annual revenues of
less than $100 million and/or a 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,
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 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. Our investments typically range from $5 million to $15
million, mature in no more than seven years and accrue interest at fixed or
variable rates. Our loans may carry a provision for deferral of some or all of
the interest payments, which is added to the principal amount of the loan. This
form of deferred interest is referred to as "payment-in-kind" or "PIK" interest
and, when earned, is recorded as interest income and an increase in the
principal amount of the loan. We had PIK interest of approximately $243,000 for
the quarter ended June 30, 2004.
To the extent possible, our loans are collateralized by a security interest in
the borrower's assets or guaranteed by a principal to the transaction. Interest
payments, if not deferred, are normally payable quarterly. In addition, we
intend to seek an equity component in connection with a substantial portion of
our investments, in the form warrants to purchase stock or similar equity
instruments. When we receive a warrant to purchase stock in a portfolio company,
the warrant will typically have a nominal strike price, and will entitle us to
purchase a modest percentage of the borrower's stock.
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. We
received no fee income for managerial assistance for the quarter ended June 30,
2004.
Prior to making an investment, we typically 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.
Since our initial public offering in November 2003 through the end of this
quarter, we have made three loans to target companies in the total amount of $33
million, with a commitment of an additional $2 million to one of our portfolio
companies. 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. We have made investments in two of these companies, Questia Media and
MortgageIT. Of the remaining two prospective portfolio companies, one was sold
(prior to the opportunity for us to complete our proposed transaction) and we
have discontinued negotiations with the other. In March 2004 we made an
investment in Advanced Aesthetics.
Although we did not complete any transactions during the second quarter, we
announced the completion of a $10 million debt transaction with The Endurance
International Group in July 2004. In addition, we currently have several
transactions in our pipeline, and we expect some of those transactions to close
during the third quarter. However, we continue to conduct due diligence and
finalize terms regarding such transactions. There can be no assurance when or if
these transactions will close.
In addition, we believe that we have a strong pipeline of potential transactions
in various stages. We continue to work diligently toward the consummation of
additional investments, and our management is actively involved in identifying
and evaluating potential opportunities. We currently believe that we will be
substantially invested by the end of this year based upon the current pipeline.
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. Members of our portfolio
management team provide information to the Board on each portfolio company
including the most recent financial statements and forecasts. In addition, we
have engaged the firm of Houlihan Lokey Howard & Zukin ("HLHZ") to evaluate our
portfolio investments, although the Board of Directors retains ultimate
authority as to the appropriate valuation of each investment. At June 30, 2004 ,
the Board used the information provided by the portfolio management team and
HLHZ's report in its determination of the final fair value of investments, as
noted in the Schedule of Investments.
The Board's final determination of fair value is based on some or all of the
following factors, as applicable, and any other factors considered to be
relevant:
o the nature of any restrictions on disposition of the securities;
o assessment of the general liquidity/illiquidity of the securities;
o the issuer's financial condition, including its ability to make payments
and its earnings and discounted cash flow;
o the markets in which the issuer does business;
o the cost of the investment;
o the size of the holding and the capitalization of issuer;
o the nature and value of any collateral;
o the prices of any recent transactions or bids/offers for the securities or
similar securities or any comparable securities that are publicly traded;
and
o any available analyst, media or other reports or information deemed
reliable by the independent valuation firm regarding the issuer or the
markets or industry in which it operates.
Fair value securities may include, but are not limited to, the following:
o private placements and restricted securities that do not have an active
trading market;
o securities whose trading has been suspended or for which market quotes are
no longer available;
o debt securities that have recently gone into default and for which there is
no current market;
o securities whose prices are stale; and
o securities affected by significant events.
RESULTS OF OPERATIONS
We were incorporated on July 21, 2003 and commenced operations in November 2003.
Therefore, there is no period with which to compare the results of operations
for the first and second quarters of 2004.
For the three months ended June 30, 2004.
INVESTMENT INCOME
Investment income for the three months ended June 30, 2004 was approximately
$1,243,000. This amount primarily consisted of interest income of approximately
$238,000 from cash and cash equivalents, $682,000 cash interest from portfolio
investments, and $243,000 in PIK from one of our debt investments. Non-recurring
fee income of $80,000 was also recorded.
Interest income from invested cash and cash equivalents reflects the investment
of the net proceeds from our initial public offering that have not been invested
in portfolio securities. Income from investments in debt securities was
relatively modest since we did not close our first investment until January 28,
2004 and the other two investments were closed during the last week of March.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2004 were approximately
$968,000. This amount consisted of investment advisory fees, salaries and
benefits, professional fees, and general and administrative expenses.
The investment advisory fee for the quarter was approximately $690,000,
representing the base fee as provided for in the advisory agreement. Salaries
and benefits were approximately $52,000, reflecting the allocation of
compensation expenses for the services of our chief financial officer, office
manager, and the vice president of business development.
Professional fees, consisting of legal and audit fees, were approximately
$118,000, and insurance costs were $20,020. Directors' fees were approximately
$38,000 for the quarter.
General and administrative expenses, consisting primarily of office supplies,
facilities costs and other expenses, were approximately $51,000. General and
administrative expenses are allocated to the Company under the terms of the
administration agreement with TIM and BDC Partners.
NET INCREASE IN STOCKHOLDERS' EQUITY FROM OPERATIONS
We had a net increase in stockholders' equity resulting from operations of
$275,000 for the three months ended June 30, 2004. Based on a weighted-average
of 10,044,459 (basic and fully diluted) shares outstanding, our net increase in
stockholders' equity from operations per common share for the three months ended
June 30, 2004 was $0.03 for basic and fully diluted earnings.
For the six months ended June 30, 2004.
INVESTMENT INCOME
Investment income for the six months ended June 30, 2004 was approximately
$2,157,000. This amount primarily consisted of interest income of approximately
$525,000 from cash and cash equivalents, $691,000 cash interest from portfolio
investments, and $411,000 in PIK from one of our debt investments. Non-recurring
fee income of $530,000 was also recorded.
Interest income from invested cash and cash equivalents reflects the investment
of the net proceeds from our initial public offering that have not been invested
in portfolio securities. Income from investments in debt securities was
relatively modest since we did not close our first investment until January 28,
2004 and the other two investments were closed during the last week of March.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2004 were approximately
$1,927,000. This amount consisted of investment advisory fees, salaries and
benefits, professional fees, and general and administrative expenses.
The investment advisory fee for the six months was approximately $1,379,000,
representing the base fee as provided for in the advisory agreement. On June 17,
2004, shareholders approved an amendment to our investment advisory agreement
that changed our base fee from 2.0% of net assets to 2.0% of gross assets. The
portion of the investment advisory fee payable subsequent to that date was
calculated in accordance with the terms of that amendment.
Salaries and benefits were approximately $98,000, reflecting the allocation of
compensation expenses for the services of our chief financial officer, office
manager, and the vice president of business development.
Professional fees, consisting of legal and audit fees, were approximately
$202,000, and insurance costs were $40,040. Directors' fees were $70,500 for the
six months ended June 30, 2004.
General and administrative expenses, consisting primarily of office supplies,
facilities costs and other expenses, were approximately $138,000. General and
administrative expenses are allocated to the Company under the terms of the
administration agreement with TIM and BDC Partners.
NET INCREASE IN STOCKHOLDERS' EQUITY FROM OPERATIONS
We had a net increase in stockholders' equity resulting from operations of
$229,000 for the six months ended June 30, 2004. Based on a weighted-average of
10,022,279 (basic and fully diluted) shares outstanding, our net increase in
stockholders' equity from operations per common share for the six months ended
June 30, 2004 was $0.02 for basic and fully diluted earnings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had investments in debt securities of, or loans to, three
private companies, totaling approximately $33.4 million of total investment
assets. This number includes approximately $411,000 in accrued PIK interest
which, as described in "Overview," is added to the carrying value of our
investments.
Cash used by operating activities for the six months ended June 30, 2004,
consisting primarily of the items described in "Results of Operations," was
approximately $307,000 reflecting the non-cash income related to PIK interest
and the increase in accrued interest receivable, offset to some degree by income
from operations and the increase in accrued expenses.
During the six months ended June 30, 2004, cash and cash equivalents decreased
from approximately $138.2 million at the beginning of the period to
approximately $104.1 million at the end of the period, due primarily to our
investing activities.
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 Code, to distribute at least 90% of our ordinary
income and short-term capital gains to our stockholders on an annual basis. In
accordance with these requirements, we declared a dividend of $0.10 per common
share in the first quarter, which was paid in April 2004, and a dividend of
$0.11 per share in the second quarter which was paid on June 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to financial market risks, including changes in interest rates.
As of June 30, 2004, the three loans in our portfolio were at fixed rates. Over
time some of our investments will be at variable rates. We may in the future
hedge against interest rate fluctuations by using standard hedging instruments
such as futures, options and forward contracts. While hedging activities may
insulate us against adverse changes 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 4. CONTROLS AND PROCEDURES.
As of June 30, 2004, 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 regarding the Company that is required to be
disclosed in reports we file or submit under the Securities and Exchange Act of
1934. 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.
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2004, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II-OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
During the three months ended June 30, 2004, we issued a total of 92,612 shares
of common stock under our dividend reinvestment plan pursuant to an exemption
from the registration requirements of the Securities Act of 1933. The aggregate
offering price for the shares of common stock issued under the dividend
reinvestment plan was approximately $1.3 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 17, 2004, we held our Annual Meeting of Shareholders in Greenwich,
Connecticut. Shareholders voted on three matters; the substance of these matters
and the results of the voting of each such matter are described below.
1. Election of Directors: Shareholders elected one director of the Company, who
will serve for three years, or until her successor is elected and qualified.
Votes were cast as follows:
FOR WITHHELD
--------------- ---------------
Tonia L. Pankopf 5,067,552 294,672
The following directors are continuing as directors of the Company for their
respective terms - Jonathan H. Cohen, Charles M. Royce, Steven P. Novak, and G.
Peter O'Brien.
2. Ratification of the selection of PricewaterhouseCoopers LLP to serve as the
Company's independent registered public accounting firm for the year ending
December 31, 2004. Votes were cast as follows:
FOR AGAINST ABSTAIN
--------------- --------------- ---------------
5,321,551 24,850 15,823
3. Amendment of the investment advisory agreement and fees paid to the Company's
adviser. Brokers cast 715,195 non-votes in connection with the approval of the
amendment to the investment advisory agreement. The remaining votes were cast as
follows:
FOR AGAINST ABSTAIN
--------------- --------------- ---------------
3,895,538 648,485 103,006
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
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 Form of Amended and Restated Investment Advisory Agreement
between Registrant and Technology Investment Management, LLC
(Incorporated by reference to Appendix B to the Registrant's
Definitive Proxy Materials on Schedule 14A (File No. 000-50398)
filed on May 18, 2004).
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 notes to the
financial statements included in this report).
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14
of the Securities Exchange Act of 1934.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14
of the Securities Exchange Act of 1934.
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.
(b) REPORTS ON FORM 8-K
On May 4, 2004, the Company filed a Current Report on Form 8-K announcing its
financial results for the quarter ended March 31, 2004.
On May 6, 2004, the Company filed a Current Report on Form 8-K announcing the
declaration of the dividend for the second quarter of 2004.
On July 30, 2004 the Company filed a Current Report on Form 8-K reflecting its
announcement that it had completed a $10 million debt transaction with The
Endurance International Group, a leading, private equity-backed provider of
shared web hosting solutions and other online products and services to small
businesses.
On August 5, 2004, the Company filed a Current Report on Form 8-K announcing the
declaration of the dividend for the third quarter of 2004.
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: August 10, 2004 By: /s/ Jonathan H. Cohen
--------------------------------------------
Jonathan H. Cohen
Chief Executive Officer
Date: August 10, 2004 By: /s/ Patrick F. Conroy
--------------------------------------------
Patrick F. Conroy
Chief Financial Officer
(Principal Accounting and Financial Officer)