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Oxford Square Capital Corp. - Quarter Report: 2006 September (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2006.

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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 (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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨.                    Accelerated filer  x.                    Non-accelerated filer  ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-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, $0.01 par value, outstanding as of November 7, 2006 was 19,616,153.

 



Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

TABLE OF CONTENTS

 

PART I.

   FINANCIAL INFORMATION    3

Item 1.

   Financial Statements (Unaudited)    3
   Balance Sheets as of September 30, 2006 and December 31, 2005    3
   Schedule of Investments as of September 30, 2006    4
   Schedule of Investments as of December 31, 2005    7
   Statements of Operations for the three months and nine months ended September 30, 2006 and 2005    9
   Statements of Stockholders’ Equity for the nine months ended September 30, 2006 and 2005    10
   Statements of Cash Flows for the nine months ended September 30, 2006 and 2005    11
   Notes to Financial Statements    12

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17
   Overview    17
   Critical Accounting Policies    21
   Results of Operations    22
   Liquidity and Capital Resources    25
   Recent Developments    27

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    27

Item 4.

   Controls and Procedures    28

PART II.

   OTHER INFORMATION    28

Item 1.

   Legal Proceedings    28

Item 1A.

   Risk Factors    28

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    36

Item 3.

   Defaults Upon Senior Securities    36

Item 4.

   Submission of Matters to a Vote of Security Holders    36

Item 5.

   Other Information    36

Item 6.

   Exhibits    37

SIGNATURES

   37

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

TECHNOLOGY INVESTMENT CAPITAL CORP.

BALANCE SHEETS

AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

 

     September 30,
2006
   December 31,
2005
 
     (Unaudited)       
ASSETS      

ASSETS

     

Investments, at fair value (cost: $295,226,313 @ 9/30/06; $211,218,202 @ 12/31/05)

     

Non-affiliated investments

   $ 277,271,930    $ 211,398,202  

Affiliated investments

     19,043,691      —    
               

Total investments at fair value

     296,315,621      211,398,202  
               

Cash and cash equivalents

     15,658,237      55,811,584  

Interest receivable

     2,948,251      2,025,931  

Securities sold not settled

     —        773,486  

Prepaid expenses and other assets

     207,046      98,615  
               

TOTAL ASSETS

   $ 315,129,155    $ 270,107,818  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY      

LIABILITIES

     

Investment advisory fee payable to affiliate

     1,494,463      1,498,813  

Dividends payable

     —        2,316,528  

Accrued expenses

     656,485      387,001  

Loans payable

     41,500,000      —    
               

Total Liabilities

     43,650,948      4,202,342  
               

STOCKHOLDERS’ EQUITY

     

Common stock, $0.01 par value, 100,000,000 shares authorized, and 19,616,153 and 19,304,401 issued and outstanding, respectively

     196,162      193,044  

Capital in excess of par value

     268,463,349      263,885,376  

Unrealized appreciation on investments

     1,089,308      180,000  

Accumulated realized gains on investments

     245,598      1,739,015  

Distributions less than (in excess of) investment income

     1,483,790      (91,959 )
               

Total Stockholders’ Equity

     271,478,207      265,905,476  
               

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 315,129,155    $ 270,107,818  
               

Net asset value per common share

   $ 13.84    $ 13.77  

SEE ACCOMPANYING NOTES.

 

3


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

 

COMPANY(1)

  

INDUSTRY

  

INVESTMENT

   PRINCIPAL
AMOUNT
   COST    FAIR
VALUE(2)

Questia Media, Inc.

   digital media    senior secured notes(3)(4)(11) (11.00%, due Jan. 28, 2009)    $ 13,608,128    $ 13,608,128    $ 13,608,128

MortgageIT, Inc.

   financial services    senior secured notes(11) (6.50%, due March 29, 2007)      15,000,000      15,000,000      15,000,000

Klinger Advanced Aesthetics, Inc.

   medical services    subordinated notes(3) (12.00%, due July 1, 2010)      1,750,000      1,078,817      1,078,817

The Endurance International Group, Inc.

   webhosting    senior secured notes (4)(5)(6)(11) (10.99%, due July 23, 2009)      21,000,000      20,717,211      20,717,211
      convertible preferred stock(9)         377,300      377,300
      warrants to purchase convertible preferred stock(9)         46,000      46,000

Avue Technologies Corp.

   software    warrants to purchase common units(9)         13,000      13,000

Trenstar Inc.

   logistics technology    senior secured notes(3)(5)(11) (10.72%, due Sept. 1, 2009)      17,451,264      17,451,264      17,451,264
      warrants to purchase convertible preferred stock(9)         0      0

3001, Inc.

   geospatial imaging    senior unsecured notes(5)(11) (11.00%, due Oct. 1, 2010)      10,000,000      10,000,000      10,000,000
      preferred stock(8)(9)         2,000,000      2,000,000
      common stock(8)(9)         1,000,000      1,000,000

Segovia, Inc.

   satellite communications    senior secured notes(5)(6)(11) (12.96%, due Feb. 8, 2010)      16,750,000      16,575,046      16,575,046
      warrants to purchase common stock(9)         600,000      680,000

WHITTMANHART, Inc.

   IT consulting    senior secured notes(4)(5)(11) (11.58%, due March 23, 2010)      5,000,000      5,000,000      5,000,000
      warrants to purchase common stock(9)         0      0
      convertible preferred stock(9)         476,000      476,000
      warrants to purchase convertible preferred stock(9)         24,000      24,000

CrystalTech Webhosting, Inc.

   webhosting    senior secured notes(5)(7)(11) (13.00%, due March 28, 2008)      1,400,000      1,400,000      1,400,000

Falcon Communications, Inc.

   satellite communications    senior unsecured notes(5)(11) (10.00%, due March 31, 2011)      6,000,000      6,000,000      6,000,000
      common stock(9)         2,000,000      2,000,000
      warrants to purchase common stock (9)         0      0

Climax Group, Inc.

   software    senior secured notes(5)(6) (15.45%, due April 30, 2008)      6,000,000      5,939,064      5,939,064
      warrants to purchase common stock(9)         229,000      600,000

Willow CSN Incorporated

   virtual workforce services    senior secured notes(5)(6)(11) (11.92%, due June 30, 2010)      10,500,000      10,350,282      10,350,282
      warrants to purchase convertible preferred stock (9)         200,000      200,000

(Continued on next page)

SEE ACCOMPANYING NOTES.

 

4


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

SCHEDULE OF INVESTMENTS - Continued

SEPTEMBER 30, 2006

(UNAUDITED)

 

COMPANY(1)

  

INDUSTRY

  

INVESTMENT

   AMOUNT    COST    FAIR
VALUE(2)

NetQuote, Inc.

   web-based services    senior secured notes(5)(11) (13.50%, due August 16, 2010)    $ 15,000,000    $ 15,000,000    $ 15,000,000

StayOnline, Inc.

   Internet service provider    senior secured notes(5)(6)(11) (11.50%, due September 2, 2010)      15,000,000      14,716,449      14,716,449
      convertible preferred stock(9)         360,588      0

GenuTec Business Solutions, Inc.

   interactive voice messaging services    senior secured notes(5)(6)(11) (12.20%, due September 16, 2010)      15,000,000      14,940,470      14,940,470
      warrants to purchase common stock(9)         91,337      75,000

Aviel Services, Inc.
(f/k/a OPTIMUS Corporation)

   IT consulting    senior unsecured notes(5)(6)(11) (14.57%, due September 23, 2010)      14,500,000      14,246,703      14,246,703
      warrants to purchase common stock(9)         300,000      1,200,000

Network Solutions, LLC

   domain name registration    senior secured notes(5)(7)(11) (10.37%, due January 9, 2012)      9,925,000      9,890,829      9,925,000

Group 329, LLC
(d/b/a “The CAPS Group”)

   digital arts imaging    senior secured term A notes(5)(6)(11) (10.64%, due February 28, 2011)      9,500,000      9,420,652      9,420,652
      warrants to purchase common stock(9)         110,000      110,000
      senior secured term B notes(5)(6)(11) (12.14%, due February 28, 2012)      9,000,000      8,919,055      8,919,055
      warrants to purchase common stock(9)         90,000      90,000

Data Transmission Network Corporation

   information services    senior secured notes(5)(11) (13.39%, due September 10, 2013)      5,000,000      5,000,000      5,000,000

American Integration Technologies, LLC.

   semiconductor capital equipment    senior secured notes(5)(11) (10.75%, due April 29, 2011)      12,000,000      12,000,000      12,000,000

Power Tools, Inc.

   software    senior secured notes(5)(6)(11) (12.00%, due May 16, 2011)      11,750,000      11,433,523      11,433,523
      warrants to purchase common stock(9)         350,000      350,000

Attachmate Corporation

   enterprise software    senior secured notes(5)(11) (12.12%, due December 30, 2012)      3,500,000      3,500,000      3,517,500

RedPrairie Corporation

   enterprise software    senior secured notes (5) (11.90%, due January 20, 2013)      3,000,000      3,000,000      3,007,500

Iridium Satellite LLC

   satellite communications    senior secured first lien tranche A notes (5)(6)(7)(11) (9.74%, due June 30, 2010)    $ 2,931,122    $ 2,902,791    $ 2,916,466
      senior secured first lien tranche B notes(5)(6)(11) (9.74%, due July 27, 2011)      3,000,000      2,941,856      2,917,500
      senior secured second lien notes(5)(6)(11) (13.74%, due July 27, 2012)      2,000,000      1,941,404      1,950,000

Algorithmic Implementation, Inc. (d/b/a Ai Squared) (12)

   software    senior secured notes(5)(6)(11) (11.40%, due September 11, 2010)      22,000,000      19,043,691      19,043,691
      common stock(9)         3,000,000      3,000,000

NameMedia, Inc.

   Internet business services    senior secured notes(5)(6)(11) (11.33%, due September 7, 2008)      12,000,000      11,941,853      12,000,000
                      

Total investments

            $ 295,226,313    $ 296,315,621
                      

(Continued on next page)

SEE ACCOMPANYING NOTES.

 

5


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

SCHEDULE OF INVESTMENTS - Continued

SEPTEMBER 30, 2006

(UNAUDITED)

 

(1) Other than Algorithmic Implementation, Inc. (d/b/a Ai Squared), 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 “1940 Act”).

In general, under the 1940 Act, we would be presumed to “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 and warrants upon satisfaction of certain specific conditions.

 

(5) Notes bear interest at variable rates.

 

(6) Cost and fair value reflect accretion of original issue discount.

 

(7) Cost and fair value reflect repayment of principal.

 

(8) Preferred stock and common stock indirectly held through limited liability company interests.

 

(9) Non-income producing at the relevant period end.

 

(10) As a percentage of net assets at September 30, 2006, investments at fair value are categorized as follows: senior secured notes (93.5%), senior unsecured notes (11.1%), preferred stock (1.1%), common stock (2.2%), and warrants to purchase equity securities (1.25%).

 

(11) Debt investment pledged as collateral under the Company's revolving credit agreement, with the following credit limits noted: Questia Media, Inc. ($10 million), Ai Squared ($20 million), TrenStar, Inc. ($15 million) and Endurance International Group, Inc. ($20 million).

 

(12) We own in excess of 25% of the voting securities of Algorithmic Implementation, Inc. (d/b/a Ai Squared), and may therefore be deemed an “affiliate” and may be presumed to “control” Ai Squared, in each case as such terms are defined in the 1940 Act.

 

(13) Aggregate gross unrealized capital appreciation for federal income tax purposes is $1,490,589; aggregate gross unrealized capital depreciation for federal income tax purposes is $401,281. Net unrealized capital appreciation is $1,089,308 based upon a tax cost basis of $295,226,313.

SEE ACCOMPANYING NOTES.

 

6


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2005

 

Company(1)

  

Industry

  

Investment

  

Principal

Amount

   Cost    Fair Value(2)

Questia Media, Inc

   digital media   

senior secured notes(3)(4)(11)

(11.00%, due Jan. 28, 2009)

   $ 12,039,331    $ 12,039,331    $ 12,039,331

MortgageIT, Inc.

   financial services   

senior secured notes(11)

(5.50%, due March 29, 2007)

     15,000,000      15,000,000      15,000,000

Klinger Advanced Aesthetics, Inc. (f/k/a Advanced Aesthetics Institute)

   medical services   

senior secured notes(5)(11)

(12.00%, due March 31, 2009)

     10,000,000      10,000,000      10,000,000

The Endurance International Group, Inc.

   webhosting   

senior secured notes(4)(5)(6)(11)

(10.04%, due July 23, 2009)

     13,000,000      12,729,661      12,729,661
      convertible preferred stock(9)         345,000      345,000

DirectRevenue, LLC

   Internet advertising   

senior secured notes(6)(7)(11)

(12.00%, due Aug. 19, 2007)

     3,220,000      3,158,305      3,158,305
      warrants to purchase common units(9)         240,000      0

Avue Technologies Corp.

   software    warrants to purchase common stock(9)         13,000      13,000

TrenStar Inc.

   logistics technology   

senior secured notes(3)(5)(11)

(10.03%, due Sept. 1, 2009)

     17,074,493      17,074,493      17,074,493
      warrants to purchase convertible preferred stock(9)         —        —  

3001, Inc.

   geospatial imaging   

senior unsecured notes(5)(11)

(10.00%, due Oct. 1, 2010)

     10,000,000      10,000,000      10,000,000
      preferred stock(8)(9)         2,000,000      2,000,000
      common stock(8)(9)         1,000,000      1,000,000

Segovia, Inc.

   satellite communications   

senior secured notes(5)(6)(11)

(10.00%, due Feb. 8, 2010)

     17,000,000      16,786,198      16,786,198
      warrants to purchase common stock(9)         260,000      680,000

WHITTMANHART, Inc.

   IT consulting   

senior secured notes(4)(5)(11)

(10.25%, due March 23, 2010)

     5,000,000      5,000,000      5,000,000
      warrants to purchase common stock(9)         —        —  
      convertible preferred stock(9)         476,000      476,000
      warrants to purchase convertible preferred stock(9)         24,000      24,000

CrystalTech WebHosting, Inc.

   webhosting   

senior secured notes(5)(11)

(12.00%, due March 28, 2010)

     8,000,000      8,000,000      8,000,000

Falcon Communications, Inc.

   satellite communications   

senior unsecured notes(5)(11)

(10.00%, due March 31, 2011)

     6,000,000      6,000,000      6,000,000
      common stock(9)         2,000,000      2,000,000

Climax Group, Inc.

   software   

senior secured notes(5)(6)

(14.00%, due April 30, 2008)

     5,000,000      4,924,350      4,924,350
      warrants to purchase common stock(9)         100,000      100,000

Willow CSN Incorported

   virtual workforce services   

senior secured notes(5)(6)(11)

(10.50%, due June 30, 2010)

     13,500,000      13,320,068      13,320,068
      warrants to purchase convertible preferred stock(9)         200,000      200,000

(Continued on next page)

SEE ACCOMPANYING NOTES.

 

7


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

SCHEDULE OF INVESTMENTS - (Continued)

DECEMBER 31, 2005

 

Company(1)

  

Industry

  

Investment

  

Principal

Amount

   Cost   

Fair

Value(2)

NetQuote, Inc.

   web-based services   

senior secured notes(5) (11)

(12.50%, due August 16, 2010)

   $ 15,000,000    $ 15,000,000    $ 15,000,000

StayOnline, Inc.

   Internet service provider   

senior secured notes(5) (6) (11)

(10.50%, due September 2, 2010)

     15,000,000      14,662,937      14,662,937
      convertible preferred stock(9)         360,588      360,588

GenuTec Business Solutions, Inc.

   interactive voice messaging services   

senior secured notes(5) (6) (11)

(10.50%, due September 2, 2010)

     15,000,000      14,929,271      14,929,271
      warrants to purchase common stock(9)         75,000      75,000

Mortgagebot Acquisitions, LLC

   web-based services   

senior secured notes(5) (11)

(10.00%, due October 29, 2010)

     11,000,000      11,000,000      11,000,000

OPTIMUS Corporation

   IT consulting   

senior unsecured notes(5)(11)

(14.00%, due September 23, 2010)

     14,500,000      14,200,000      14,200,000
      warrants to purchase common stock(9)         300,000      300,000
                      

Total investments

            $ 211,218,202    $ 211,398,202
                      

(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 “1940 Act”). In general, under the 1940 Act, we would be presumed to “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 and warrants upon satisfaction of certain specified conditions.

 

(5) Notes bear interest at variable rates.

 

(6) Cost and fair value reflect accretion of original issue discount.

 

(7) Cost and fair value reflect repayment of principal.

 

(8) Preferred stock and common stock held by limited liability company, in which we own membership interests.

 

(9) Non-income producing at the relevant period end.

 

(10) As a percentage of net assets at December 31, 2005, investments at fair value are categorized as follows: senior secured notes (65.3%), senior unsecured notes (11.4%), preferred stock (1.2%), common stock (1.1%) and warrants to purchase equity securities (0.5%).

 

(11) Debt investment pledged as collateral under the Company’s revolving credit agreement, with the following collateral limits noted: Questia Media, Inc. ($9 million), TrenStar Inc. ($15 million) and Segovia, Inc. ($15 million).

 

(12) Aggregate gross unrealized appreciation for federal income tax purposes is $420,000; aggregate gross unrealized depreciation for federal income tax purposes is $240,000. Net unrealized appreciation is $180,000 based upon a tax cost basis of $211,218,202.

SEE ACCOMPANYING NOTES.

 

8


Table of Contents

TECHNOLOGY INVESTMENT CAPITAL CORP.

STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

 

     Three Months
Ended
September 30,
2006
   Three Months
Ended
September 30,
2005
   Nine Months
Ended
September 30,
2006
   Nine Months
Ended
September 30,
2005

INVESTMENT INCOME

           

From non-affiliated investments:

           

Interest income - debt investments

   $ 8,100,962    $ 4,725,201    $ 21,432,020    $ 11,582,635

Interest income - cash and cash equivalents

     108,659      217,752      555,433      852,867

Other income

     399,359      1,556,100      2,294,118      3,012,369
                           

Total investment income from non-affiliated investments

     8,608,980      6,499,053      24,281,571      15,447,871
                           

From affiliated investments:

           

Interest income - debt investments

     183,024      —        183,024      —  
                           

Total investment income from affiliated investments

     183,024      —        183,024      —  
                           

Total investment income

     8,792,004      6,499,053      24,464,595      15,447,871
                           

EXPENSES

           

Salaries and benefits

     222,711      427,862      483,057      619,313

Investment advisory fees

     1,494,463      1,026,746      4,244,537      2,761,229

Professional fees

     217,160      294,050      746,805      923,908

Interest expense

     556,664      91,874      789,034      91,874

Insurance

     20,708      25,318      61,447      75,318

Directors’ fees

     41,000      38,250      123,000      102,750

Transfer agent and custodian fees

     26,900      23,065      79,012      71,401

General and administrative

     70,915      91,382      205,487      225,610
                           

Total expenses

     2,650,521      2,018,547      6,732,379      4,871,403
                           

NET INVESTMENT INCOME

     6,141,483      4,480,506      17,732,216      10,576,468
                           

NET UNREALIZED CAPITAL APPRECIATION ON NON-AFFILIATED INVESTMENTS

     308,896      239,000      909,308      239,000
                           

NET REALIZED CAPITAL GAINS ON NON-AFFILIATED INVESTMENTS

     309,210      0      245,598      0
                           

NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS

   $ 6,759,589    $ 4,719,506    $ 18,887,122    $ 10,815,468
                           

Net increase in stockholders’ equity resulting from operations per common share:

           

Basic and Diluted

   $ 0.35    $ 0.35    $ 0.97    $ 0.83

Weighted average shares of common stock outstanding:

           

Basic and Diluted

     19,537,811      13,393,082      19,448,624      13,056,977

SEE ACCOMPANYING NOTES.

 

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TECHNOLOGY INVESTMENT CAPITAL CORP.

STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

 

     Common
Shares
   Stock
Amount
   Capital in
Excess of Par
Value
  

Unrealized

Appreciation
on
Investments

   Accumulated
Realized
Gains on
Investments
   

Distributions
Less than

(in Excess of)
Investment
Income

    Total
Stockholders’
Equity
 

Balance at December 31, 2004

   10,157,848    $ 101,578    $ 139,410,302    $ —      $ —       $ (250,343 )   $ 139,261,537  

Net increase in stockholders’ equity resulting from operations

   —        —        —        239,000      —         10,576,468       10,815,468  

Shares issued in rights offering (net of offering expenses of $2,234,872)

   3,115,666      31,157      41,443,649      —        —         —         41,474,806  

Shares issued in connection with dividend reinvestment

   190,338      1,904      2,893,397      —        —         —         2,895,301  

Dividends declared

   —        —        —        —        —         (7,871,054 )     (7,871,054 )
                                                  

Balance at September 30, 2005

   13,463,852    $ 134,639    $ 183,747,348    $ 239,000    $ —       $ 2,455,071     $ 186,576,058  
                                                  

Balance at December 31, 2005

   19,304,401      193,044      263,885,376      180,000      1,739,015       (91,959 )     265,905,476  

Net increase in stockholders’ equity resulting from operations

   —        —        —        909,308      245,598       17,732,216       18,887,122  

Shares issued in connection with dividend reinvestment

   311,752      3,118      4,577,973      —        —         —         4,581,091  

Dividends declared

   —        —        —        —        (1,739,015 )     (16,156,467 )     (17,895,482 )
                                                  

Balance at September 30, 2006

   19,616,153    $ 196,162    $ 268,463,349    $ 1,089,308    $ 245,598     $ 1,483,790     $ 271,478,207  
                                                  

SEE ACCOMPANYING NOTES.

 

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TECHNOLOGY INVESTMENT CAPITAL CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(UNAUDITED)

 

    

Nine Months
Ended
September 30,

2006

   

Nine Months
Ended
September 30,

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in stockholders’ equity resulting from operations

   $ 18,887,122     $ 10,815,468  

Adjustments to reconcile net increase in stockholders’ equity resulting from operations to net cash provided by operating activities:

    

Increase in investments due to PIK

     (1,492,173 )     (3,060,069 )

Increase in non-cash fee income

     (470,837 )     —    

Net realized gain on non-affiliated investments

     (245,598 )     —    

Net unrealized appreciation on non-affiliated investments

     (909,308 )     (239,000 )

Increase in interest receivable

     (922,320 )     (901,880 )

(Increase) Decrease in prepaid expenses and other assets

     (108,431 )     489,567  

Amortization of discounts

     (480,702 )     (285,405 )

(Decrease) Increase in investment advisory fee payable

     (4,350 )     345,947  

Increase in accrued expenses

     269,484       326,758  
                

Net Cash Provided By Operating Activities

     14,522,887       7,491,386  
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchases of investments

     (134,000,300 )     (151,003,358 )

Repayments of principal

     52,213,878       18,900,000  

Proceeds from the sale of investments

     1,241,107       —    
                

Net Cash Used in Investing Activities

     (80,545,315 )     (132,103,358 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from the issuance of common stock

     —         43,709,678  

Offering expenses from the issuance of common stock

     —         (2,234,872 )

Amounts borrowed under revolving credit facility

     41,500,000       35,000,000  

Amount borrowed under repurchase agreement

     —         39,166,667  

Dividends paid

     (15,630,919 )     (4,975,753 )
                

Net Cash Provided By Financing Activities

     25,869,081       110,665,720  
                

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (40,153,347 )     (13,946,252 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     55,811,584       57,317,398  
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 15,658,237     $ 43,371,146  
                

NON-CASH FINANCING ACTIVITIES

    

Shares issued in connection with dividend reinvestment plan

   $ 4,581,091     $ 2,895,301  

SUPPLEMENTAL DISCLOSURES

    

Cash paid for interest

   $ 626,692       —    

SEE ACCOMPANYING NOTES.

 

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TECHNOLOGY INVESTMENT CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(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, 2005, 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 management 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 “Code”). 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 (the “Advisers Act”). BDC Partners, LLC (“BDC Partners”) is the managing member of TIM and serves as the administrator 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 reported closing price on the valuation date. Debt and equity securities, for which market quotations are not readily available, are valued at fair value as determined in good faith by the Board of Directors. In connection with that determination, members of TIM’s portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. The Company has engaged the third party valuation firm, Houlihan Lokey Howard & Zukin (“HLHZ”), to perform valuations of its investments, except for any portfolio investments that, when combined with all other investments in the same portfolio company, (i) have a fair value as of the previous quarter of less than 1% of the Company’s total asset value as of the previous quarter; or (ii) have an estimated fair value below 1% of the Company’s anticipated total asset value for the current quarter as a result of the repayment of outstanding principal amounts during the current quarter. The frequency of HLHZ’s valuation of the Company’s securities is based upon the grade assigned to each such security under the Company’s credit grading system, as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4 and 5, at least quarterly.

An affiliate of HLHZ (the “HLHZ Affiliate”) owns a controlling interest in one of our portfolio companies, American Integration Technologies, LLC. Certain HLHZ personnel who perform the valuation services for the Company hold investments (directly and/or indirectly) in the HLHZ Affiliate. TICC’s Board has considered the relative amount of the investment and believes that it does not affect HLHZ’s ability to perform its valuation services.

The Board of Directors uses the recommended valuations as prepared by management and HLHZ, respectively, as a component of the foundation for its final fair value determination. In making such determination, the Board of Directors values debt securities at cost plus amortized original issue discount and payment-in-kind (“PIK”) interest, if any, unless other factors lead to a determination of fair value at a different amount. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had a readily available 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 valuation currently assigned to such investments. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidation events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors. We will record unrealized capital depreciation on investments when we believe that an investment has become impaired, including when the enterprise value of the portfolio company does not currently support the carrying value of our debt or equity investment. We

 

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will record unrealized capital appreciation if we believe that the underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value are recorded in the statements of operations as the net change in unrealized capital appreciation or depreciation.

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 nine months ended September 30, 2006 and 2005, respectively:

 

     Three Months
Ended
September 30,
2006
   Three Months
Ended
September 30,
2005
   Nine Months
Ended
September 30,
2006
   Nine Months
Ended
September 30,
2005
     (Unaudited)    (Unaudited)    (Unaudited)    (Unaudited)

Numerator for basic and diluted income per share - net increase in stockholders’ equity resulting from operations

   $ 6,759,589    $ 4,719,506    $ 18,887,122    $ 10,815,468

Denominator for basic and diluted income per share - weighted average shares

     19,537,811      13,393,082      19,448,624      13,056,977

Basic and diluted net increase in stockholders’ equity resulting from operations per common share

   $ 0.35    $ 0.35    $ 0.97    $ 0.83

NOTE 5. RELATED PARTY TRANSACTIONS

The Company has entered into an investment advisory agreement with TIM. TIM is controlled by BDC Partners, its managing member. In addition to BDC Partners, TIM is owned by Royce & Associates, LLC (“Royce & Associates”) as the non-managing member. BDC Partners, as the managing member of TIM, manages the business and internal affairs of TIM. In addition, BDC Partners provides TICC with office facilities and administrative services pursuant to an administration agreement. Jonathan H. Cohen, the Company’s Chief Executive Officer, as well as a Director, is the managing member of BDC Partners. Saul B. Rosenthal, the Company’s President and Chief Operating Officer, is also the President and Chief Operating Officer of TIM and a member of BDC Partners. Messrs. Cohen and Rosenthal have an equal equity interest in BDC Partners.

Mr. Royce is also President and Chief Investment Officer of Royce & Associates. Royce & Associates, as the non-managing member of TIM, does not take part in the management or participate in the operations of TIM; however, Royce & Associates has agreed to make Mr. Royce or certain other portfolio managers available to TIM to provide certain consulting services without compensation. Royce & Associates is a wholly owned subsidiary of Legg Mason, Inc.

JHC Capital Management, a registered investment adviser owned by Mr. Cohen, serves as the sub-adviser to the Royce Technology Value Fund.

In addition, Messrs. Cohen and Rosenthal serve as Chief Executive Officer and President, respectively, of TAC Acquisition Corp., a special purpose acquisition company formed for the purpose of acquiring one or more operating companies in the technology-related sector. Messrs. Cohen, Rosenthal and Steven P. Novak, one of the Company’s directors, also serve on the Board of Directors of TAC Acquisition Corp., and Messrs. Cohen, Rosenthal and Royce are stockholders of TAC Acquisition Corp. On June 9, 2006, TAC Acquisition Corp. entered into an Agreement and Plan of Merger with AVIEL Systems, Inc., in which the Company currently has senior unsecured notes and warrants valued at approximately $15.4 million. In the event the proposed merger is approved, the Company anticipates that its senior unsecured notes would be repaid upon consummation of the merger. In addition, pursuant to the terms of the merger agreement, TAC Acquisition Corp. will assume the warrants to purchase shares of AVIEL common stock currently held by the Company. Upon a change of control or merger, the terms of the warrants provide that the Company shall have the right to receive upon exercise of the warrants, for a nominal exercise price, approximately $1.0 million in the form of shares of TAC Acquisition Corp. common stock (subject to adjustment in accordance with the terms of the merger agreement) and cash equal to approximately $1.4 million. The proposed merger remains subject to the satisfaction of certain conditions, including obtaining necessary regulatory and shareholder approvals.

Likewise, Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, for T2 Advisers, LLC, an investment adviser to T2 Income Fund Limited, a Guernsey fund, established and operated for the purpose of investing primarily in the debt and equity securities of small to medium sized companies with a particular focus on technology companies. BDC Partners is the managing member, and Royce & Associates is a non-managing member, of T2 Advisers, LLC.

In addition, Patrick F. Conroy, the Chief Financial Officer, Chief Compliance Officer, Treasurer and Corporate Secretary of TIM, BDC Partners and TICC, serves as Chief Financial Officer, Chief Compliance Officer and

 

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Treasurer for both T2 Income Fund Limited and T2 Advisers, LLC. Messrs. Rosenthal and Conroy also each serve as a non-independent director of T2 Income Fund Limited.

In order to minimize the potential conflicts of interest that might arise, the Company has adopted a policy that prohibits it 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 & Associates, LLC, Palladio Capital Management or T2 Advisers, LLC holds a long or short position. The investment focus of each of these entities tends to be different from the Company’s investment objective. Nevertheless, it is possible that new investment opportunities that meet the Company’s 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 the Company. Also, our investment policy precluding the investments referenced above could cause the Company 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 we will not be disadvantaged in relation to any other particular client. In addition, the Company has adopted a formal Code of Ethics that governs the conduct of the Company’s officers and directors. The Company’s officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law. Finally, the Company pays 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, chief compliance officer, controller and other administrative support personnel, which creates conflicts of interest that our Board of Directors must monitor.

For the quarters ended September 30, 2006 and 2005, TICC incurred investment advisory fees of $1,494,463 and $1,026,746; for the nine months ended September 30, 2006 and 2005, respectively, TICC incurred investment advisory fees of $4,244,537 and $2,761,229, of which $1,494,463 and $1,042,969 remained payable to TIM at September 30, 2006 and 2005, respectively. Pursuant to the terms of its administration agreement with BDC Partners, for the quarters ended September 30, 2006 and 2005, respectively, TICC incurred $222,711 and $427,862 in compensation expenses for employees allocated to the administrative activities of TICC; for the nine months ended September 30, 2006 and 2005, respectively, TICC incurred $483,057 and $619,313 in such expenses, of which $167,512 and $346,949 remained payable at the end of the respective period. TICC also incurred $21,318 and $11,856 for reimbursement of facility costs for the three months ended September 30, 2006 and 2005, respectively; for the nine months ended September 30, 2006 and 2005, respectively, TICC incurred $43,524 and $35,421 in such expenses, of which amounts $7 and $529, respectively, remained payable to BDC Partners at the end of each period.

NOTE 6. DIVIDENDS

The Company intends to continue to operate so as to qualify to be taxed as a RIC under the Code and, as such, the Company 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 annual 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. To the extent that the Company’s earnings fall below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.

On September 29, 2006, the Company paid a dividend of $0.32 per share. The Company has a dividend reinvestment plan under which all 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 September 30, 2006 was $13.84, and at December 31, 2005 was $13.77. In determining the Company’s net asset value per share, the Board of Directors determined in good faith the fair value of the Company’s portfolio investments for which reliable market quotations are not readily available.

NOTE 8. PAYMENT-IN-KIND INTEREST

The Company has investments in its portfolio which contain a PIK provision. The PIK interest is added to the cost basis of the investment 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. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. For the three months ended September 30, 2006 and 2005, the Company recorded PIK income of $46,603 and $1,130,342, respectively, and a corresponding increase in the cost of the investment. For the nine month periods ended September 30, 2006 and 2005, the Company recorded PIK income of $1,492,173 and $3,060,069, respectively.

In addition, the Company recorded original issue discount income (“OID”) of approximately $234,531 and $480,702 for the three months and nine months ended September 30, 2006, respectively, representing the amortization of the discounted cost attributed to certain debt securities purchased by the Company in connection with the issuance of warrants or stock. The Company had approximately $112,238 and $285,405 in OID income for the three months and nine months ended September 30, 2005, respectively.

NOTE 9. OTHER INCOME

Other income includes primarily closing fees, or origination fees, associated with investments in portfolio companies. Such fees are normally paid at closing of the Company’s investments, are fully earned and non-refundable, 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 nine months ended September 30, 2006 and 2005, respectively, the Company received no fee income for managerial assistance.

 

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NOTE 10. FINANCIAL HIGHLIGHTS

Financial highlights for the three month and nine month periods ending September 30, 2006 and 2005, respectively, are as follows:

 

     Three Months
Ended
September 30,
2006
    Three Months
Ended
September 30,
2005
    Nine Months
Ended
September 30,
2006
    Nine Months
Ended
September 30,
2005
 
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Per Share Data

        

Net asset value at beginning of period

   $ 13.81     $ 13.74     $ 13.77     $ 13.71  
                                

Net investment income

     0.31       0.33       0.91       0.81  

Net realized and unrealized capital gains(1)

     0.04       0.04       0.08       0.04  

Effect of shares issued, net of offering expenses

     0.00       0.00       0.00       (0.11 )
                                

Total from investment operations

     0.35       0.37       0.99       0.74  
                                

Dividends from net investment income

     (0.23 )     (0.25 )     (0.83 )     (0.59 )

Distributions from net realized capital gains

     (0.09 )     (0.00 )     (0.09 )     (0.00 )
                                

Total distributions

     (0.32 )     (0.25 )     (0.92 )     (0.59 )
                                

Net asset value at end of period

   $ 13.84     $ 13.86     $ 13.84     $ 13.86  
                                

Per share market value at beginning of period

   $ 14.65     $ 14.80     $ 15.10     $ 15.01  

Per share market value at end of period

   $ 14.63     $ 15.79     $ 14.63     $ 15.79  

Total return(2)(3)

     2.05 %     8.38 %     3.12 %     9.13 %

Shares outstanding at end of period

     19,616,153       13,463,852       19,616,153       13,463,852  

Ratios/Supplemental Data

        

Net assets at end of period

   $ 271,478,207     $ 186,576,058     $ 271,478,207     $ 186,576,058  

Average net assets

   $ 270,805,517     $ 184,927,207     $ 269,226,495     $ 178,271,603  

Ratio of expenses to average net assets - annualized

     3.92 %     4.37 %     3.33 %     3.64 %

Ratio of expenses, excluding interest expense, to average net assets - annualized

     3.09 %     4.17 %     2.94 %     3.57 %

Ratio of net investment income to average net assets - annualized

     9.07 %     9.69 %     8.78 %     7.91 %

(1) Includes rounding adjustment to reconcile change in net asset value per share.

 

(2) Amount not annualized.

 

(3) Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company’s dividend reinvestment plan.

 

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NOTE 11. CASH AND CASH EQUIVALENTS

At September 30, 2006 and December 31, 2005, respectively, cash and cash equivalents consisted of:

 

     September 30,
2006
   December 31,
2005
     (Unaudited)     

Eurodollar Time Deposit (due 10/2/06 and 1/3/06)

   $ 15,658,237    $ 15,700,000

U.S. Treasury Bill (1/12/06)

     —        39,954,167
             

Total Cash Equivalents

     15,658,237      55,654,167

Cash

     —        157,417
             

Cash and Cash Equivalents

   $ 15,658,237    $ 55,811,584
             

NOTE 12. COMMITMENTS

As of September 30, 2006, the Company had issued commitments to purchase additional debt investments and/or warrants from certain portfolio companies, contingent upon their meeting agreed-upon financial milestones. Total commitments of $16 million were outstanding as of September 30, 2006 to The Endurance International Group ($9 million) and WHITTMANHART, Inc. ($7 million).

NOTE 13. REVOLVING CREDIT AGREEMENT

As of September 30, 2006, the Company had an uncommitted $100 million senior secured revolving credit facility (the “Credit Facility”) with Royal Bank of Canada (“RBC”), as administrative agent and lender. The Credit Facility supplements the Company’s equity capital and provides funding for additional portfolio investments, as well as general corporate matters. All amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable at the earlier of one year from the date of the borrowing or the termination date of the Credit Facility; the Credit Facility has a termination date of April 11, 2008. The Company had borrowed $ 41.5 million under the credit agreement as of September 30, 2006.

Under the terms of the credit facility, the Company must satisfy certain portfolio covenant requirements on a monthly basis including minimum market value, weighted average maturity, and average weighted coupon rate of all secured transaction assets, as well as limitations on the principal amounts of eligible transaction assets. In addition, the Company must comply with other general covenants including limitations on indebtedness, liens and pledges, restricted payments, mergers and consolidations and transactions with affiliates.

NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation establishes for all entities, including pass-through entities such as the Company, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosure. The Interpretation is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. Management has recently begun to evaluate the application of the Interpretation to the Company, and is not in a position at this time to estimate the significance of its impact, if any, on the Company’s financial statements.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, the Company is in the process of reviewing the Standard against its current valuation policies to determine future applicability.

NOTE 15. SUBSEQUENT EVENTS

On October 2, 2006, the Company completed a $15 million investment in subordinated unsecured notes issued by FusionStorm, a national provider of IT products, professional services, support contract services and 24x7 managed services for enterprises.

On October 3, 2006, the Company completed a $5.1 million investment in senior secured notes issued by WHITTMANHART, Inc. an existing portfolio company, pursuant to its previously established commitment facility.

On October 13, 2006, the Company completed a $5 million investment in senior secured term A notes with warrants issued by Group 329, LLC (d/b/a “The CAPS Group”), an existing portfolio company.

On October 26, 2006, the Board of Directors declared a dividend of $0.34 per share for the fourth quarter, payable on December 29, 2006 to shareholders of record as of December 8, 2006.

On October 30, 2006, the Company completed a $9 million investment in senior secured notes with warrants issued by Punch Software, LLC.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The information contained in this section should be read in conjunction with our financial statements and related notes and schedules thereto appearing elsewhere in this Quarterly Report, as well as the sections entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes and schedules thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

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:

 

    an economic downturn could impair our customers’ ability to repay our loans and increase our non-performing assets,

 

    an economic downturn could disproportionately impact the technology-related industry in which we concentrate causing us to suffer losses in our portfolio and experience diminished demand for capital in this industry sector,

 

    a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities,

 

    interest rate volatility could adversely affect our results, and

 

    the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this Form 10-Q and in our filings with the SEC.

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 inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. 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. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this Quarterly Report. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report.

Except as otherwise specified, references to “TICC,” “the Company,” “we,” “us” and “our” refer to Technology Investment Capital Corp.

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Form 10-Q.

OVERVIEW

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 operate as a closed-end, non-diversified management investment company, and have elected to be treated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. We have elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code.

Our investment activities are managed by Technology Investment Management, LLC, or TIM, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. TIM is owned by BDC Partners LLC, or BDC Partners, its managing member, and Royce & Associates, LLC, or Royce & Associates. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President and Chief Operating Officer, are the members of BDC Partners, and Charles M. Royce, our non-executive Chairman, is the President of Royce & Associates. Under the investment advisory agreement, we have agreed to pay TIM an annual base fee calculated on gross assets, 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. Our executive officers and directors, and the executive officers of TIM and BDC Partners, serve or may serve as officers and directors of entities that operate in a line of business similar to our own.

 

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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 more information, see Part II—Item 1A—“Risk Factors—Risks Relating to Our Business and Structure—There are significant potential conflicts of interest, which could impact our investment returns.”

We currently concentrate our investments in companies having annual revenues of less than $200 million and/or an equity capitalization of less than $300 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: Internet, IT services, media, telecommunications, semiconductors, hardware, software and technology-enabled services.

While the structure of our investments will vary, we 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 will, at the time of our investment, have employees and revenues. Many 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.

We expect that our investments will generally range between $5 million and $30 million each, although this investment size may vary proportionately as the size of our capital base changes, and will accrue interest at fixed and variable rates. As of September 30, 2006, our debt investments had stated interest rates of between 6.5% and 15.45% and maturity dates of between 6 and 84 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 12.3%.

Our loans may carry a provision for deferral of some or all of the interest payments, which will be 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 $47,000 and $1,492,000 for the three months and nine months ended September 30, 2006, respectively.

We also borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to our investment adviser, TIM, will be borne by our common stockholders.

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 would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date.

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.

To the extent possible, our loans will be 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 with amortization of principal being deferred for several years. 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.

During the quarter ended September 30, 2006, we closed approximately $47.2 million in portfolio investments, including additional debt investments of approximately $2.5 million in existing portfolio companies, and approximately $44.7 million of investments in new portfolio companies. A total of $40.6 million of principal in debt investments was repaid by our portfolio companies during the quarter ended September 30, 2006.

During the quarter ended September 30, 2006, we had net realized capital gains of approximately $309,000, resulting primarily from a contingency payout relating to the prior sale of Innovation Interactive, Inc.

Based upon the fair value determinations made in good faith by the Board of Directors, we had net unrealized capital appreciation on investments of approximately $309,000 for the quarter ended September 30, 2006.

PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY

The total portfolio value of our investments was approximately $296.3 million and $211.4 million at September 30, 2006 and December 31, 2005, respectively. The increase in investments during the nine month period was due to newly originated debt investments of approximately $107.6 million, partially offset by debt repayments of approximately $52.3 million including a warrant sale for approximately $750,000. The increase is also due to additional investments in existing portfolio

 

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companies of approximately $26.8 million, accrual of payment-in-kind interest of approximately $1.5 million and changes in fair value of approximately $0.8 million. During the quarter ended September 30, 2006, we originated investments in six portfolio companies (four of which were new portfolio companies and two of which were existing portfolio companies). During the quarter ended September 30, 2006, we had gross originations and advances of approximately $47.2 million; in addition, we received fee income in the form of additional equity of approximately $356,000.

We receive payments in our portfolio based on scheduled amortization of the outstanding balances and sales of equity investments. In addition, we receive repayments of some of our investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. For the quarter ended September 30, 2006 and the year ended December 31, 2005, we had repayments of $41.3 million and $29.5 million, respectively. During the quarter ended September 30, 2006 the repayments on our investments were largely due to payments from MortgageIT, Inc. ($15 million), Mortgagebot Acquisitions, LLC ($11 million) and Klinger Advanced Aesthetics, Inc. ($10 million).

At September 30, 2006, we had investments in debt securities of, or loans to, twenty-six private companies, totaling approximately $284.1 million, and equity investments of approximately $12.2 million. At December 31, 2005, we had investments in debt securities of, or loans to, eighteen private companies, totaling approximately $203.8 million, and equity investments of approximately $7.6 million.

Total portfolio investment activity for the nine months ended September 30, 2006 and the year ended December 31, 2005 was as follows:

 

     September 30, 2006     December 31, 2005  
     (dollars in millions)     (dollars in millions)  

Beginning Investment Portfolio

   $ 211.4     $ 82.1  

Portfolio Investments Acquired

     134.3       159.5  

Gross payments

     (52.2 )     (36.3 )

Payment in Kind

     1.5       3.8  

Original Issue Discount

     0.5       0.4  

Net Unrealized Appreciation

     0.9       0.2  

Net Realized Gains

     (0.1 )     1.7  
                

Ending Investment Portfolio

   $ 296.3     $ 211.4  
                

The following table indicates the quarterly portfolio investment activity for the nine months ended September 30, 2006 and the year ended December 31, 2005:

 

     New
Investments
   Repayments
     (dollars in
millions)
   (dollars in
millions)

Quarter ended

     

September 30, 2006

   $ 47.5    $ 41.3

June 30, 2006

     36.8      6.3

March 31, 2006

     50.0      4.6
             

Total

     134.3      52.2
             

December 31, 2005

     8.5      10.6

September 30, 2005

     70.0      0.6

June 30, 2005

     37.5      16.9

March 31, 2005

     43.5      1.4
             

Total

   $ 159.5    $ 29.5
             

 

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The following table shows the fair value of our portfolio of investments by asset class as of September 30, 2006 and December 31, 2005:

 

     September 30, 2006     December 31, 2005  
     Investments
at Fair
Value
   Percentage
of Total
Portfolio
    Investments
at Fair
Value
   Percentage
of Total
Portfolio
 
     (dollars in
millions)
         (dollars in
millions)
      

Senior Secured Notes

   $ 253.8    85.7 %   $ 173.6    82.1 %

Senior Unsecured Notes

     30.2    10.2 %     30.2    14.3 %

Preferred Stock

     2.9    1.0 %     3.2    1.5 %

Common Stock

     6.0    2.0 %     3.0    1.4 %

Warrants

     3.4    1.1 %     1.4    0.7 %
                          

Total

   $ 296.3    100.0 %   $ 211.4    100.0 %
                          

The following table shows our portfolio of investments by industry at fair value, as of September 30, 2006 and December 31, 2005:

 

     September 30, 2006     December 31, 2005  
     Investments
at Fair
Value
   Percentage
of Fair
Value
    Investments
at Fair
Value
   Percentage
of Fair
Value
 
     (dollars in
millions)
         (dollars in
millions)
      

Software

   $ 40.4    13.6 %   $ 5.0    2.4 %

Satellite communications

     33.0    11.1 %     25.5    12.0 %

Webhosting

     22.5    7.6 %     21.1    10.0 %

IT consulting

     20.9    7.0 %     20.0    9.5 %

Digital imaging

     18.5    6.2 %     —      0.0 %

Logistics technology

     17.5    5.9 %     17.1    8.1 %

Interactive voice messaging services

     15.0    5.1 %     15.0    7.1 %

Financial services

     15.0    5.1 %     15.0    7.1 %

Web-based services

     15.0    5.1 %     26.0    12.3 %

Internet service provider

     14.7    5.0 %     15.0    7.1 %

Digital media

     13.6    4.6 %     12.0    5.7 %

Geospatial imaging

     13.0    4.4 %     13.0    6.1 %

Semiconductor capital equipment

     12.0    4.0 %     —      0.0 %

Internet business services

     12.0    4.0 %     —      0.0 %

Virtual workforce services

     10.6    3.6 %     13.5    6.4 %

Domain name registration

     10.0    3.4 %     —      0.0 %

Enterprise software

     6.5    2.2 %     —      0.0 %

Information services

     5.0    1.7 %     —      0.0 %

Medical services

     1.1    0.4 %     10.0    4.7 %

Internet advertising

     —      0.0 %     3.2    1.5 %
                          
   $ 296.3    100.0 %   $ 211.4    100.0 %
                          

Since our inception in 2003, our portfolio has consisted primarily of senior loans to companies operating in the technology-related sector. We may also invest in the publicly traded debt and/or equity securities of other technology-related companies or take controlling interests in such companies in certain limited circumstances. We intend to continue to maintain a diverse portfolio; however, we have no policy with respect to the level of our diversification and we do not intend to operate as a “diversified company” within the meaning of the 1940 Act.

 

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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. However, there can be no assurance when or if these potential transactions will close.

PORTFOLIO GRADING

We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of September 30, 2006 and December 31, 2005, respectively, our portfolio had a weighted average grade of 2.0, based upon the fair value of the debt investments in the portfolio. Equity securities are not graded.

At September 30, 2006 and December 31, 2005, our debt investment portfolio was graded as follows:

 

          September 30, 2006     December 31, 2005  

Grade

  

Summary Description

   Portfolio at
Fair Value
   Percentage of
Total Portfolio
    Portfolio at
Fair Value
   Percentage of
Total Portfolio
 
          (dollars in
millions)
         (dollars in
millions)
      

1

   Trending ahead of expectations    $ 47.1    16.6 %   $ 52.5    25.8 %

2

   Full repayment of principal and interest is expected      191.6    67.4 %     119.3    58.5 %

3

   Requires closer monitoring, but full repayment of principal and interest is expected      45.4    16.0 %     32.0    15.7 %

4

   Some reduction of interest income is expected, but no loss of principal is expected      —      0.0 %     —      0.0 %

5

   Some loss of principal is expected      —      0.0 %     —      0.0 %
                             
      $ 284.1    100.0 %   $ 203.8    100.0 %
                             

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 income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified our investment valuation policy as our only 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.

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. We are required to specifically value each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful, or when the enterprise value of the portfolio company does not currently support the cost of our debt or equity investment. Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time.

Our process for determining the fair value of a private finance investment begins with determining the enterprise value of the portfolio company. The fair value of our investment is based on the enterprise value at which the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The liquidity event whereby we exit a private finance investment is generally the sale, the recapitalization or, in some cases, the initial public offering of the portfolio company.

There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To determine the enterprise value of a portfolio company, we analyze its historical and projected financial results, as well as the nature and value of any collateral. We generally require portfolio companies to provide annual audited and quarterly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

 

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If there is adequate enterprise value to support the repayment of our debt, the fair value of our loan or debt security normally corresponds to cost unless the borrower’s condition or other factors lead to a determination of fair value at a different amount. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidation events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.

Our Board of Directors determines the fair value of our investment portfolio each quarter. In connection with that determination, members of TIM’s portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. The Company has engaged the third party valuation firm, Houlihan Lokey Howard & Zukin, or HLHZ, to perform valuations of its investments, except for any portfolio investments that, when combined with all other investments in the same portfolio company, (i) have a fair value as of the previous quarter of less than 1% of the Company’s total asset value as of the previous quarter; or (ii) have an estimated fair value below 1% of the Company’s anticipated total asset value for the current quarter as a result of the repayment of outstanding principal amounts during the current quarter. The frequency of HLHZ’s valuation of our portfolio securities is based upon the grade assigned to each such security under the Company’s credit grading system, as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4 and 5, at least quarterly.

An affiliate of HLHZ (the “HLHZ Affiliate”) owns a controlling interest in one of our portfolio companies, American Integration Technologies, LLC. Certain HLHZ personnel who perform the valuation services for the Company hold investments (directly and/or indirectly) in the HLHZ Affiliate. TICC’s Board has considered the relative amount of the investment and believes that it does not affect HLHZ’s ability to perform its valuation services.

The Board of Directors uses the recommended valuations as prepared by management and HLHZ, respectively, as a component of the foundation for its final fair value determination. In making such determination, the Board of Directors values debt securities at cost plus amortized original issue discount and payment-in-kind (“PIK”) interest, if any, unless other factors lead to a determination of fair value at a different amount. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had a readily available 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 valuation currently assigned to such investments. We will record unrealized capital depreciation on investments when we believe that an investment has become impaired, including when the enterprise value of the portfolio company does not currently support the carrying value of our debt or equity investment. We will record unrealized capital appreciation if we believe that the underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value are recorded in the statements of operations as the net change in unrealized capital appreciation or depreciation.

RESULTS OF OPERATIONS

Set forth below is a comparison of our results of operations for the three months ended September 30, 2006 to the three months ended September 30, 2005.

Investment Income

Investment income for the three months ended September 30, 2006 was approximately $8.8 million compared to approximately $6.5 million for the three months ended September 30, 2005. This increase resulted primarily from our portfolio investing activities throughout 2005 and early 2006, as the debt investment portfolio increased from $146.9 million to $284.1 million. For the quarter ended September 30, 2006 investment income consisted of approximately $8.0 million in cash interest from portfolio investments, approximately $0.1 million in cash interest from cash and cash equivalents, approximately $47,000 in PIK interest from one of our debt investments, and amortization of original issue discount of approximately $235,000. For the quarter ended September 30, 2005, investment income consisted of approximately $3.5 million in cash interest from portfolio investments, approximately $0.2 million in cash interest from cash and cash equivalents, approximately $1.1 million in PIK interest from two investments, and amortization of original issue discount of approximately $112,000. As a percentage of total investment income, PIK interest for the quarter ended September 30, 2006 was approximately 0.5%, down from approximately 16.9% for the three months ended September 30, 2005, primarily as a result of the conversion of two of our debt investments from PIK interest payments to cash interest payments during 2006.

As of September 30, 2006, our debt investments had stated interest rates of between 6.5% and 15.45% and maturity dates of between 6 and 84 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 12.3% compared to 10.7% as of September 30, 2005. In addition to cash interest, 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.

For the quarter ended September 30, 2006, other income of approximately $0.4 million was recorded, consisting primarily of non-recurring amendment fees earned in connection with existing portfolio investments, compared to fee income of approximately $1.6 million for the same period in 2005. This decrease is primarily due to our participation in several investments during the quarter ended September 30, 2006 for which no closing fees were earned.

Operating Expenses

Operating expenses for the quarter ended September 30, 2006 were approximately $2.7 million. This amount consisted primarily of investment advisory fees, interest expense, professional fees, salaries and benefits, and general and administrative expenses. This was an increase of approximately $632,000 from the quarter ended September 30, 2005, which was attributable primarily to an increase of $468,000 in our investment advisory fees and an increase of $465,000 in interest

 

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expense partially offset by lower salaries and benefits of approximately $205,000. Operating expenses for the quarter ended September 30, 2005 were approximately $2.0 million.

The investment advisory fee for the third quarter of 2006 was approximately $1.5 million, representing the base fee for the period as provided for in the investment advisory agreement. The investment advisory fee in the comparable period in 2005 was approximately $1.0 million which consisted of the base fee for the period. The increase of approximately $500,000 is due to an increase in average gross assets. At each of September 30, 2006 and December 31, 2005, respectively, approximately $1.5 million of investment advisory fees remained payable to TIM.

Interest expense was approximately $557,000 for the quarter ended September 30, 2006 compared to approximately $92,000 for the same quarter in the prior year, as a result of an increase in borrowings under the credit facility during the second quarter. The average interest rate on the amounts borrowed was 7.74% for the quarter ended September 30, 2006, compared to approximately 6.54% during the comparable period during 2005.

Professional fees, consisting of legal, valuation, audit and consulting fees, were approximately $217,000 for the quarter ended September 30, 2006, compared to approximately $294,000 for the quarter ended September 30, 2005. The decrease is primarily related to a decrease of approximately $64,000 in legal fees for general corporate matters.

Salaries and benefits were approximately $223,000 for the quarter ended September 30, 2006, compared to approximately $428,000 for the quarter ending September 30, 2005, reflecting primarily the allocation of compensation expenses for the services of our Chief Financial Officer, our Controller, and other administrative support personnel. The decrease of approximately $205,000 from 2005 reflects a lower year-to-date accrual of estimated bonuses. At September 30, 2006 and December 31, 2005, respectively, approximately $167,000 and $0 of compensation expenses remained payable to BDC Partners.

General and administrative expenses, consisting primarily of office supplies, facilities costs and other expenses, were approximately $71,000 for the three months ended September 30, 2006 compared to approximately $91,000 for the same period in 2005 primarily as a result of decreased listing fees in 2006. Office supplies, facilities costs and other expenses are allocated to the Company under the terms of the administration agreement with TIM and BDC Partners.

Realized and Unrealized Gains/Losses on Investments

During the quarter ended September 30, 2006, we had realized capital gains of approximately $309,000 resulting primarily from a contingency payout of approximately $302,000 relating to the prior sale of Innovation Interactive, Inc. The Company had no realized gains or losses on investments for the three months ended September 30, 2005.

The Company also had net unrealized capital appreciation of approximately $309,000, primarily with respect to its equity investments in AVIEL Systems, Inc. ($400,000), Climax Group, Inc. ($300,000) and unrealized appreciation associated with various investments of approximately $100,000. These increases were partially offset by unrealized capital depreciation associated with its equity investments in Segovia, Inc. ($340,000) and StayOnline, Inc. ($150,000). The Company had unrealized capital appreciation of $239,000 on investments for the three months ended September 30, 2005.

The increase in the fair value of the Company’s investment in the warrants of AVIEL Systems, Inc. is based, among other things, on a third party valuation analysis of the enterprise value of the company. TAC Acquisition Corp., a related party to TICC, has announced a proposed acquisition of AVIEL. See “Related Parties” below.

Net Increase in Stockholders’ Equity from Operations

The Company had a net increase in stockholders’ equity resulting from operations of approximately $6.8 million for the quarter ended September 30, 2006 compared to an increase of approximately $4.7 million for the comparable period in 2005. This increase was attributable primarily to an increase in interest income from debt investments as the number of our portfolio investments grew and our overall portfolio increased.

Based on a weighted-average of 19,537,811 shares outstanding (basic and diluted), the net increase in stockholders’ equity from operations per common share for the quarter ended September 30, 2006 was approximately $0.35 for basic and diluted earnings, compared to $0.35 per share for the same period in 2005.

Set forth below is a comparison of our results of operations for the nine months ended September 30, 2006 to the nine months ended September 30, 2005.

Investment Income

Investment income for the nine months ended September 30, 2006 was approximately $24.5 million compared to approximately $15.4 million for the nine months ended September 30, 2005. The increase resulted primarily from our portfolio investing activities throughout 2005 and early 2006. For the nine months ended September 30, 2006 investment income consisted of approximately $19.6 million in cash interest from portfolio investments, approximately $0.6 million in

 

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cash interest from cash and cash equivalents, approximately $1.5 million in PIK interest from three debt investments, and amortization of original issue discount of approximately $481,000. For the nine months ended September 30, 2005 investment income consisted of approximately $8.2 million in cash interest from portfolio investments, approximately $0.9 million in cash interest from cash and cash equivalents, approximately $3.1 million in PIK interest from two of our investments, and amortization of original issue discount of approximately $285,000. As a percentage of total investment income, PIK interest for the nine months ended September 30, 2006 was approximately 6%, as compared to approximately 20% for the nine months ended September 30, 2005, the decrease was primarily the result of two of our debt investments making cash interest payments instead of PIK interest payments pursuant to the terms of their debt instruments during 2006.

As of September 30, 2006, our debt investments had stated interest rates of between 6.5% and 15.45% and maturity dates of between 6 and 84 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 12.3% compared to approximately 10.7% as of September 30, 2005. In addition to cash interest, 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.

For the nine months ended September 30, 2006, other income of approximately $2.3 million was recorded, consisting primarily of non-recurring origination fees earned in connection with new investments, compared to fee income of approximately $3.0 million for the same period in 2005. This decrease is primarily due to our participation in several investments during the quarter ended September 30, 2006 for which no closing fees were earned.

Operating Expenses

Operating expenses for the nine months ended September 30, 2006 were approximately $6.7 million compared to approximately $4.9 million for the nine months ended September 30, 2005. Expenses consisted primarily of investment advisory fees, interest expense, professional fees, salaries and benefits, and general and administrative expenses. The increase of approximately $1.8 million over the same period in 2005 was attributable primarily to an increase of $1.5 million in our investment advisory fees, and an increase of $697,000 in interest expense. This increase was partially offset by lower compensation expense of approximately $136,000 and decreased professional fees of approximately $177,000 compared with the same period in 2005.

The investment advisory fee for the nine months ended September 30, 2006 was approximately $4.2 million, representing the base fee and an incentive fee of approximately $5,000 as provided for in the investment advisory agreement. The investment advisory fee in the comparable period in 2005 was approximately $2.8 million which consisted of the base fee for the period. This increase of approximately $1.5 million is due to an increase in average gross assets. At each of September 30, 2006 and December 31, 2005, respectively, approximately $1.5 million of investment advisory fees remained payable to TIM.

Interest expense was approximately $789,000 for the nine months ended September 30, 2006 compared to approximately $92,000 for the same period in the prior year, as a result of an increase in borrowings outstanding under our credit facility. The amount outstanding under our credit facility was approximately $41.5 million as of September 30, 2006 compared to $35.0 million as of September 30, 2005. The average interest rate on the amounts borrowed under the credit facility during the nine months ended September 30, 2006 was approximately 7.74% compared with 6.54% during the comparable period in 2005.

Salaries and benefits were approximately $483,000 for the nine months ended September 30, 2006, compared to approximately $619,000 for the same period in 2005, reflecting primarily the allocation of compensation expenses for the services of our Chief Financial Officer, our Controller, and other administrative support personnel. The decrease of approximately $136,000 from 2005 reflects primarily the accrual of estimated bonuses. At September 30, 2006 and December 31, 2005, respectively, approximately $167,000 and $0 of compensation expenses remained payable to BDC Partners.

Professional fees, consisting of legal, valuation, audit and consulting fees, were approximately $747,000 for the nine months ended September 30, 2006, compared to approximately $924,000 for the nine months ended September 30, 2005. The decrease is related to an decrease in legal fees for general corporate matters of approximately $157,000 and a decrease in audit fees of approximately $59,000 associated with our compliance with the Section 404 requirements of the Sarbanes-Oxley Act of 2002, offset by an increase of approximately $27,000 for valuation services.

General and administrative expenses, consisting primarily of office supplies, facilities costs and other expenses, were approximately $205,000 for the nine months ended September 30, 2006 compared to approximately $226,000 for the same period in 2005 primarily as a result of lower printing costs during 2006. Office supplies, facilities costs and other expenses, are allocated to the Company under the terms of the administration agreement with TIM and BDC Partners.

 

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Realized and Unrealized Gains/Losses on Investments

For the nine months ended September 30, 2006 the Company had net realized capital gains of approximately $246,000 resulting primarily from contingency payouts of approximately $460,000 relating to the prior sale of Innovation Interactive, Inc. These realized capital gains were partially offset by the realized capital loss of approximately $240,000 on the surrender of warrants in DirectRevenue in connection with the early repayment of its outstanding notes. The Company had no realized capital gains or losses on investments for the nine months ended September 30, 2005.

Net unrealized capital appreciation of approximately $909,000 resulted primarily from the reversal of previously recorded unrealized capital depreciation on the DirectRevenue warrants of $240,000, increases in the fair value of warrants in AVIEL Systems, Inc. ($900,000) and Climax Group, Inc. ($371,000), and unrealized appreciation associated with various investments of approximately $100,000. We make an accounting entry to reverse any unrealized appreciation or depreciation, respectively, when we exit an investment and realize a gain or loss for which we had previously recorded unrealized appreciation or depreciation. This unrealized capital appreciation was partially offset by unrealized capital depreciation associated with our equity investments in Segovia, Inc. ($340,000) and StayOnline, Inc. ($361,000). The Company had net unrealized capital appreciation on investments of approximately $239,000 for the nine months ended September 30, 2005.

The increase in the fair value of the Company’s investment in the warrants of AVIEL Systems, Inc. is based, among other things, on the third party valuation analysis of the enterprise value of the company. TAC Acquisition Corp., a related party to TICC, has announced a proposed acquisition of AVIEL. See “Related Parties” below.

Net Increase in Stockholders’ Equity from Operations

The Company had a net increase in stockholders’ equity resulting from operations of approximately $18.9 million for the nine months ended September 30, 2006 compared to an increase of approximately $10.8 million for the comparable period in 2005. This increase was attributable primarily to the increase in interest income from debt investments as the number of our portfolio investments grew and our overall portfolio increased. Based on a weighted-average of approximately 19,448,624 shares outstanding (basic and diluted), the net increase in stockholders’ equity from operations per common share for the nine months ended September 30, 2006 was approximately $0.97 for basic and diluted earnings, compared to approximately $0.83 per share for the same period in 2005.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2006, cash and cash equivalents decreased from approximately $55.8 million at the beginning of the period to approximately $15.7 million at the end of the period. Cash provided by operating activities for the period, consisting primarily of the items described in “—Results of Operations,” was approximately $14.5 million, reflecting net investment income, offset by non-cash income related to PIK interest and OID, and an increase in interest receivable. Net cash used in investing activities was approximately $80.5 million, reflecting new investments of approximately $134.0 million offset by principal repayments of approximately $52.2 million and the proceeds of the sale of investments of approximately $1.2 million. During the period, additional cash was provided by borrowing under the credit facility of approximately $41.5 million; a substantial outflow from financing activities of approximately $15.6 million reflects the payment of dividends.

As a business development company, we have an ongoing need to raise additional capital for investment purposes. As a result, we expect from time to time to access the debt and/or equity markets when we believe it is necessary and appropriate to do so.

Contractual Obligations

In addition, we have certain obligations with respect to the investment advisory and administration services we receive. See “–Overview”. We incurred approximately $4.2 million for investment advisory services and $468,000 for administrative services for the nine months ended September 30, 2006.

The following table shows our significant contractual obligations for the repayment of outstanding borrowings under our senior secured revolving credit facility as of September 30, 2006.

 

    

Payments Due By Year

(dollars in millions)

     Total    2006    2007    2008

Senior Secured Revolving Credit Facility (1)

   $ 41.5    $ —      $ 41.5    $ —  

 

(1) At September 30, 2006, $59.5 million remained unused under our senior secured revolving credit facility.

 

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Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices. However, as of September 30, 2006, we had unused commitments to extend credit to our existing portfolio companies of approximately $16.0 million, which are not reflected on our balance sheet.

Borrowings

At September 30, 2006 and December 31, 2005, respectively, we had outstanding borrowings of $41.5 million and $0, respectively, under our senior secured revolving credit facility. The following table shows the facility amounts and outstanding borrowings at September 30, 2006 and December 31, 2005:

 

     September 30, 2006    December 31, 2005
    

Facility

Amount

  

Amount

Outstanding

  

Facility

Amount

  

Amount

Outstanding

    

(dollars in

millions)

  

(dollars in

millions)

  

(dollars in

millions)

  

(dollars in

millions)

Senior Secured Revolving Credit Facility

   $ 100.0    $ 41.5    $ 100.0    $ —  
                           

On April 11, 2006, we entered into an amended and restated credit facility, with the RBC as agent and a lender under the amended and restated credit facility, and BB&T as an additional lender. Under the amended and restated credit facility, the amount of our credit facility was established at $100 million, with each lender providing $50 million under the facility. The credit facility supplements our equity capital and provides funding for additional portfolio investments, as well as general corporate matters. All amounts borrowed under the credit facility will mature, and all accrued and unpaid interest there under will be due and payable at the earlier of one year from the date of the borrowing and the termination date of the credit facility; the credit facility has a termination date of April 11, 2008. As of November 7, 2006, we had $60.5 million outstanding under the credit facility.

Under the terms of our credit facility agreement we must satisfy certain portfolio covenant requirements on a monthly basis including minimum market value, weighted average maturity, and average weighted coupon rate of all secured transaction assets, as well as limitations on the principal amounts of eligible transaction assets. In addition, we must comply with other general covenants relating to indebtedness, liens and pledges, restricted payments, mergers and consolidations and transactions with affiliates.

Distributions

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.

The following table reflects the cash distributions, including dividends and returns of capital, if any, per share that we have declared on our common stock to date:

 

Date Declared

   Record Date    Payment Date    Amount  

Fiscal 2006

        

October 26, 2006

   December 8, 2006    December 29, 2006    $ 0.34  

July 26, 2006

   September 8, 2006    September 29, 2006      0.32  

April 26, 2006

   June 9, 2006    June 30, 2006      0.30  

February 9, 2006

   March 10, 2006    March 31, 2006      0.30  
              

Total (2006)

           1.26  
              

Fiscal 2005

        

December 7, 2005

   December 30, 2005    January 18, 2006      0.12  

October 27, 2005

   December 9, 2005    December 30, 2005      0.30  

July 27, 2005

   September 10, 2005    September 30, 2005      0.25  

April 27, 2005

   June 10, 2005    June 30, 2005      0.20  

February 9, 2005

   March 10, 2005    March 31, 2005      0.14  
              

Total (2005)

           1.01  
              

Fiscal 2004

        

October 27, 2004

   December 10, 2004    December 31, 2004      0.11  (1)

July 28, 2004

   September 10, 2004    September 30, 2004      0.11  

May 5, 2004

   June 10, 2004    June 30, 2004      0.11  

February 2, 2004

   March 15, 2004    April 5, 2004      0.10  
              

Total (2004)

           0.43  (1)
              

Total Distributions:

         $ 2.70  (1)(2)
              

(1) Includes a return of capital of $0.10 per share for tax purposes.

 

(2) We did not declare a dividend for the period ended December 31, 2003.

 

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Related Parties

The Company has a number of business relationships with affiliated or related parties, including the following:

 

    We have entered into an investment advisory agreement with TIM. TIM is controlled by BDC Partners, its managing member. In addition to BDC Partners, TIM is owned by Royce & Associates as the non-managing member. BDC Partners, as the managing member of TIM, manages the business and internal affairs of TIM. In addition, BDC Partners provides us with office facilities and administrative services pursuant to an administration agreement.

 

    Messrs. Cohen and Rosenthal serve as Chief Executive Officer and President, respectively, of TAC Acquisition Corp., a special purpose acquisition company formed for the purpose of acquiring one or more operating companies in the technology-related sector. Messrs. Cohen, Rosenthal and Novak also serve on the Board of Directors, and Messrs. Cohen, Rosenthal and Royce are stockholders of TAC Acquisition Corp. On June 9, 2006, TAC Acquisition Corp. entered into an Agreement and Plan of Merger with AVIEL Systems, Inc., in which TICC currently has senior unsecured notes and warrants valued at approximately $15.4 million. In the event the proposed merger is approved, we anticipate that TICC’s senior unsecured notes would be repaid upon consummation of the merger. In addition, pursuant to the terms of the merger agreement, TAC Acquisition Corp. will assume the warrants to purchase shares of AVIEL common stock currently held by TICC. Upon a change of control or merger, the terms of the warrants provide we shall have the right to receive upon exercise of the warrants, for a nominal exercise price, approximately $1.0 million in the form of shares of TAC Acquisition Corp. common stock (subject to adjustment in accordance with the terms of the merger agreement) and cash equal to approximately $1.4 million. The proposed merger remains subject to the satisfaction of certain conditions, including obtaining necessary regulatory and shareholder approvals.

 

    Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, for T2 Advisers, LLC, an investment adviser to T2 Income Fund Limited, a Guernsey fund, established and operated for the purpose of investing primarily in the debt and equity securities of small to medium sized companies with a particular focus on technology companies. BDC Partners is the managing member, and Royce & Associates is a non-managing member, of T2 Advisers, LLC. In addition, Mr. Conroy serves as Chief Financial Officer, Chief Compliance Officer and Treasurer for both T2 Income Fund Limited and T2 Advisers, LLC. Messrs. Rosenthal and Conroy also each serve as a non-independent director of T2 Income Fund Limited.

In order to minimize the potential conflicts of interest that might arise, the Company has adopted a policy that prohibits it 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 & Associates, LLC, Palladio Capital Management or T2 Advisers, LLC holds a long or short position. The investment focus of each of these entities tends to be different from the Company’s investment objective. Nevertheless, it is possible that new investment opportunities that meet the Company’s 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 the Company. Also, our investment policy precluding the investments referenced above could cause the Company 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 we will not be disadvantaged in relation to any other particular client. In addition, the Company has adopted a formal Code of Ethics that governs the conduct of the Company’s officers and directors. The Company’s officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law. Finally, the Company pays 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, chief compliance officer, controller and other administrative support personnel, which creates conflicts of interest that our Board of Directors must monitor.

Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report.

RECENT DEVELOPMENTS

On October 2, 2006, the Company completed a $15 million investment in subordinated unsecured notes issued by FusionStorm, a national provider of IT products, professional services, support contract services and 24x7 managed services for enterprises.

On October 3, 2006, the Company completed a $5.1 million investment in senior secured notes issued by WHITTMANHART, Inc. an existing portfolio company, pursuant to its previously established commitment facility.

On October 13, 2006, the Company completed a $5 million investment in senior secured term A notes with warrants issued by Group 329, LLC (d/b/a “the CAPS Group”), an existing portfolio company.

On October 26, 2006, the Board of Directors declared a dividend of $0.34 per share for the fourth quarter, payable on December 29, 2006 to shareholders of record as of December 8, 2006.

On October 30, 2006, the Company completed a $9 million investment in senior secured notes with warrants issued by Punch Software, LLC.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. As of September 30, 2006, three debt investments in our portfolio were at fixed rates, and the remaining twenty-three debt investments were at variable rates, representing approximately $30.3 million and $259.2 million in principal debt, respectively. The variable rates are based upon the five-year Treasury note or LIBOR, and generally reset each year. We expect that future debt investments will generally be made at variable rates. In addition, we have an uncommitted revolving credit agreement which carries variable rate interest charges when drawn. Because we fund a portion of our investments with borrowings, our net increase in net

 

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assets resulting from operations is affected by the spread between the rate at which we invest and the rate at which we borrow. We attempt to match-fund our liabilities and assets by financing variable rate assets with variable rate borrowings.

To illustrate the potential impact of a change in the underlying interest rate on our net increase in stockholders’ equity resulting from operations, we have assumed a 1% increase in the underlying five-year Treasury note or LIBOR, and no other change in our portfolio as of September 30, 2006. We have also assumed a borrowing of $41.5 million under the credit facility. Under this analysis, the increase in stockholders’ equity would be approximately $2.2 million annually. Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including borrowing under the credit facility, that could affect the net increase in stockholders’ equity resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

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 the investments in our portfolio with fixed interest rates.

 

ITEM 4. CONTROLS AND PROCEDURES.

As of September 30, 2006, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, 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.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2006 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 business, financial condition or results of operations.

 

ITEM 1A. RISK FACTORS

An investment in our securities involves certain risks relating to our structure and investment objectives. The risks set forth below are not the only risks we face, and we face other risks which we have not yet identified, which we do not currently deem material or which are not yet predictable. 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 have a limited 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 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 subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

 

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We are dependent upon TIM’s key management personnel for our future success, particularly Jonathan H. Cohen and Saul B. Rosenthal.

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 of TIM, and Saul B. Rosenthal, the President and Chief Operating Officer of TIM. Neither Mr. Cohen nor Mr. Rosenthal will devote all of their business time to our operations, and both will have other demands on their time as a result of their other activities. Neither Mr. Cohen nor Mr. Rosenthal is subject to an employment contract. The departure of either of these individuals 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.

Our ability to achieve our investment objective will depend on our ability to grow, which will depend, in turn, on our investment adviser’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 investment adviser’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.

We and TIM, through TIM’s managing member, BDC Partners, will need to continue 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 make in 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 than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a 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 and maintenance of strong referral relationships with private equity and venture capital funds and investment banking firms.

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. 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 our investments are generally not in publicly traded securities, there is uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value.

Our portfolio investments are generally not in publicly traded securities. As a result, the fair value of these securities is not readily determinable. We value these securities at fair value as determined in good faith by our Board of Directors based upon the recommendation of the Board’s Valuation Committee. In connection with that determination, members of TIM’s portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. The Company also utilizes the services of HLHZ, a third party valuation firm, which prepares valuations for each of our portfolio investments other than those that, when combined with all other investments in

 

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the same portfolio company, (i) have a fair value as of the previous quarter of less than 1% of our total asset value as of the previous quarter; or (ii) have an estimated fair value below 1% of our anticipated total asset value for the current quarter as a result of the repayment of outstanding principal amounts during the current quarter. In addition, the frequency of HLHZ’s valuation of our portfolio securities is based upon the grade assigned to each such security under our credit grading system as follows: Grade 1, as least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. The types of factors that the Valuation Committee takes into account in providing its fair value recommendation to the Board of Directors includes, 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 readily available market for these securities existed.

The lack of liquidity in our investments may adversely affect our business.

As stated above, our investments are generally not in publicly traded securities. Substantially all of these securities are 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. Also, 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, because we generally invest in debt securities with a term of up to seven years and generally intend to hold such investments until maturity of the debt, we do not expect realization events, if any, to occur in the near-term. 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 may experience fluctuations in our quarterly operating results due to a number of factors, including the rate at which we make new investments, 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 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.

Even in the event the value of your investment declines, the management fee and, in certain circumstances, the incentive fee will still be payable.

The management fee is calculated as 2.0% of the value of our average gross assets on a quarterly basis. Accordingly, the management fee will be payable regardless of whether the value of our gross assets and/or your investment have decreased. Moreover, a portion of our incentive fee is payable if our net investment income for a calendar quarter exceeds a designated “hurdle rate.” This portion of the incentive fee is payable without regard to any capital gain, capital loss or unrealized depreciation that may occur during the quarter. Accordingly, this portion of our adviser’s incentive fee may also be payable notwithstanding a decline in net asset value that quarter. In addition, in the event we recognize deferred loan interest income in excess of our available capital as a result of our receipt of PIK interest, we may be required to liquidate assets in order to pay a portion of the incentive fee. TIM, however, is not required to reimburse us for the portion of any incentive fees attributable to deferred loan interest income in the event of a default of the obligor.

We borrow money, which would magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

We currently have $100 million available to us under a credit facility of which we have borrowed $60.5 million as of November 7, 2006. RBC serves as administrative agent and a lender under our credit facility. Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We borrow from and issue senior debt securities to banks, insurance companies, and other lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common shareholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to our investment adviser, TIM, will be

 

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payable on our gross assets, including those assets acquired through the use of leverage, TIM may have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management fee payable to TIM.

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 ratio, as defined in the 1940 Act, of gross assets less all liabilities and indebtedness not represented by senior securities, equals at least 200% of senior securities, after each issuance of senior securities. As a result of the issuance of senior securities, including preferred stock and debt securities, we are exposed to typical risks associated with leverage, including an increased risk of loss and an increase in expenses, which are ultimately borne by our common stockholders. Because 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. When 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. We have $100 million available to us under a credit facility with RBC; we had $60.5 million outstanding under our credit facility as of November 7, 2006.

Our ability to pay dividends or issue additional senior securities would be restricted if our asset coverage ratio was 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 then-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 certain limited circumstances, pursuant to an SEC staff interpretation, we may also issue shares at a price below net asset value in connection with a transferable rights offering so long as: (1) the offer does not discriminate among shareholders; (2) we use our best efforts to ensure an adequate trading market exists for the rights; and (3) the ratio of the offering does not exceed one new share for each three rights held. 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.

Our Board of Directors is authorized to reclassify any unissued shares of stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

Our charter permits our Board of Directors to reclassify any authorized but unissued shares of stock into one or more classes of preferred stock. We are currently authorized to issue up to 100,000,000 shares of common stock, of which 19,616,153 are currently issued and outstanding. In the event our Board of Directors opts to reclassify a portion of our unissued shares of common stock into a class of preferred stock, those preferred shares would have a preference over our common stock with respect to dividends and liquidation. The cost of any such reclassification would be borne by our existing common stockholders. The class voting rights of any preferred shares we may issue could make it more difficult for us to take some actions that may, in the future, be proposed by the Board of Directors and/or the holders of our common stock, such as a merger, exchange of securities, liquidation, or alteration of the rights of a class of our securities, if these actions were perceived by the holders of preferred shares as not in their best interests. The issuance of preferred shares convertible into shares of common stock might also reduce the net investment income and net asset value per share of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.

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 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

 

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borrowings to finance our investment activities. As of November 7, 2006, we had approximately $60.5 million outstanding under a credit facility with RBC. Some of our investments in debt securities are at fixed rates and others at variable 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 remain entitled to the tax benefits accorded to RICs under the Code, we must meet certain income source, asset diversification and annual distribution requirements. In order to qualify as a RIC, we must derive 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. 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 currently maintain a credit facility, and we may use additional 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 satisfy the annual distribution requirement. If we are unable to obtain cash 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 PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. A significant portion of our interest income from debt investments since our inception has been attributable to PIK interest received from our debt investments that contain a PIK provision. We also may be required to include in income certain other amounts that we will not receive in cash.

Because in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty satisfying the annual distribution requirement applicable to RICs. 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 investments to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment 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 that operate in a line of business similar to our own. 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 of TIM, BDC Partners and TICC, is a principal of JHC Capital Management, LLC, a registered investment adviser. Mr. Cohen also manages the Royce Technology Value Fund. 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 & Associates, the non-managing member of our investment adviser.

In addition, Messrs. Cohen and Rosenthal serve as Chief Executive Officer and President, respectively, of TAC Acquisition Corp., a special purpose acquisition company formed for the purpose of acquiring one or more operating companies in the technology-related sector. Messrs. Cohen, Rosenthal and Novak also serve on the Board of Directors, and Messrs. Cohen, Rosenthal and Royce are significant shareholders, of TAC Acquisition Corp. Likewise, Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer, and President, respectively, for T2 Advisers, LLC, an investment adviser to T2 Income Fund Limited, a Guernsey fund, established and operated for the purpose of investing primarily in the debt and equity securities of small and medium sized companies with a particular focus on technology companies. BDC

 

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Partners is the managing member, and Royce & Associates is a non-managing member, of T2 Advisers, LLC. In addition, Patrick F. Conroy, the Chief Financial Officer, Chief Compliance Officer, Treasurer and Corporate Secretary of TIM, BDC Partners and TICC, serves as Chief Financial Officer, Chief Compliance Officer and Treasurer for both T2 Income Fund Limited and T2 Advisers, LLC. Messrs. Rosenthal and Conroy also each serve as a non-independent director of T2 Income Fund Limited. Because of these possible conflicts of interest, these individuals may direct potential business and investment opportunities to other entities rather than to us or such individuals may undertake or otherwise engage in activities or conduct on behalf of such other entities that is not in, or which may be adverse to, our best interests.

In addition, on June 9, 2006, TAC Acquisition Corp. entered into an Agreement and Plan of Merger with AVIEL Systems, Inc., in which TICC currently has senior unsecured notes and warrants valued at approximately $15.4 million. In the event the proposed merger is approved, we anticipate that TICC’s senior unsecured notes would be repaid upon consummation of the merger. In addition, pursuant to the terms of the merger agreement, TAC Acquisition Corp. will assume the warrants to purchase shares of AVIEL common stock currently held by TICC. Upon a change of control or merger, the terms of the warrants provide we shall have the right to receive upon exercise of the warrants, for a nominal exercise price, approximately $1.0 million in the form of shares of TAC Acquisition Corp. common stock (subject to adjustment in accordance with the terms of the merger agreement) and cash equal to approximately $1.4 million. The proposed merger remains subject to the satisfaction of certain conditions, including obtaining necessary regulatory and shareholder approvals.

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 & Associates, LLC, Palladio Capital Management or T2 Advisers, LLC holds a long or short position. The investment focus of each of these entities tends to be different from our investment objective. 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 us in a fair and equitable manner over time consistent with their applicable duties under law so that we will not be disadvantaged in relation to any other particular client. In addition, we have adopted a formal Code of Ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law. 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, chief compliance officer, controller and other administrative support personnel, which creates 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 are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Any change in these laws or regulations could have a material adverse effect on our business.

 

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Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti- takeover provisions may inhibit a change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.

RISKS RELATED TO OUR INVESTMENTS

Our portfolio may be concentrated in a limited number of portfolio companies in the technology-related 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-related sector experiences a market downturn.

A consequence of our 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-related 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 market downturn in the technology-related sector could materially adversely affect us.

The technology-related sector is subject to many risks, including volatility, intense competition, decreasing life cycles and periodic downturns.

We invest in companies in the technology-related 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-related market is generally characterized by abrupt business cycles and intense competition. Since mid-2000, there has been substantial excess capacity and a significant slowdown in many industries in the technology-related sector. In addition, this overcapacity, together with a cyclical economic downturn, resulted in substantial decreases in the market capitalization of many technology-related companies. While such valuations have recovered to some extent, we can offer no assurance that such decreases in market capitalizations 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, the average selling prices of products and some services provided by the technology-related sector have historically 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 investments.

Although a prospective portfolio company’s assets are one component of our analysis when determining whether to provide debt capital, we generally do not base an investment decision primarily on the liquidation value of a company’s balance sheet assets. Instead, given the nature of the companies that TICC invests in, we also review the company’s historical and projected cash flows, equity capital and “soft” assets, including intellectual property (patented and non-patented), databases, business relationships (both contractual and non-contractual) and the like. Accordingly, considerably higher levels of overall risk will likely be associated with TICC’s portfolio compared with that of a traditional asset-based lender whose security consists primarily of receivables, inventories, equipment and other tangible assets. Interest rates payable by our portfolio companies may not compensate for these additional risks.

Specifically, investment in the technology-related companies that we are targeting involves a number of significant risks, including:

 

    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 value from the liquidation of such collateral;

 

    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;

 

   

because they tend to be 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

 

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companies, their operations and their prospects, we may not learn all of the material information we need to know regarding these businesses;

 

    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

 

    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.

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 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 failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value of our investment.

We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with business development company requirements or the desire to maintain our tax status.

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 TIM is determined, which is calculated as a percentage of the return on invested capital, may encourage TIM 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 TIM will receive the incentive fee based, in part, upon the 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 obligations to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. In addition, we 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.

 

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Because we generally do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by the managements of our portfolio companies that could decrease the value of our investments.

To date we have taken controlling equity positions in only one of our portfolio companies. As a result, with respect to the remaining portfolio companies we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

Our common stock price may be volatile.

The trading price of our common stock may fluctuate substantially depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

 

    price and volume fluctuations in the overall stock market from time to time;

 

    significant volatility in the market price and trading volume of securities of regulated investment companies, business development companies or other financial services companies;

 

    changes in regulatory policies or tax guidelines with respect to regulated investment companies or business development companies;

 

    actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

 

    general economic conditions and trends;

 

    loss of a major funding source; or

 

    departures of key personnel.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term.

Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. During the second and third quarters of 2004, and during the second quarter of 2006, our shares of common stock traded at a discount to the net asset value attributable to those shares.

There is a risk that you may not receive dividends or that our dividends may not grow over time.

We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions or year-to-year increases in cash distributions.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

While we did not engage in unregistered sales of equity securities during the three months ended September 30, 2006, we issued a total of 80,083 shares of common stock under our dividend reinvestment plan. This issuance was not subject to the registration requirements of the Securities Act of 1933. The aggregate valuation price for the shares of common stock issued under the dividend reinvestment plan was approximately $1.2 million.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

 

ITEM 5. OTHER INFORMATION.

On October 26, 2006, the Board of Directors approved an annual base salary of up to $300,000, exclusive of any discretionary bonuses or such other compensation as the Board of Directors may approve, from time-to-time, in its sole discretion, for Patrick F. Conroy in connection with his service as the Company’s Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary. Mr. Conroy’s salary is payable by BDC Partners, subject to reimbursement from the Company for the allocable portion of Mr. Conroy’s time that is devoted to the Company’s affairs.

In addition, on October 26, 2006, the Board of Directors approved the reimbursement of a discretionary bonus in the amount of $200,000, payable by BDC Partners to Mr. Conroy for his prior service and ongoing contributions to the Company.

 

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ITEM 6. EXHIBITS.

(a) 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      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 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      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).
10.5      Amended and Restated Credit Agreement between Registrant and Royal Bank of Canada (Incorporated by reference to Current Report on Form 8-K (File No. 814-00638) filed on April 14, 2006).
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 Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
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.

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: November 8, 2006

   

By:

  /s/    JONATHAN H. COHEN        
       

Jonathan H. Cohen

Chief Executive Officer

Date: November 8, 2006

   

By:

  /s/    PATRICK F. CONROY        
       

Patrick F. Conroy

Chief Financial Officer

(Principal Accounting and Financial Officer)

 

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