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TICC > SEC Filings for TICC > Form 10-K on 13-Mar-2013All Recent SEC Filings

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Form 10-K for TICC CAPITAL CORP.


13-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 TICC, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to:

our future operating results;

our business prospects and the prospects of our portfolio companies;

the impact of investments that we expect to make;

our contractual arrangements and relationships with third parties;

the dependence of our future success on the general economy and its impact on the industries in which we invest;

the ability of our portfolio companies to achieve their objectives;

our expected financings and investments;

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations of our portfolio companies.

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 portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

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, particularly if we elect to use leverage as part of our investment strategy;

currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and

the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in this Annual Report on Form 10-K 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 on Form 10-K 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 annual report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K.


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

OVERVIEW

Our investment objective is to maximize our portfolio's total return. Our primary focus is to seek current income by investing in corporate debt securities. We have also invested and may continue to invest in structured finance investments, including CLO vehicles, which own debt securities. We may also invest in publicly traded debt and/or 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 (the "1940 Act"). We have elected to be treated for tax purposes as a regulated investment company ("RIC"), under the Internal Revenue Code of 1986, as amended (the "Code"), beginning with our 2003 taxable year.

Our investment activities are managed by TICC Management, a registered investment adviser under the Investment Advisers Act of 1940, as amended. TICC Management is owned by BDC Partners, its managing member, and Charles M. Royce, our non-executive Chairman, who holds a minority, non-controlling interest in TICC Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President and Chief Operating Officer, are the members of BDC Partners. Under an investment advisory agreement (the "Investment Advisory Agreement"), we have agreed to pay TICC Management an annual base fee calculated on gross assets, and an incentive fee based upon our performance. Under an amended and restated administration agreement (the "Administration Agreement"), we have agreed to pay or reimburse BDC Partners, as administrator, for certain expenses incurred in operating TICC. Our executive officers and directors, and the executive officers of TICC Management and 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 more information, see "Risk Factors - Risks Relating to our Business and Structure - There are significant potential conflicts of interest, which could impact our investment returns."

On August 10, 2011, we completed a $225.0 million debt securitization financing transaction. On August 23, 2012, we completed a $160.0 million securitization financing transaction. On September 26, 2012, we completed a private placement of 5-year unsecured 7.50% Senior Convertible Notes Due 2017 (the "Convertible Notes"). A total of $105.0 million aggregate principal amount of the Convertible Notes were issued at the closing. An additional $10.0 million aggregate principal amount of the Convertible Notes were issued on October 22, 2012 pursuant to the exercise of the initial purchasers' option to purchase additional Convertible Notes. For more information about these transactions, see "- Liquidity and Capital Resources - Borrowings."

We generally expect to invest between $5 million and $50 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant, and accrue interest at fixed or variable rates. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5% of the total portfolio. As of December 31, 2012, our debt investments had stated interest rates of between 4.00% and 16.00% (excluding our investment in GenuTec Business Solutions, Inc. which carries a zero interest rate through October 30, 2014) and maturity dates of between 2 and 141 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 9.4% including GenuTec Business Solutions, Inc.

Our loans may carry a provision for deferral of some or all of the interest payments and amendment fees, which will be added to the principal amount of the loan. This form of deferred income is referred to as "payment-in-kind," or "PIK," interest or other income and, when earned, is recorded as interest or other income and an increase in the principal amount of the loan. For the year ended December 31, 2012, we recognized approximately $5.0 million of interest income attributable to PIK associated with our investments in American Integration Technologies, LLC, Pegasus Solutions, Inc., Merrill Communications,
LLC. and Shearers Food, Inc., compared to PIK interest of approximately $1.5 million for the year ended December 31,


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2011. In the event we recognize deferred loan interest income in excess of our available capital as a result of our PIK income, we may be required to liquidate assets in order to pay a portion of the incentive fee due to TICC Management.

We have historically and may continue to 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 TICC Management, will be borne by our common stockholders.

In addition, as a BDC 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 may 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 most debt investments having scheduled principal payments on a monthly or quarterly basis. 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 year ended December 31, 2012, we closed approximately $494.6 million in portfolio investments, including additional investments of approximately $170.6 million in existing portfolio companies and approximately $324.0 million in new portfolio companies. During the year ended December 31, 2012, we recognized a total of $191.2 million from principal repayments on debt investments, and we recognized approximately $69.3 million from the sale of portfolio investments. We realized net gains on investments during the year ended December 31, 2012 in the amount of approximately $16.9 million. For the year ended December 31, 2012, we had net unrealized appreciation of approximately $14.3 million.

Current Market and Economic Conditions

Current market conditions appear generally stable. During the year ended December 31, 2012, we saw much less severe price volatility for corporate loans (compared with the prior three year period), consistent with many other parts of the debt and equity markets. During 2012, the market for new investments has become more competitive and yields have generally decreased. We expect the market for new investments to remain competitive through 2013. In view of the above circumstances, we continue to invest in syndicated and larger middle-market loans, and, opportunistically, in certain structured finance investments, including collateralized loan obligation investment vehicles, and continue to be active in those markets.

PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY

The total value of our investments was approximately $667.5 million and $391.5 million at December 31, 2012 and December 31, 2011, respectively. The increase in investments during the year ended December 31, 2012 was due to purchases of portfolio investments of approximately $494.6 million, debt repayments and sales of securities of approximately $260.5 million, as well as by the fair value adjustments on our portfolio. The value of cash and cash equivalents increased by approximately $46.9 million during the year ended December 31, 2012. Our gross originations and advances totaled approximately $272.5 million during the year ended December 31, 2011.


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In certain instances we receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. For the years ended December 31, 2012 and December 31, 2011, we had $191.2 million and $107.9 million, respectively, of loan repayments. The most significant repayments during the year ended December 31, 2012 were as follows (in millions):

[[Image Removed]]                        [[Image Removed]]
Portfolio Company                               2012
                                             Repayments
American Integration Technologies, LLC   $            26.5
Endurance International Group, Inc.                   26.0
Blue Coat Systems, Inc                                11.2
Decision Resources, LLC                               10.3
WEB.COM Group, Inc.                                    9.0
Power Tools, Inc.                                      8.0
AKQA, Inc.                                             7.7
Global Tel Link Corp.                                  6.5
SonicWall, Inc.                                        6.1
US FT Hold Co., Inc. (A/K/A Fundtech)                  6.0
Attachmate Corporation                                 5.2
Skillsoft Corporation                                  5.0
Getty Images, Inc.                                     5.0
Sunquest Information Systems, Inc.                     5.0
Anchor Glass Container Corporation.                    5.0
Net all other                                         48.7
Total repayments                         $           191.2

Portfolio activity also reflects sales of securities in the amounts of $69.3 million and $11.3 million for 2012 and 2011, respectively. The most significant sales during the year ended December 31, 2012 were as follows (in millions):

[[Image Removed]]                 [[Image Removed]]
Portfolio Company                         2012
                                         Sales
Prospero CLO BV                   $            7.9
RCN Telecom Services, LLC                      4.7
Harch 2005-2A BB CLO                           3.9
Community Health Systems, Inc                  3.9
Aspen Dental Management, Inc                   3.8
Avenue CLO V LTD 2007-5A, 5X D1                3.6
Latitude III CLO 2007-3A                       3.4
Kingsland LTD 2007 4AE                         3.1
Ocean Trails CLO II 2007-2AD                   3.0
Canaras CLO - 2007-1AE                         3.0
Hewitts Island CDO 2007-1RAE                   3.0
Hyland Software, Inc                           2.8
Loomis Sayles CLO 2006-1AE                     2.7
Airvana Network Solutions, Inc                 2.7
Diversified Machine, Inc                       2.6
Net all other                                 15.2
Total sales                       $           69.3

For the year ended December 31, 2012, we recorded net realized capital gains on investments of approximately $16.9 million, which are largely comprised of aggregate gains from the sale of several CLO debt investments ($12.4 million) and the gain on the repayment on our investment in American Integration Technologies, LLC ($1.4 million).


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Based upon the fair value determinations made in good faith by the Board of Directors, during the year ended December 31, 2012, we had net unrealized gains of approximately $14.3 million, comprised of $52.4 million in gross unrealized appreciation, $24.0 million in gross unrealized depreciation and approximately $14.1 million relating to the reversal of prior period net unrealized appreciation as certain investments were realized. The most significant changes in net unrealized appreciation and depreciation during the year ended December 31, 2012 were as follows (in millions):

[[Image Removed]]                        [[Image Removed]]
Portfolio Company                            Changes in unrealized appreciation
                                                       (depreciation)
Canaras CLO Equity - 2007-1A, 1X         $                         1.9
Integra Telecom Holdings, Inc                                      1.5
GSC Partners 2007-8X Sub CDO                                       1.7
Emporia CLO 2007 3A E                                              1.7
Hewetts Island CDO IV 2006-4 E                                     1.5
Jersey Street 2006-1A CLO LTD                                      1.3
Harbourview - 2006A CLO Equity                                     1.2
GALE 2007-4A CLO                                                   1.0
Algorithmic Implementations, Inc                                   1.0
Band Digital Inc                                                  (1.3 )
American Integration Technologies, LLC                            (1.5 )
RBS Holding Company                                               (1.5 )
Prospero CLO II BV                                                (1.6 )
Pegasus Solutions, Inc                                            (1.8 )
GenuTec Business Solutions, Inc                                   (2.0 )
Net all other(1)                                                  11.2
Total                                    $                        14.3

[[Image Removed]]

(1) Unrealized gains and losses less than $1.0 million have been combined.

At December 31, 2011, we had investments in debt securities of, or loans to, 69 portfolio companies, with a fair value totaling approximately $345.8 million, and equity investments of approximately $45.7 million. The debt investments include approximately $1.5 million in accrued PIK interest which, as described in "- Overview" above, is added to the carrying value of our investments, reduced by repayments of principal.

A reconciliation of the investment portfolio for the years ended December 31, 2012 and 2011 follows:

[[Image Removed]]                     [[Image Removed]]         [[Image Removed]]
                                         December 31, 2012         December 31, 2011
                                       (dollars in millions)     (dollars in millions)
Beginning Investment Portfolio        $            391.5        $            247.5
Portfolio Investments Acquired                     494.6                     272.5
Debt repayments                                   (191.2 )                  (107.9 )
Sales of securities                                (69.3 )                   (11.3 )
Payment in Kind(1)                                   4.9                       1.5
Original Issue Discount                              5.8                       5.0
Net Unrealized Appreciation                         14.3                     (19.4 )
(Depreciation)
Net Realized Gains (Losses)                         16.9                       3.6
Ending Investment Portfolio           $            667.5        $            391.5

[[Image Removed]]

(1) Includes rounding adjustment to reconcile ending investment portfolio at December 31, 2012.


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The following table indicates the quarterly portfolio investment activity for the years ended December 31, 2012 and 2011:

[[Image Removed]]    [[Image Removed]]          [[Image Removed]]          [[Image Removed]]
                         New Investments            Debt Repayments          Sales of Securities
                      (dollars in millions)      (dollars in millions)      (dollars in millions)
Quarter ended
December 31, 2012    $                247.0     $                 75.3     $               48.8
September 30, 2012                    128.0                       45.3                      9.0
June 30, 2012                          62.1                       66.2                      2.5
March 31, 2012                         57.5                        4.4                      9.0
Total                $                494.6     $                191.2     $               69.3
December 31, 2011    $                 60.3     $                 28.5     $                2.9
September 30, 2011                     81.0                        9.0                      0.0
June 30, 2011                          30.6                       12.6                      0.0
March 31, 2011                        100.6                       57.8                      8.4
Total                $                272.5     $                107.9     $               11.3

The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2012 and 2011:

[[Image Removed]]      [[Image Removed]]       [[Image Removed]]            [[Image Removed]]       [[Image Removed]]
                                              2012                                                 2011
                        Investments at Fair       Percentage of Total        Investments at Fair       Percentage of Total
                               Value                   Portfolio                    Value                   Portfolio
                       (dollars in millions)                                (dollars in millions)
Senior Secured Notes   $             494.9                  74.1 %          $             289.9                  74.1 %
CLO Equity                           109.3                  16.4 %                         39.3                  10.0 %
CLO Debt                              55.6                   8.3 %                         51.0                  13.0 %
Subordinated Notes                     0.1                   0.0 %                          4.9                   1.3 %
Common Stock                           4.4                   0.7 %                          3.1                   0.8 %
Preferred Shares                       2.7                   0.4 %                          2.5                   0.6 %
Warrants                               0.5                   0.1 %                          0.8                   0.2 %
Total                  $             667.5                 100.0 %          $             391.5                 100.0 %

The following table shows our portfolio of investments by industry at fair value, as of December 31, 2012 and 2011:

[[Image Removed]]   [[Image Removed]]       [[Image Removed]]             [[Image Removed]]             [[Image Removed]]
                                     December 31, 2012                                        December 31, 2011
                     Investments at Fair     Percentage of Fair Value      Investments at Fair Value     Percentage of Fair Value
                            Value

Structured          $             164.9                    24.7 %         $                  90.3                      23.0 %
finance
Financial                          65.2                     9.8 %                            11.6                       3.0 %
intermediaries
Business services                  60.7                     9.1 %                            29.4                       7.5 %
Enterprise                         50.9                     7.6 %                            18.9                       4.8 %
software
Retail                             39.6                     5.9 %                            18.8                       4.8 %
Web hosting                        36.9                     5.5 %                            14.5                       3.7 %
Software                           35.9                     5.4 %                            42.5                      10.9 %
Telecommunication                  32.8                     4.9 %                            32.6                       8.3 %
services
Healthcare                         27.7                     4.2 %                            28.1                       7.2 %
Consumer services                  24.1                     3.6 %                             0.0                       0.0 %
IT consulting                      22.0                     3.3 %                             9.6                       2.5 %
IT outsourcing                     15.0                     2.2 %                             0.0                       0.0 %
Education                          14.9                     2.2 %                             8.7                      2.2%


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[[Image Removed]]   [[Image Removed]]       [[Image Removed]]             [[Image Removed]]       [[Image Removed]]
                                     December 31, 2012                                     December 31, 2011
                     Investments at Fair     Percentage of Fair Value      Investments at Fair     Percentage of Fair Value
                            Value                                                 Value

Auto parts                         12.9                     1.9 %                         9.4                     2.4 %
manufacturer
Computer hardware                   9.9                     1.5 %                        10.1                     2.6 %
Logistics                           9.9                     1.5 %                         0.0                     0.0 %
Insurance                           8.0                     1.2 %                         0.0                     0.0 %
Printing and                        7.8                     1.2 %                        14.7                     3.8 %
publishing
Electronics                         4.7                     0.7 %                         0.0                     0.0 %
Medical services                    4.0                     0.6 %                         0.0                     0.0 %
Grocery                             3.7                     0.6 %                         0.0                     0.0 %
Pharmaceutical                      3.5                     0.5 %                         0.0                     0.0 %
Shipping and                        3.4                     0.5 %                         0.0                     0.0 %
transportation
Digital media                       3.0                     0.5 %                         0.0                     0.0 %
Advertising                         2.9                     0.4 %                         7.6                     1.9 %
. . .
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