[March 13, 2013] TICC CAPITAL CORP. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) 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. 49 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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, 50 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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. 51 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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). 52 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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. 53 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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% 54 -------------------------------------------------------------------------------- TABLE OF CONTENTS [[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 % Utilities 2.5 0.4 % 0.0 0.0 % IT value-added 0.7 0.1 % 1.5 0.4 % reseller Semiconductor 0.0 0.0 % 22.6 5.8 % capital equipment Packaging and 0.0 0.0 % 4.9 1.3 % glass Cable/satellite 0.0 0.0 % 4.9 1.2 % television Building and 0.0 0.0 % 4.8 1.2 % development Food products 0.0 0.0 % 4.0 1.0 % manufacturer Interactive voice messaging 0.0 0.0 % 2.0 0.5 % services Total $ 667.5 100.0 % $ 391.5 100.0 % Since our inception in 2003, our portfolio has consisted primarily of senior loans to middle-market companies. We may also invest in publicly traded debt and/or equity securities or take controlling interests in portfolio companies in certain limited circumstances, as well as syndicated corporate loans and structured finance investments. On December 3, 2007, we changed our name from Technology Investment Capital Corp. to TICC Capital Corp. We expect to actively seek new investment opportunities both within and outside this sector that otherwise meet our investment criteria. 55 -------------------------------------------------------------------------------- TABLE OF CONTENTS PORTFOLIO GRADING We have adopted a credit grading system to monitor the quality of our debt investment portfolio. Equity securities are not graded. As of December 31, 2012 and 2011 our portfolio had a weighted average grade of 2.1 and 2.2, respectively, based upon the fair value of the debt investments in the portfolio. At December 31, 2012 and 2011, our debt investment portfolio was graded as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] December 31, 2012 Grade Summary Description Principal Value Percentage of Total Portfolio at Fair Value Percentage of Total Portfolio Portfolio (dollars in millions) (dollars in millions) Company is ahead of expectations and/or outperforming 1 financial $ - 0.0 % $ - 0.0 % covenant requirements and such trend is expected to continue. Full repayment 2 of principal 495.5 86.7 % 483.3 87.8 % and interest is expected Closer monitoring is required. Full 3 repayment of 59.7 10.4 % 59.1 10.7 % principal and interest is expected. A reduction of interest income has occurred or 4 is 6.4 1.1 % 5.5 1.0 % expected to occur. No loss of principal is expected. A loss of some 5 portion of 10.3 1.8 % 2.8 0.5 % principal is expected. $ 571.9 100.0 % $ 550.7 100.0 % [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] December 31, 2011 Grade Summary Description Principal Value Percentage of Total Portfolio at Fair Value Percentage of Total Portfolio Portfolio (dollars in millions) (dollars in millions) Company is ahead of expectations and/or out performing 1 financial $ 13.2 3.4 % $ 13.1 3.8 % covenant requirements and such trend is expected to continue. Full repayment 2 of principal 301.9 78.3 % 267.1 77.2 % and interest is expected Closer monitoring is required. Full 3 repayment of 67.2 17.4 % 63.6 18.4 % principal and interest is expected. A reduction of interest income has occurred or 4 is - 0.0 % - 0.0 % expected to occur. No loss of principal is expected. A loss of some 5 portion of 3.5 0.9 % 2.0 0.6 % principal is expected. $ 385.8 100.0 % $ 345.8 100.0 % We expect that a portion of our investments will be in the Grades 3, 4 or 5 categories from time to time, and, as such, we will be required to work with troubled portfolio companies to improve their business and protect our investment. The number and amount of investments included in Grade 3, 4 or 5 may fluctuate from year to year. RESULTS OF OPERATIONS Set forth below is a comparison of our results of operations for the years ended December 31, 2012, 2011 and 2010. Comparison of the years ended December 31, 2012 and December 31, 2011 Investment Income 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., compared with 11.3% as of December 31, 2011. 56 -------------------------------------------------------------------------------- TABLE OF CONTENTS Investment income for the year ended December 31, 2012 was approximately $71.2 million compared to approximately $45.2 million for the period ended December 31, 2011. This increase was due in part to an increase in the distributions from the equity interests in our CLO vehicle investments and the amount of performing assets in the portfolio as well as a one-time fee of approximately $3.4 million associated with our investment in American Integration Technologies, LLC. The total principal value of income producing debt investments as of December 31, 2012 and December 31, 2011 was approximately $566.5 million and $382.3 million, respectively. For the year ended December 31, 2012, investment income consisted of approximately $32.2 million in cash interest from portfolio investments, approximately $5.8 million in amortization of original issue and market discount, approximately $0.6 million of discount income derived from unscheduled principal cash remittances at par on discounted debt securities, approximately $25.8 million in distributions from the equity interest in securitized vehicle investments and an equity investment, as well as approximately $1.6 million in PIK interest income. For the year ended December 31, 2012, fee income of approximately $5.2 million was recorded, compared to fee income of approximately $921,000 for the year ended December 31, 2011. Fee income consists of non-recurring fees in connection with our investments in portfolio companies, including commitment fees, origination fees and amendment fees. During the year ended December 31, 2012, we recorded approximately $3.4 million of PIK fee income in association with the exit of our investment in American Integration Technologies, LLC. Operating Expenses Total expenses for the year ended December 31, 2012 were $34.0 million, which includes the accrued capital gains incentive fee of approximately $5.5 million. Expenses before incentive fees, for the year ended December 31, 2012, were approximately $23.0 million. This amount consisted of investment advisory fees, interest expense and other debt financing expenses, professional fees, compensation expense, and general and administrative expenses. Expenses before incentive fees increased approximately $11.2 million from the year ended December 31, 2011, attributable primarily to higher interest expense associated with the senior notes issued under our collateralized loan obligation transactions, higher investment advisory fees (consisting of the base management fee) as well as increased professional fees associated with our legal and audit expenses. Expenses before incentive fees for the year ended December 31, 2011 were approximately $11.8 million. The investment advisory fee for the year ended December 31, 2012 was approximately $11.2 million, representing the base fee as provided for in the Investment Advisory Agreement. The investment advisory fee in the comparable period in 2011 was approximately $7.3 million. The increase of approximately $3.9 million is due to an increase in average gross assets. At each of December 31, 2012 and December 31, 2011, respectively, approximately $4.9 million and $2.9 million of investment advisory fees remained payable to TICC Management, including the net investment income incentive fee discussed below. Interest expense and other debt financing expenses for the year ended December 31, 2012 was approximately $7.3 million, which was directly related to our debt securitization financing transactions and 2017 Convertible Notes issuance, compared with interest expense of approximately $1.2 million for the year ended December 31, 2011. TICC CLO LLC In August 2011, senior notes in the amount of $101,250,000 were issued by a newly formed special purpose vehicle in which a whole-owned subsidiary of TICC owns all of the equity. Under this structure, the notes bear interest, after the effective date, at three-month London Inter Bank Offered Rate ("LIBOR") plus 2.25% (prior to the effective date, the Class A Notes bear interest at five-month LIBOR plus 2.25%). The accrued interest payable at December 31, 2012 was approximately $491,000. Additionally, for the year ended December 31, 2012, the amortization of discount on the issued notes was approximately $172,000 and the amortization of deferred debt issuance costs was approximately $303,000. At December 31, 2011, interest expense of approximately $1.1 million remained payable. 57 -------------------------------------------------------------------------------- TABLE OF CONTENTS TICC CLO 2012-1 LLC On August 23, 2012, the Company completed a $160 million debt securitization financing transaction. The secured and subordinated notes offered in the debt securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer" or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a wholly-owned subsidiary of the Company. The secured notes of the 2012 Securitization Issuer have an aggregate face amount of $120 million and were issued in four classes. The class A-1 notes have an initial face amount of $88 million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1 notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 5.75%. The LIBOR rate which is the basis of the total interest rate on the secured notes that were issued by the 2012 Securitization Issuer was measured on a six-month basis until February 2013. TICC presently owns all of the subordinated notes, which totaled $40 million as of December 31, 2012. On February 25, 2013, the special purpose vehicle issued additional secured notes of $60 million and subordinated notes of $20 million under the "accordion" feature. For further information on this securitization, see Note 8 in the financial statements. The aggregate accrued interest payable on the notes of the 2012 Securitization Issuer at December 31, 2012 was approximately $1.4 million. Additionally, for the year ended December 31, 2012, the aggregate amortization of discount on the issued notes of the 2012 Securitization Issuer was approximately $139,000 and the amortization of deferred debt issuance costs was approximately $86,000. 2017 Convertible Notes On September 26, 2012, we issued $105.0 million aggregate principal amount of the Convertible Notes. An additional $10.0 million aggregate principal amount of the Convertible Notes was issued on October 22, 2012 pursuant to the exercise of the initial purchasers' option to purchase additional Convertible Notes. The Convertible Notes mature on November 1, 2017. The Convertible Notes bear interest at a rate of 7.50% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The accrued interest payable on the Convertible Notes at December 31, 2012 was approximately $2.3 million. Additionally, for the year ended December 31, 2012, the amortization of deferred issuance costs was approximately $157,000. 58 -------------------------------------------------------------------------------- TABLE OF CONTENTS The table below summarizes the components of interest expense for the year ended December 31, 2012 and 2011: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended December 31, 2012 Year Ended December 31, 2011 (dollars in Stated Interest Expense Note Discount Expense Amortization of Deferred Total Stated Interest Expense Note Discount Expense Amortization of Deferred Total thousands) Debt Issuance Costs Debt Issuance Costs TICC CLO LLC $ 2,783.1 $ 171.8 $ 303.3 $ 3,258.2 $ 1,076.1 $ 49.0 $ 118.5 $ 1,243.6 Class A Notes TICC CLO 2012-1 LLC Class A-1 790.4 61.2 - 851.6 - - - - Notes TICC CLO 2012-1 LLC Class B-1 153.5 17.7 - 171.2 - - - - Notes TICC CLO 2012-1 LLC Class C-1 228.8 31.9 - 260.7 - - - - Notes TICC CLO 2012-1 LLC Class D-1 179.8 28.6 - 208.4 - - - - Notes TICC CLO 2012-1 amortization of - - 85.8 85.8 - - - - deferred debt issuance costs 2017 Convertible 2,269.8 - 157.0 2,426.8 - - - - Notes Total $ 6,405.4 $ 311.2 $ 546.1 $ 7,262.7 $ 1,076.1 $ 49.0 $ 118.5 $ 1,243.6 Professional fees, consisting of legal, valuation, audit and tax fees, were approximately $1.9 million for the year ended December 31, 2012, compared to approximately $1.2 million for the year ended December 31, 2011. This was the result of an increase in audit fees of approximately $577,000 due to an increase in the size of the portfolio and additional procedures related to the non-binding indicative bids on certain investments, and legal services of approximately $216,000 incurred during the twelve months ended December 31, 2012. These increases were partially offset by a decrease in fees related to valuation services of approximately $87,000 for the period ended December 31, 2012. Compensation expenses were approximately $1.2 million for the year ended December 31, 2012, compared to approximately $1.1 million for the period ended December 31, 2011, reflecting the allocation of compensation expenses for the services of our chief financial officer, chief compliance officer, controller, accounting staff and administrative support personnel. At December 31, 2012 and December 31, 2011, respectively, approximately $0 and $605,000 of compensation expenses remained payable. General and administrative expenses, consisting primarily of printing expenses, listing fees, facilities costs and other expenses were approximately $1.0 million for the year ended December 31, 2012 compared to approximately $587,000 for the same period in 2011. This increase was largely due to direct charges incurred by our debt securitization vehicles for rating bureau and administrative services. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement. Incentive Fees The net investment income incentive fee for the year ended December 31, 2012 was approximately $5.5 million compared to $2.2 million for the period ended December 31, 2011. The net investment income incentive fee is calculated and payable quarterly in arrears based on our "Pre-Incentive Fee Net Investment Income" for the immediately preceding calendar quarter subject to a hurdle rate which is determined as of December 31 of the preceding year. For this purpose, "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income accrued during the calendar quarter minus our operating expenses for the quarter (including the base fee, expenses payable under the Administration Agreement with BDC Partners, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). 59 -------------------------------------------------------------------------------- TABLE OF CONTENTS The capital gains incentive fee expense for the year ended December 31, 2012 was approximately $5.5 million. The capital gains incentive fee expense, as reported under generally accepted accounting principles, is calculated on the basis of net realized and unrealized gains and losses at the end of each period. The expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to our investment adviser in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on such date. For the year ended December 31, 2011, an expense of approximately $1.1 million was recorded under the hypothetical liquidation calculation. The amount of the capital gains incentive fee which will actually be payable is determined in accordance with the terms of the Investment Advisory Agreement and is calculated as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). The terms of the Investment Advisory Agreement state that the capital gains incentive fee calculation is based on net realized gains, if any, offset by gross unrealized depreciation for the calendar year. No effect is given to gross unrealized appreciation in this calculation. For the year ended December 31, 2012, the amount calculated, and payable, under the terms of the Investment Advisory Agreement was approximately $1,553,000. For the year ended December 31, 2011, such an accrual was not required under the terms of the Investment Advisory Agreement. Realized and Unrealized Gains/Losses on Investments 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). 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. 60 -------------------------------------------------------------------------------- TABLE OF CONTENTS For the year ended December 31, 2011, we recorded net realized gains on investments of approximately $3.6 million, which largely represents relatively small gains on several different investments including the realized gains on the repayment on our investment in Prodigy Health Group ($0.7 million) and the sale of our investments in Hudson Straits CLO 2004-1AE ($0.5 million) and Del Mar CLO I Ltd. 2006-1 ($0.4 million). Based upon the fair value determinations made in good faith by the Board of Directors, during the year ended December 31, 2011, we had net unrealized losses of approximately $19.4 million, comprised of $23.3 million in gross unrealized appreciation, $39.9 million in gross unrealized depreciation and approximately $2.8 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, 2011 were as follows (in millions): [[Image Removed]] [[Image Removed]] Portfolio Company Changes in Unrealized Appreciation (Depreciation) Emporia CLO 2007 3A E $ (1.0 ) Hewetts Island CDO IV 2006-4 (1.4 ) Integra Telecomm, Inc. (2.1 ) Lightpoint CLO 2007-8a (1.0 ) RBS Holding Company (1.0 ) SourceHov, LLC (1.1 ) Algorithmic Implementations, Inc. (1.5 ) common stock Net all other(1) (10.3 ) Total $ (19.4 ) [[Image Removed]] (1) Unrealized gains and losses less than $1.0 million have been combined. Please see "- Portfolio Grading" for more information. Net Increase in Net Assets Resulting from Net Investment Income Net investment income for the year ended December 31, 2012 and 2011 was approximately $37.2 million and $30.0 million, respectively. This increase was due in part to an increase in the amount of performing assets in the portfolio and distributions from the CLO equity investments in our portfolio, as well as the non-recurrence of a one-time fee of approximately $3.4 million associated with our investment in American Integration Technologies, LLC. Excluding the impact of the capital gains incentive fee of approximately $5.5 million, core net investment income for the year ended December 31, 2012 was approximately $42.7 million compared to approximately $31.1 million for the period ending December 31, 2011. Based on weighted-average shares outstanding of 37,978,693 (basic) and 40,575,776 (diluted), the net increase in net assets resulting from net investment income per common share for the year ended December 31, 2012 was approximately $0.98 (basic) and $0.96 (diluted), compared to approximately $0.92 per share (basic and diluted) for the year ended December 31, 2011. Excluding the impact of the accrued capital gains incentive fee, the net increase in net assets resulting from core net investment income per common share would have been approximately $1.12 (basic) and approximately $1.10 (diluted), compared to $0.96 per share (basic and diluted) for the period ending December 31, 2011. Please see "- Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations" below for more information. Net Increase in Net Assets Resulting from Operations We had a net increase in net assets resulting from operations of approximately $68.3 million for the year ended December 31 2012, compared to a net increase of approximately $14.2 million for the year ended December 31, 2011. This increase was attributable to greater net investment income, a large shift in net unrealized appreciation on investments and a significant increase in net realized capital gains. 61 -------------------------------------------------------------------------------- TABLE OF CONTENTS Based on weighted-average shares outstanding of 37,978,693 (basic) and 40,575,776 (diluted), the net increase in net assets resulting from operations per common share for year ended December 31, 2012 was approximately $1.80 (basic) and approximately $1.73 (diluted), compared to a net increase in net assets resulting from operations of approximately $0.44 per share (basic and diluted) for the period ending December 31, 2011. Excluding the impact of the accrued capital gains incentive fee, the core net increase in net assets resulting from operations per common share would have been approximately $1.94 (basic) and approximately $1.87 (diluted), compared to an increase of $0.47 per share (basic and diluted) for the period ending December 31, 2011. Please see "- Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations" below for more information. Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations On a supplemental basis, we provide information relating to core net investment income, its ratio to net assets, and core net increase in net assets resulting from operations, which are non-GAAP measures. These measures are provided in addition to, but not as a substitute for, net investment income and net increase in net assets resulting from operations. Our non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures. Core net investment income represents net investment income excluding our capital gains incentive fee. Core net increase in net assets resulting from operations represents net increase in net assets resulting from operations excluding the capital gains incentive fee. As the capital gains incentive fee, for generally accepted accounting purposes, is based on the hypothetical liquidation of the entire portfolio (and as any capital gains incentive fee may be non-recurring), we believe that core net investment income and core net increase in net assets resulting from operations are useful indicators of performance during this period. Further, as the capital gains incentive fee may not be fully currently tax deductible and as the RIC requirements are to distribute taxable earnings, the core net investment income provides a better indication of estimated taxable income for the year to date. The following table provides a reconciliation of net investment income to core net investment income (for the year ended December 31, 2012): [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended December 31, 2012 Amount Per Share Amounts (basic) Net investment income $ 37,177,354 $ 0.979 Capital gains incentive fee 5,509,061 0.145 Core net investment income $ 42,686,415 $ 1.124 The following table provides a reconciliation of net increase in net assets resulting from operations to core net increase in net assets resulting from operations (for the year ended December 31, 2012): [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended December 31, 2012 Amount Per Share Amounts (basic) Net increase in net assets $ 68,323,188 $ 1.799 resulting from operations Capital gains incentive fee 5,509,061 0.145 Core net increase in net assets $ 73,832,249 $ 1.944 resulting from operations 62 -------------------------------------------------------------------------------- TABLE OF CONTENTS In addition, the following ratio is presented to supplement the financial highlights included in Note 10 to the consolidated financial statements: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2012 2011 2010 2009 2008 Ratio of core net investment income to average net assets, for the years ended 11.74 % 9.77 % 9.95 % 6.54 % 8.83 % December 31, 2012, 2011, 2010, 2009 and 2008, respectively The following table provides a reconciliation of the ratio of net investment income to average net assets to the ratio of core net investment income to average net assets, for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively. [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2012 2011 2010 2009 2008 Ratio of net investment income 10.23 % 9.42 % 9.95 % 6.54 % 8.83 % to average net assets Ratio of capital gain incentive 1.51 % 0.35 % 0.00 % 0.00 % 0.00 % fee to average net assets Ratio of core net investment income 11.74 % 9.77 % 9.95 % 6.54 % 8.83 % to average net assets Comparison of the years ended December 31, 2011 and December 31, 2010 Investment Income As of December 31, 2011, our debt investments had stated interest rates of between 2.33% and 15.75% (excluding our investment in GenuTec Business Solutions, Inc. which carries a zero interest rate through October 30, 2014) and maturity dates of between 12 and 130 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 11.3% including all investments in the portfolio, compared to 14.1% as of December 31, 2010. Investment income for the year ended December 31, 2011 was approximately $45.2 million compared to approximately $33.5 million for the period ended December 31, 2010. This increase was due largely to an increase in the amount of performing assets in the portfolio and distributions from the equity interests in our CLO vehicle investments. The total principal value of income producing debt investments as of December 31, 2011 and December 31, 2010 was approximately $382.3 million and $251.8 million, respectively. For the year ended December 31, 2011, investment income consisted of approximately $24.2 million in cash interest from portfolio investments, approximately $5.0 million in amortization of original issue and market discount, approximately $0.5 million of discount income derived from unscheduled principal cash remittances at par on discounted debt securities, approximately $13.1 million in distributions from the equity interest in securitized vehicle investments and approximately $1.5 million in PIK interest income. For the year ended December 31, 2011, fee income of approximately $921,000 was recorded, compared to fee income of approximately $968,000 for the year ended December 31, 2010. Fee income consists of non-recurring fees in connection with our investments in portfolio companies, including commitment fees, origination fees and amendment fees. Operating Expenses Total expenses for the year ended December 31, 2011 were $15.2 million, which includes an accrual of approximately $1.1 million for a capital gains incentive fee. Expenses before incentive fees for the year ended December 31, 2011 were approximately $11.8 million. This amount consisted primarily of investment advisory fees, compensation expense, interest expense, professional fees, and general and administrative expenses. Expenses before incentive fees increased 63 -------------------------------------------------------------------------------- TABLE OF CONTENTS approximately $3.9 million from the comparable period ended December 31, 2010, attributable primarily to higher investment advisory fees (consisting of the base management fee) and interest expense and other debt financing expenses associated with the senior notes issued under our debt securitization financing transaction. Expenses before incentive fees for the period ended December 31, 2010 were approximately $7.9 million. The investment advisory fee for the year ended December 31, 2011 was approximately $7.3 million, representing the base fee as provided for in the Investment Advisory Agreement. The investment advisory fee in the comparable period in 2010 was approximately $5.0 million. The increase of approximately $2.3 million is due to an increase in average gross assets. At each of December 31, 2011 and December 31, 2010, respectively, approximately $2.9 million and $1.8 million of investment advisory fees remained payable to TICC Management, including the net investment income incentive fee discussed below. Interest expense and other debt financing expenses for the year ended December 31, 2011 was approximately $1.2 million, which was directly related to our debt securitization financing transaction. Senior notes in the amount of $101,250,000 were issued by a newly formed special purpose vehicle in which a wholly-owned subsidiary of TICC owns all of the equity. Under this structure, the notes bear interest, after the effective date, at three-month London Inter Bank Offered Rate ("LIBOR") plus 2.25% (prior to the effective date, the Class A Notes bear interest at five-month LIBOR plus 2.25%). The accrued interest payable on these notes during the year ended December 31, 2011 was $1.1 million. Additionally, for the year ended December 31, 2011, the amortization of the discount on the issued notes was approximately $49,000 and amortization of deferred debt issuance costs was approximately $119,000. Compensation expense was approximately $1.1 million for the year ended December 31, 2011, compared to approximately $1.0 million for the period ending December 31, 2010, reflecting the allocation of compensation expense for the services of our Chief Financial Officer, Chief Compliance Officer, Controller and senior accountant, and other administrative support personnel. At December 31, 2011 and December 31, 2010, respectively, approximately $650,000 and $0 of compensation expenses remained payable. Professional fees, consisting of legal, valuation, audit and consulting fees, were approximately $1.2 million for the year ended December 31, 2011, compared to approximately $1.0 million for the year ended December 31, 2010. This was primarily the result of increases in audit fees of approximately $255,000 and legal costs of approximately $34,000 incurred during the twelve months ended December 31, 2011. These increases were partially offset by a decrease in fees related to valuation services of approximately $117,000 for the period ended December 31, 2011. General and administrative expenses, consisting primarily of printing expenses, listing fees, facilities costs and other expenses, were approximately $587,000 in 2011 compared to approximately $401,000 for the same period in 2010. This increase was due largely to costs associated with regulatory filing fees and proxy materials. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement. Incentive Fees The net investment income incentive fee for the year ended December 31, 2011 was approximately $2.2 million compared to $1.4 million for the period ended December 31, 2010. The increase is the result of the increase in pre-incentive fee net investment income. The net investment income incentive fee is calculated and payable quarterly in arrears based on the Company's "Pre-Incentive Fee Net Investment Income" for the immediately preceding calendar quarter subject to a hurdle rate which is determined as of December 31 of the preceding year. For this purpose, "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income accrued during the calendar quarter minus the Company's operating expenses for the quarter (including the base fee, expenses payable under the Administration Agreement with BDC Partners, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). The capital gains incentive fee expense for the year ended December 31, 2011 was approximately $1.1 million. The capital gains incentive fee expense, as reported under generally accepted accounting principles, is calculated on the basis of net realized and unrealized gains and losses at the end of each period. The expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized 64 -------------------------------------------------------------------------------- TABLE OF CONTENTS or unrealized gains and losses) would only become payable to our investment adviser in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on such date. The $1.1 million capital gains incentive fee accrual for the year ending December 31, 2011 relates entirely to the hypothetical liquidation calculation. There was no such expense recorded for the year ended December 31, 2010. The amount of the capital gains incentive fee which will actually be payable is determined in accordance with the terms of the Investment Advisory Agreement and is calculated as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). The terms of the Investment Advisory Agreement state that the capital gains incentive fee calculation is based on net realized gains, if any, offset by gross unrealized depreciation for the calendar year. No effect is given to gross unrealized appreciation in this calculation. Based on the terms of the Investment Advisory Agreement, no capital gains incentive fee is due as of December 31, 2011. Realized and Unrealized Gains/Losses on Investments For the year ended December 31, 2011, we recorded net realized gains on investments of approximately $3.6 million, which largely represents relatively small gains on several different investments including the realized gains on the repayment on our investment in Prodigy Health Group ($0.7 million) and the sale of our investments in Hudson Straits CLO 2004-1AE ($0.5 million) and Del Mar CLO I Ltd. 2006-1 ($0.4 million). Based upon the fair value determinations made in good faith by the Board of Directors, during the year ended December 31, 2011, we had net unrealized losses of approximately $19.4 million, comprised of $23.3 million in gross unrealized appreciation, $39.9 million in gross unrealized depreciation and approximately $2.8 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, 2011 were as follows (in millions): [[Image Removed]] [[Image Removed]] Portfolio Company Changes in Unrealized Appreciation (Depreciation) Emporia CLO 2007 3A E $ (1.0 ) Hewetts Island CDO IV 2006-4 (1.4 ) Integra Telecomm, Inc. (2.1 ) Lightpoint CLO 2007-8a (1.0 ) RBS Holding Company (1.0 ) SourceHov, LLC (1.1 ) Algorithmic Implementations, Inc. (1.5 ) common stock Net all other(1) (10.3 ) Total $ (19.4 ) [[Image Removed]] (1) Unrealized gains and losses less than $1.0 million have been combined. For the year ended December 31, 2010, we had a net realized loss on investments of approximately $42.1 million, which largely represents the loss of approximately $22.9 million on our investment in The CAPS Group, $15.0 million on our investment in WAICCS Las Vegas, LLC, as well as the loss of approximately $7.8 million on our investment in Box Services, LLC. These losses were partially offset by the gain on our investment in Cavtel Holdings, LLC of approximately $1.5 million. 65 -------------------------------------------------------------------------------- TABLE OF CONTENTS Based upon the fair value determinations made in good faith by the Board of Directors, during the year ended December 31, 2010, we had net unrealized gains of approximately $81.8 million, comprised of $53.6 million in gross unrealized appreciation, $16.0 million in gross unrealized depreciation and approximately $44.2 million relating to the reversal of prior period net unrealized depreciation as certain investments were realized. The most significant changes in net unrealized appreciation and depreciation during the year ended December 31, 2010 were as follows (in millions): [[Image Removed]] [[Image Removed]] Portfolio Company Changes In Unrealized Appreciation (Depreciation) The CAPS Group $ 22.9 American Integration Technologies, LLC 14.3 WAICCS Las Vegas, LLC 13.5 Box Services, LLC 7.8 SCS Holdings II, Inc 2.6 Prospero CLO II BV 2.1 Hewetts Island CDO III 2005-1A D 2.1 Lightpoint CLO 2007-8a 1.8 Pegasus Solutions, Inc 1.7 Power Tools, Inc 1.5 Palm, Inc 1.1 Sargas CLO 2006-1A 1.1 Workflow Management, Inc (1.0 ) Cavtel Holdings, LLC (2.2 ) Net all other(1) 12.5 Total $ 81.8 [[Image Removed]] (1) Unrealized gains and losses less than $1.0 million have been combined. Please see "- Portfolio Grading" above for more information. Net Increase in Net Assets Resulting from Net Investment Income Net investment income for the year ended December 31, 2011 and 2010 was $30.0 million and $24.2 million, respectively. This increase was due largely to greater distributions from the equity interests in our securitization vehicle investments and an increase in the principal amount of income producing investments. This increase was partially offset by the accrual of a capital gains incentive fee recorded for the year ended December 31, 2011 of approximately $1.1 million. Based on a weighted-average of 32,433,101 shares outstanding (basic and diluted), the net increase in net assets resulting from net investment income per common share for the year ended December 31, 2011 was approximately $0.92 for basic and diluted, compared to approximately $0.89 per share for the same period in 2010. Excluding the impact of the capital gains incentive fee, the net increase in net assets resulting from core net investment income per common share would have been $0.96, basic and diluted, compared to $0.89 per share for the same period in 2010. Please see "- Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations" below for more information. Net Increase in Net Assets Resulting from Operations We had a net increase in net assets resulting from operations of approximately $14.2 million for the year ended December 31, 2011, compared to a net increase of approximately $63.9 million in 2010. This decrease was attributable directly to a large shift in net unrealized depreciation on investments, partially offset by greater net realized gains. Based on a weighted-average of 32,433,101 shares outstanding (basic and diluted), the net increase in net assets resulting from operations per common share for the year ended December 31, 2011 was approximately $0.44 for basic and diluted, compared to a net increase in net assets resulting from operations of approximately $2.35 per share in 2010. Excluding the impact of the capital gains incentive fee reduction, the 66 -------------------------------------------------------------------------------- TABLE OF CONTENTS core net increase in net assets resulting from operations per common share would have been $0.47, basic and diluted, compared to $2.35 per share for the same period in 2010. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 2012, we issued approximately 8.3 million shares in two equity offerings, raising approximately $78.4 million in net proceeds. During the year ended December 31, 2012, cash and cash equivalents increased from approximately $4.5 million at the beginning of the period to approximately $51.4 million at the end of the period. Net cash used by operating activities for the period, consisting primarily of the items described in "- Results of Operations," was approximately $215.7 million, largely reflecting purchases of new investments of approximately $508.0 million partially offset by proceeds from principal repayments and sales of investments of approximately $259.0 million. Net cash provided by investing activities reflects the change in restricted cash in the debt securitization entities. During the year ended December 31, 2012, net cash provided by financing activities was approximately $260.7 million reflecting primarily the net proceeds of approximately $112.7 million borrowed under our debt securitization financing transaction completed in August 2012, $111.8 million borrowed under our issuance of the Convertible Notes and $78.4 million resulting from two equity offerings, partially offset by the distribution of dividends. Contractual Obligations We have certain obligations with respect to the investment advisory and administration services we receive. See "- Overview." We incurred approximately $11.2 million for investment advisory services, excluding pre-incentive net investment income incentive fees and approximately $1.5 million for administrative services for the period ending December 31, 2012. For the year ended December 31, 2012, the investment advisor earned a capital gains incentive fee of approximately $1.6 million based upon the fee calculated and payable in accordance with the terms of the Investment Advisory Agreement. TICC CLO is obligated to repay the notes issued in connection with the debt securitization financing that we completed in August 2011. The notes of the 2011 Securitization Issuer mature in 2021, in the total amount of $101,250,000. There are no amortization payments due on the notes of the 2011 Securitization Issuer prior to maturity. See "Borrowings" below. TICC CLO 2012-1 is obligated to repay the notes issued in connection with the debt securitization financing that we completed in August 2012. The notes of the 2012 Securitization Issuer mature in 2023, in the total amount of $120,000,000. There are no amortization payments due on the notes of the 2012 Securitization Issuer prior to maturity. See "Borrowings" below. TICC is obligated to repay the Convertible Notes, which mature in 2017, in the total amount of $115,000,000, unless previously converted in accordance with their terms. Share Repurchase Program On July 30, 2009, the Board of Directors authorized a share repurchase program which provides for the purchase of up to $10 million worth of shares to be implemented at the discretion of our management team. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices. Borrowings In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. As of December 31, 2012, our asset coverage for borrowed amounts was 220%. 67 -------------------------------------------------------------------------------- TABLE OF CONTENTS The following are the Company's outstanding principal amounts, carrying values and fair values of the Company's notes payable as of December 31, 2012 and December 31, 2011. Fair values of our notes payable are based upon the bid price provided by the placement agent at the measurement date, if available: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] As of December 31, 2012 December 31, 2011 ($ in thousands) Principal Amount Carrying Fair Value Principal Amount Carrying Value Fair Value Value TICC CLO LLC $ 101,250 $ 99,883 (1) $ 101,250 $ 101,250 $ 99,711 $ 95,723 2021 Notes TICC CLO 2012-1 LLC 88,000 86,149 (1) 87,780 - - - Class A-1 2023 Notes TICC CLO 2012-1 LLC 10,000 9,455 (1) 9,875 - - - Class B-1 2023 Notes TICC CLO 2012-1 LLC 11,500 10,501 (1) 11,155 - - - Class C-1 2023 Notes TICC CLO 2012-1 LLC 10,500 9,347 (1)(2) 10,382 - - - Class D-1 2023 Notes Sub-total TICC CLO 120,000 115,452 119,192 - - - 2012-1, LLC 2017 Convertible Notes 115,000 115,000 113,131 - - - $ 336,250 $ 330,335 $ 333,573 $ 101,250 $ 99,711 $ 95,723 [[Image Removed]] (1) Represents the aggregate principal amount outstanding less the unaccreted discount. The total unaccreted discount for the 2021 Notes, the 2023 Class A Notes, the 2023 Class B Notes, the 2023 Class C Notes and the 2023 Class D Notes was approximately $1,367, $1,851, $545, $999 and $1,153, respectively. As of December 31, 2011, the unaccreted discount on the 2021 Notes was approximately $1,539. (2) $3.0 million principal amount of the TICC CLO 2012-1 LLC Class D-1 notes was previously owned by TICC Capital Corp. For the period ending September 30, 2012, this portion of the Class D-1 note indebtedness was eliminated in consolidation of TICC's financial statements. On December 26, 2012, the $3.0 million note was sold and, as a result, is reflected within the table above. The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of December 31, 2012 were 4.50% and 8.1 years, respectively, and as of December 31, 2011 were 2.66% and 9.6 years, respectively. Debt Securitization Notes Payable-TICC CLO LLC On August 10, 2011, we completed a $225.0 million debt securitization financing transaction. The Class A Notes and the subordinated notes offered in the debt securitization were issued by TICC CLO LLC ("2011 Securitization Issuer" or "TICC CLO"), a subsidiary of TICC Capital Corp. 2011-1 Holdings, LLC ("Holdings"), which is in turn a direct subsidiary of TICC. The Class A Notes are secured by the assets held by the 2011 Securitization Issuer. The securitization was executed through a private placement of $101.25 million of secured notes rated AAA/Aaa by Standard & Poor's Rating Service ("S&P") and Moody's Investors Service Inc. ("Moody's"), respectively, and bearing interest at the three-month LIBOR plus 2.25%. Holdings retained all of the subordinated notes, which totaled $123.75 million (the "2011 Subordinated Notes"), and retained all the membership interests in the 2011 Securitization Issuer. The notes were sold at a discount to par, and the amount of the discount is being amortized over the term of the notes. The Class A Notes are included in the December 31, 2012 consolidated statements of assets and liabilities. For the year ended December 31, 2012, the Class A note holders were paid interest on the Class A notes of approximately $3.4 million. Holdings retained all of the 2011 Subordinated Notes totaling $123.75 million and all of the membership interests in the 2011 Securitization Issuer. The 2011 Subordinated Notes do not bear interest, but are entitled to the residual economic interest in the 2011 Securitization Issuer. 68 -------------------------------------------------------------------------------- TABLE OF CONTENTS During a period of up to three years from the closing date, all principal collections received on the underlying collateral may be used by the 2011 Securitization Issuer to purchase new collateral under our direction in our capacity as collateral manager of the 2011 Securitization Issuer and in accordance with our investment strategy, allowing us to maintain the initial leverage in the securitization for such three-year period. The Class A Notes are scheduled to mature on July 25, 2021. The proceeds of the private placement of the Class A Notes, net of discount and debt issuance costs, were used for investment purposes. As part of the securitization, we entered into a master loan sale agreement with Holdings and the 2011 Securitization Issuer under which we agreed to sell or contribute certain senior secured and second lien loans (or participation interests therein) to Holdings, and Holdings agreed to sell or contribute such loans (or participation interests therein) to the 2011 Securitization Issuer and to purchase or otherwise acquire subordinated notes issued by the 2011 Securitization Issuer. The Class A Notes are the secured obligations of the 2011 Securitization Issuer, and an indenture governing the Notes includes customary covenants and events of default. We serve as collateral manager to the 2011 Securitization Issuer under a collateral management agreement. We are entitled to a deferred fee for our services as collateral manager. The deferred fee is eliminated in consolidation. As of December 31, 2012, there were 45 investments in portfolio companies with a total fair value of approximately $216.4 million, securing the Class A Notes. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. Effective January 25, 2012 and through April 24, 2012, the interest rate of 2.81% charged under the securitization was based on three-month LIBOR of 0.56%. Effective April 25, 2012 and through July 24, 2012, the interest rate of 2.72% charged under the securitization was based on three-month LIBOR of 0.47%. Effective July 25, 2012, and through October 24, 2012, the interest rate of 2.70% charged under the securitization was based on three-month LIBOR of 0.45%. Effective October 25, 2012, the interest rate of 2.57% charged under the securitization was based on the three-month LIBOR of 0.32%. For the year ended December 31, 2012, the effective annualized average interest rate, which includes amortization of discount and debt issuance costs on the securitization, was 3.21%. For the year ended December 31, 2012, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the Class A Notes, was $3,258,260. The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A Notes are as follows: [[Image Removed]] [[Image Removed]] Description Class A Notes Type Senior Secured Floating Rate Amount Outstanding $101,250,000 Moody's Rating "Aaa" Standard & Poor's Rating "AAA" Interest Rate LIBOR + 2.25% Stated Maturity July 25, 2021 Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company's debt securitization. As of December 31, 2012, the Company had a deferred debt issuance balance of approximately $2.6 million. Discount on the notes of the 2011 Securitization Issuer at the time of issuance totaled approximately $1.6 million. These amounts are being amortized and included in interest expense in the consolidated statements of operations over the term of the debt securitization. Amortization expense for the year ended December 31, 2012, was approximately $475,000. The amortization expense for the year ended December 31, 2011 was approximately $167,000. 69 -------------------------------------------------------------------------------- TABLE OF CONTENTS Notes Payable - TICC CLO 2012-1 LLC On August 23, 2012, the Company completed a $160 million debt securitization financing transaction. The secured and subordinated notes offered in the debt securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer" or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a wholly-owned subsidiary of the Company. The secured notes of the 2012 Securitization Issuer have an aggregate face amount of $120 million and were issued in four classes. The class A-1 notes have an initial face amount of $88 million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1 notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf) by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 5.75%. The LIBOR rate which is the basis of the total interest rate on the secured notes that were issued by the 2012 Securitization Issuer was measured on a six-month basis until February 2013. TICC presently owns all of the subordinated notes, which totaled $40 million as of December 31, 2012. The TICC CLO 2012-1 debt securitization financing transaction has an "accordion" feature which allows, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes issued by the special purpose vehicle. If the same classes of secured notes are to be issued, the increase must be pro rata to the existing secured and subordinated notes, and is limited to a total increase of $160 million in total size. Alternatively, the special purpose vehicle may issue a class of secured notes that is pari passu to the class D-1 notes or junior to all secured classes, without a cap on the amount of the notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may affect the accounting treatment of the debt securitization financing transaction. On February 25, 2013, the special purpose vehicle issued additional secured notes of $60 million and subordinated notes of $20 million under the "accordion" feature. During a period of up to four years from the closing date, all principal collections received on the underlying collateral may be used by the 2012 Securitization Issuer to purchase new collateral under the direction of TICC in its capacity as collateral manager of the 2012 Securitization Issuer and in accordance with the Company's investment strategy, allowing the Company to maintain the initial leverage in the securitization for such three-year period. All note classes are scheduled to mature on August 25, 2023. The proceeds of the private placement of the Classes A, B, C, D and 2012 Subordinated Notes of the 2012 Securitization Issuer, net of discount and debt issuance costs, were used for investment purposes. As part of the securitization, TICC entered into a master loan sale agreement with TICC CLO 2012-1 pursuant to which TICC agreed to sell or contribute certain senior secured and second lien loans (or participation interests therein) to TICC CLO 2012-1, and to purchase or otherwise acquire the 2012 Subordinated Notes. The Classes A, B, C, D and 2012 Subordinated Notes of the 2012 Securitization Issuer are the secured obligations of TICC CLO 2012-1, and an indenture governing the notes of the 2012 Securitization Issuer includes customary covenants and events of default. As of December 31, 2012, there were 40 investments in portfolio companies with a total fair value of approximately $156.3 million, collateralizing the secured notes of the 2012 Securitization Issuer. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. For the year ended December 31, 2012, the effective annualized average interest rate, which includes amortization of discount and debt issuance costs on the securitization, was 3.75%. For the same period, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes under the securitization was $1,577,657 comprised of coupon interest expense ($1,352,438) and accreted discount ($139,386), as well as amortized deferred debt issuance costs ($85,833). Effective August 23, 2012 and as of December 31, 2012, the interest charged under the securitization was based on six-month LIBOR, which was 0.72%. The classes, interest rates, spread over LIBOR, stated interest expense and note discount expense are as follows: 70 -------------------------------------------------------------------------------- TABLE OF CONTENTS [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Stated Interest Rate LIBOR Spread (basis points) Stated Interest Expense Note Discount Expense TICC CLO 2012-1 LLC Class A-1 2.46815 % 175 $ 790,356 $ 61,215 Notes TICC CLO 2012-1 LLC Class B-1 4.21815 % 350 153,494 17,692 Notes TICC CLO 2012-1 LLC Class C-1 5.46815 % 475 228,827 31,868 Notes TICC CLO 2012-1 LLC Class D-1 6.46815 % 575 179,761 28,611 Notes Total $ 1,352,438 $ 139,386 The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A-1, B-1, C-1, D-1 and 2012 Subordinated Notes are as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Description Class A-1 Notes Class B-1 Notes Class C-1 Notes Class D-1 Notes Subordinated Notes Senior Secured Senior Secured Secured Secured Type Floating Rate Floating Rate Deferrable Deferrable Subordinated Floating Rate Floating Rate Amount $ 88,000,000 $ 10,000,000 $ 11,500,000 $ 10,500,000 $ 40,000,000 Outstanding Moody's Rating "Aaa" "Aa2" "A2" "Baa2" N/A Standard & Poor's "AAA" "AA" "A" "BBB" N/A Rating Interest Rate LIBOR + 1.75 % LIBOR + 3.50 % LIBOR + 4.75 % LIBOR + 5.75 % N/A Stated Maturity August 25, 2023 August 25, 2023 August 25, 2023 August 25, 2023 August 25, 2023 B-1, C-1, D-1 C-1, D-1 D-1 Junior Classes and Subordinated and and Subordinated None Subordinated Subordinated TICC serves as collateral manager to the 2012 Securitization Issuer under a collateral management agreement. TICC is entitled to a deferred fee for its services as collateral manager. The deferred fee is eliminated in consolidation. 2017 Convertible Notes On September 26, 2012, the Company issued $105,000,000 aggregate principal amount of the Convertible Notes and an additional $10,000,000 aggregate principal amount of the Convertible Notes was issued on October 22, 2012 pursuant to the exercise of the initial purchasers' option to purchase additional Convertible Notes. The Convertible Notes bear interest at a rate of 7.50% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The Convertible Notes are convertible into shares of our common stock based on an initial conversion rate of 87.2448 shares of our common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock. The conversion price for the Convertible Notes will be reduced for quarterly cash dividends paid to common shares to the extent that the quarterly dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes mature on November 1, 2017, unless previously converted in accordance with their terms. The Company does not have the right to redeem the Convertible Notes prior to maturity. In certain circumstances, the Convertible Notes will be convertible into shares of the Company's common stock at its initial conversion rate (listed below) subject to customary anti-dilution adjustments and the requirements of its indenture, at any time on or prior to the close of business on the business day immediately preceding the maturity date. We will in certain circumstances increase the conversion rate. [[Image Removed]] [[Image Removed]] November 2017 Convertible Notes Conversion premium 10.00 % Closing stock price $ 10.42 Closing stock price date September 20, 2012 Initial conversion price $ 11.46 Initial conversion rate (shares per one thousand 87.2448 dollar principal amount) Maturity date November 1, 2017 71 -------------------------------------------------------------------------------- TABLE OF CONTENTS As of December 31, 2012, the principal amount of the Convertible Notes exceeded the value of the underlying shares multiplied by the per share closing price of the Company's common stock. The Convertible Notes are the Company's general, unsecured obligations and rank equal in right of payment with all of the Company's existing and future senior, unsecured indebtedness and senior in right of payment to any of the Company's subordinated indebtedness. As a result, the Convertible Notes will be effectively subordinated to the Company's existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to any existing and future liabilities and other indebtedness of the Company's subsidiaries. Distributions In order to qualify as a RIC 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 realized net short-term capital gains in excess of realized net long-term capital losses to our stockholders on an annual basis. For the years ended December 31, 2012 and 2011 we believe that we did not have distributions in excess of our taxable earnings. For tax purposes, distributions for 2012 and 2011 were funded from current net investment income. A written statement identifying the source of the dividends was posted on our website. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a business development company under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure shareholders that they will receive any distributions. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains. The final determination of the nature of our distributions can only be made upon the filing of our tax return. 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: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Date Declared Record Date Payment Date Amount Fiscal 2013 February 28, 2013 March 22, 2013 March 29, 2013 $ 0.29 Fiscal 2012 November 1, 2012 December 17, 2012 December 31, 2012 0.29 July 26, 2012 September 14, 2012 September 28, 2012 0.29 May 2, 2012 June 15, 2012 June 29, 2012 0.27 March 1, 2012 March 21, 2012 March 30, 2012 0.27 Total (2012) 1.12 (1) Fiscal 2011 November 3, 2011 December 16, 2011 December 30, 2011 0.25 July 28, 2011 September 16, 2011 September 30, 2011 0.25 May 3, 2011 June 16, 2011 June 30, 2011 0.25 March 3, 2011 March 21, 2011 March 31, 2011 0.24 Total (2011) 0.99 (1) 72 -------------------------------------------------------------------------------- TABLE OF CONTENTS [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Date Declared Record Date Payment Date Amount Fiscal 2010 November 2, 2010 December 10, 2010 December 31, 2010 0.24 July 29, 2010 September 10, 2010 September 30, 2010 0.22 April 29, 2010 June 10, 2010 June 30, 2010 0.20 March 4, 2010 March 24, 2010 March 31, 2010 0.15 Total (2010) 0.81 (1) Fiscal 2009 October 29, 2009 December 10, 2009 December 31, 2009 0.15 July 30, 2009 September 10, 2009 September 30, 2009 0.15 May 5, 2009 June 10, 2009 June 30, 2009 0.15 March 5, 2009 March 17, 2009 March 31, 2009 0.15 Total (2009) 0.60 (1) Fiscal 2008 October 30, 2008 December 10, 2008 December 31, 2008 0.20 July 31, 2008 September 10, 2008 September 30, 2008 0.20 May 1, 2008 June 16, 2008 June 30, 2008 0.30 March 11, 2008 March 21, 2008 March 31, 2008 0.36 Total (2008) 1.06 (2) Fiscal 2007 October 25, 2007 December 10, 2007 December 31, 2007 0.36 July 26, 2007 September 7, 2007 September 28, 2007 0.36 April 30, 2007 June 8, 2007 June 29, 2007 0.36 February 27, 2007 March 9, 2007 March 30, 2007 0.36 Total (2007) 1.44 (3) Fiscal 2006 December 20, 2006 December 29, 2006 January 17, 2007 0.12 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) 1.38 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 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 (4) Total Distributions: $ 9.13 (5) [[Image Removed]] (1) Distributions for the fiscal years ended December 31, 2012, 2011, 2010 and 2009 were funded from undistributed net investment income. 73 -------------------------------------------------------------------------------- TABLE OF CONTENTS (2) Includes a return of capital of approximately $0.08 per share for tax purposes. (3) Includes a return of capital of approximately $0.02 per share for tax purposes. (4) Includes a return of capital of approximately $0.10 per share for tax purposes. (5) We did not declare a dividend for the period ended December 31, 2003. Related Parties We have a number of business relationships with affiliated or related parties, including the following: • We have entered into the Investment Advisory Agreement with TICC Management. TICC Management is controlled by BDC Partners, its managing member. In addition to BDC Partners, TICC Management is owned by Charles M. Royce, our non-executive Chairman, who holds a minority, non-controlling interest in TICC Management as the non-managing member. BDC Partners, as the managing member of TICC Management, manages the business and internal affairs of TICC Management. In addition, BDC Partners provides us with office facilities and administrative services pursuant to the Administration Agreement. • Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, for T2 Advisers, LLC, an investment adviser to Greenwich Loan Income Fund Limited (f/k/a T2 Income Fund Limited) ("GLIF"), a Guernsey fund, established and operated for the purpose of investing in bilateral transactions and syndicated loans across a variety of industries globally. BDC Partners is the managing member of T2 Advisers, LLC. In addition, Mr. Conroy serves as the Chief Financial Officer of GLIF and the Chief Financial Officer, Chief Compliance Officer and Treasurer of T2 Advisers, LLC. • Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in leveraged corporate loans, and its investment adviser, Oxford Lane Management, LLC. BDC Partners provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management, LLC. In addition, Patrick F. Conroy serves as the Chief Financial Officer, Chief Compliance Officer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer, Chief Compliance Officer and Treasurer of Oxford Lane Management, LLC. • BDC Partners is the managing member of Oxford Gate Capital, LLC, a private fund in which Messrs. Cohen and Rosenthal are invested. BDC Partners has adopted a written policy with respect to the allocation of investment opportunities among TICC, Oxford Lane Capital Corp., Greenwich Loan Income Fund Limited and Oxford Gate Capital, LLC in view of the potential conflicts of interest raised by the relationships described above. In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board of Directors reviews these procedures on an annual basis. We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual's personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics. As required by the NASDAQ Global Select Market corporate governance listing 74 -------------------------------------------------------------------------------- TABLE OF CONTENTS standards, the Audit Committee of our Board of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K). Information concerning related party transactions is included in the consolidated financial statements and related notes, appearing elsewhere in this annual report on Form 10-K. CRITICAL ACCOUNTING POLICIES The preparation of consolidated 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 consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified our investment valuation policy as a critical accounting policy. Investment Valuation The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. There is no single method 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 fair value each individual investment on a quarterly basis. In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement which represents amendments to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS." The amendments are of two types: (i) those that clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements relate to (i) measuring the fair value of the financial instruments that are managed within a portfolio; (ii) application of premium and discount in a fair value measurement; and (iii) additional disclosures about fair value measurements. We adopted this update on January 1, 2012. We have increased our disclosures related to Level 3 fair value measurements in addition to other required disclosures. There were no related impacts on our financial position or results of operations. We adopted ASC 820-10, Fair Value Measurements and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements, on January 1, 2008. ASC 820-10 clarified 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. ASC 820-10 defines fair value as 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. ASC 820-10 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. We have determined that due to the general illiquidity of the market for our investment portfolio, whereby little or no market data exists, all of our investments are based upon "Level 3" inputs. Our Board of Directors determines the value of our investment portfolio each quarter. In connection with that determination, members of TICC Management's portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. Since March 2004, we have engaged third-party valuation firms to provide assistance in valuing our bilateral investments and, more recently, for certain of our syndicated loans, although our Board of Directors ultimately determines the appropriate valuation of each such investment. Our process for determining the fair value of a bilateral investment begins with determining the enterprise value of the portfolio company. Enterprise value means the entire value of the company to a 75 -------------------------------------------------------------------------------- TABLE OF CONTENTS potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The fair value of our investment is based, in part, 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 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 the historical and projected financial results, as well as the nature and value of any collateral. We also use industry valuation benchmarks and public market comparables. We also consider other events, including private mergers and acquisitions, a purchase transaction, public offering or subsequent debt or equity sale or restructuring, and include these events in the enterprise valuation process. We generally require portfolio companies to provide annual audited and quarterly unaudited financial statements, as well as annual projections for the upcoming fiscal year. Typically, our bilateral debt investments are valued on the basis of a fair value determination arrived at through an analysis of the borrower's financial and operating condition or other factors, as well as consideration of the entity's enterprise value. The types of factors that we may take into account in valuing our investments include: market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flows, among other factors. 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 liquidity 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 depreciation on bilateral investments when we believe that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful. To the extent that we believe that it has become probable that a loan is not collectible or probable that an equity investment is not realizable, we will classify that amount as a realized loss. We will record unrealized 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, other than such changes that are considered probable of non-collection or non-realization, as described above, are recorded in the statement of operations as net change in unrealized appreciation or depreciation. Under the valuation procedures approved by our Board of Directors, upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of our bilateral investments for which market quotations are not readily available that, when combined with all other investments in the same portfolio company, (i) have a value as of the previous quarter of greater than or equal to 2.5% of our total assets as of the previous quarter, and (ii) have a value as of the current quarter of greater than or equal to 2.5% of our total assets as of the previous quarter, after taking into account any repayment of principal during the current quarter. In addition, the frequency of those third-party valuations of our portfolio securities is based upon the grade assigned to each such security under our credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. TICC Management also retains the authority to seek, on our behalf, additional third party valuations with respect to both our bilateral portfolio securities and our syndicated loan investments. Our Board of Directors retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment. On April 9, 2009, the FASB issued additional guidelines under ASC 820-10-35, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," which provides guidance on factors that should be considered in determining when a previously active market becomes inactive and whether a transaction is orderly. In 76 -------------------------------------------------------------------------------- TABLE OF CONTENTS accordance with ASC 820-10-35, our valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace for which we obtain indicative bid quotes for purposes of determining the fair value of our syndicated loan investments have shown these attributes of illiquidity as described by ASC-820-10-35. Due to limited market liquidity in the syndicated loan market, TICC believes that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value and therefore alternative valuation procedures may need to be undertaken. As a result, TICC has engaged third-party valuation firms to provide assistance in valuing certain syndicated investments that we own. In addition, TICC Management prepares an analysis of each syndicated loan, including a financial summary, covenant compliance review, recent trading activity in the security, if known, and other business developments related to the portfolio company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider the number of trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information, and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms. We have considered the factors described in ASC 820-10 and have determined that we are properly valuing the securities in our portfolio. During the past few years, we have acquired a number of debt and equity positions in CLO investment vehicles. These investments are special purpose financing vehicles. In valuing such investments, we consider the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. In addition, we consider the indicative prices provided by the broker who arranges transactions in such investment vehicles, as well as any available information on other relevant transactions in the market. TICC Management or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to our Board of Directors for its determination of fair value of these investments. Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at December 31, 2012, were as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] ($ in millions) Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Other Observable Significant Assets Active Markets for Inputs Unobservable Inputs Total Identical Assets (Level 2) (Level 3) (Level 1) Senior Secured $ 0.0 $ 9.8 $ 485.1 $ 494.9 Notes CLO Debt 0.0 0.0 55.6 55.6 CLO Equity 0.0 0.0 109.3 109.3 Subordinated 0.0 0.0 0.1 0.1 Notes Common Stock 0.0 0.0 4.4 4.4 Preferred Shares 0.0 0.0 2.7 2.7 Warrants to 0.0 0.0 0.5 0.5 purchase equity Total $ 0.0 $ 9.8 $ 657.7 $ 667.5 77 -------------------------------------------------------------------------------- TABLE OF CONTENTS A reconciliation of the fair value of investments for the year ended December 31, 2012, utilizing significant unobservable inputs, is as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[ImageRemoved]] Senior Secured Note Collateralized Loan Collateralized Loan Subordinated Note Preferred Share Equity Warrants to Purchase ($ in millions) Investments Obligation Debt Obligation Equity Investments Common Stock Investments Investments Equity Investments Total Investments Investments Balance at $ 279.2 $ 51.0 $ 39.3 $ 4.9 $ 3.1 $ 2.5 $ 0.8 $ 380.8 December 31, 2011 Realized Gains included in 4.0 12.4 0.0 0.1 0.0 0.0 0.1 16.6 earnings Unrealized (depreciation) appreciation (2.6 ) 4.5 11.3 0.2 1.3 (0.2 ) 0.1 14.6 included in earnings Accretion of 2.9 2.8 0.0 0.0 0.0 0.0 0.0 5.7 discount Purchases 398.7 27.3 58.7 0.0 0.0 0.0 0.0 484.7 Repayments and (201.6 ) (42.4 ) 0.0 (5.2 ) 0.0 0.0 (0.5 ) (249.7 ) Sales(1) Payment in Kind 4.5 0.0 0.0 0.1 0.0 0.4 0.0 5.0 income Transfers in and/or out of 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 level 3 Balance at $ 485.1 $ 55.6 $ 109.3 $ 0.1 $ 4.4 $ 2.7 $ 0.5 $ 657.7 December 31, 2012 The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to our Level 3 assets $ (1.7 ) $ 8.0 $ 11.3 $ 0.1 $ 1.3 $ (0.1 ) $ 0.0 $ 18.9 still held at the reporting date and reported within the net change in unrealized gains or losses on investments in our Statement of Operations [[Image Removed]] (1) Includes rounding adjustments to reconcile period balances. Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at December 31, 2011, were as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] ($ in millions) Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Other Significant Assets Active Markets for Observable Inputs Unobservable Inputs Total Identical Assets (Level 2) (Level 3) (Level 1) Senior Secured $ 0.0 $ 10.7 $ 279.2 $ 289.9 Notes CLO Debt 0.0 0.0 51.0 51.0 CLO Equity 0.0 0.0 39.3 39.3 Subordinated 0.0 0.0 4.9 4.9 Notes Common Stock 0.0 0.0 3.1 3.1 Preferred Shares 0.0 0.0 2.5 2.5 Warrants to 0.0 0.0 0.8 0.8 purchase equity Total $ 0.0 $ 10.7 $ 380.8 $ 391.5 78 -------------------------------------------------------------------------------- TABLE OF CONTENTS A reconciliation of the fair value of investments for the year ended December 31, 2011, utilizing significant unobservable inputs, is as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Senior Secured Note Collateralized Loan Collateralized Loan Subordinated Note Common Stock Preferred Share Equity Warrants to Purchase Equity ($ in millions) Investments Obligation Debt Obligation Equity Investments Investments Investments Investments Total Investments Investments Balance at $ 173.9 $ 50.4 $ 8.9 $ 6.0 $ 5.8 $ 2.0 $ 0.5 $ 247.5 December 31, 2010 Realized Losses included in 2.7 0.9 0.0 0.0 0.0 0.0 0.0 3.6 earnings Unrealized (depreciation) appreciation (5.7 ) (9.5 ) (1.5 ) (0.4 ) (2.7 ) 0.1 0.3 (19.4 ) included in earnings Accretion of 2.8 2.2 0.0 0.0 0.0 0.0 0.0 5.0 discount Purchases 230.0 10.6 31.9 0.0 0.0 0.0 0.0 272.5 Repayments and (113.8 ) (3.6 ) 0.0 (0.7 ) 0.0 0.4 0.0 (117.7 ) Sales(1) Transfers in and/or out of (10.7 ) 0.0 0.0 0.0 0.0 0.0 0.0 (10.7 ) level 3 Balance at $ 279.2 $ 51.0 $ 39.3 $ 4.9 $ 3.1 $ 2.5 $ 0.8 $ 380.8 December 31, 2011 The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to our Level 3 assets $ (4.1 ) $ (8.8 ) $ (1.3 ) $ (0.3 ) $ (2.7 ) $ 0.1 $ 0.3 $ (16.8 ) still held at the reporting date and reported within the net change in unrealized gains or losses on investments in our Statement of Operations [[Image Removed]] (1) Includes PIK interest of approximately $1.5 million and rounding adjustments to reconcile period balances. 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 Debt 55.6 8.3 % 51.0 13.0 % CLO Equity 109.3 16.4 % 39.3 10.0 % 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 % 79 -------------------------------------------------------------------------------- TABLE OF CONTENTS OTHER ACCOUNTING POLICIES Interest Income Recognition Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Payment in Kind Interest We have investments in our portfolio which contain a PIK provision. The PIK income is added to the principal balance of the investment and is recorded as income. To maintain our status as a RIC, this income must be paid out to stockholders in the form of dividends, even though we have not collected any cash. For the year ended December 31, 2012 we recorded PIK income of approximately $4,978,000. For the years ended December 31, 2011 and 2010, we recorded approximately $1,474,000 and $710,000 in PIK interest income, respectively. In addition, we recorded original issue discount income of approximately $5,833,000, $5,011,000 and $5,578,000 for the years ended December 31, 2012, 2011 and 2010, respectively, representing the amortization of the discount attributed to certain debt securities purchased by us, including original issue discount ("OID") and market discount. Other Income Other income includes closing fees, or origination fees, associated with investments in portfolio companies. Such fees are normally paid at closing of our investments, are fully earned and non-refundable, and are generally non-recurring. Managerial Assistance Fees The 1940 Act requires that a business development company offer managerial assistance to its portfolio companies. We offer to provide managerial assistance to our portfolio companies in connection with our investments and may receive fees for our services. We have not received any fees for such services since inception. Federal Income Taxes We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, to not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. For tax purposes, the cost basis of the portfolio investments at December 31, 2012 and December 31, 2011 was approximately $699,581,000 and $408,054,000, respectively. RECENT DEVELOPMENTS On February 11, 2013, we completed a public offering of 6,325,000 shares of our common stock (including 825,000 shares of common stock that were issued pursuant to the full exercise of the option granted to the underwriters to purchase additional shares) at a public offering price of $10.36 per share for total gross proceeds of approximately $65.5 million. On February 25, 2013, we completed the sale of $60,000,000 of incremental senior debt in connection with the collateralized loan obligation transaction that originally closed on August 23, 2012 (the "Original Closing Date"). The issuance of additional notes was proportional across all existing classes of notes issued 80 -------------------------------------------------------------------------------- TABLE OF CONTENTS on the Original Closing Date. The notes offered in this transaction (the "Additional Notes") were issued by the 2012 Securitization Issuer, which is our wholly-owned subsidiary, and are backed by a diversified portfolio of bank loans. The secured Additional Notes (the "Additional Secured Notes") were issued as Class A-1 senior secured floating rate notes which have an initial face amount of $44,000,000, are rated AAA/Aaa by S&P and Moody's, respectively, and bear interest at the three-month London Interbank Offered Rate ("LIBOR") plus 1.75%, Class B-1 senior secured floating rate notes which have an initial face amount of $5,000,000, are rated AA/Aa2 by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 3.50%, Class C-1 secured deferrable floating rate notes which have an initial face amount of $5,750,000, are rated A/A2 by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 4.75%, and Class D-1 secured deferrable floating rate notes which have an initial face amount of $5,250,000, are rated BBB/Baa2 by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus 5.75%. The Company purchased all of the subordinated Additional Notes of the Issuer (the "Additional Subordinated Notes"), which have an initial face amount of $20,000,000. The Additional Subordinated Notes do not bear interest and are not rated. The Additional Notes have a stated maturity date of August 25, 2023 and are subject to a non-call period until the payment date on the Additional Notes occurring in August 2014. The Issuer has a reinvestment period to and including the payment date on the Additional Notes occurring in August 2016, or such earlier date as is provided in the indenture relating to the Additional Notes. On February 28, 2013, our Board of Directors declared a cash dividend of $0.29 per share payable on March 29, 2013 to holders of record on March 22, 2013. [ Back To TMCnet.com's Homepage ]