e497
PROSPECTUS
Filed Pursuant to Rule 497
Registration Statement
Nos. 333-172550
and
333-175051
4,670,000 Shares
FIDUS INVESTMENT
CORPORATION
Common
Stock
We provide customized mezzanine debt and equity financing
solutions to lower middle-market companies located throughout
the United States. Upon completion of this offering, we will be
an externally managed, closed-end, non-diversified management
investment company that will elect to be regulated as a business
development company under the Investment Company Act of 1940, as
amended. Our investment objective is to provide attractive
risk-adjusted returns by generating both current income from our
debt investments and capital appreciation from our equity
related investments. Our strategy includes partnering with
business owners, management teams and financial sponsors by
providing customized financing for change of ownership
transactions, recapitalizations, strategic acquisitions,
business expansion and other growth initiatives.
This is an initial public offering of our shares of common
stock. All of the shares of common stock offered by this
prospectus are being sold by us. Our common stock has been
approved for quotation on The Nasdaq Global Market under the
symbol FDUS.
Our shares of common stock have no history of public trading.
Shares of closed-end investment companies, including business
development companies, frequently trade at a discount to their
net asset value. If our shares trade at a discount to our net
asset value, the risk of loss for purchasers in this offering
will likely increase. Based on the initial public offering price
of $15.00 per share, purchasers in this offering will experience
immediate dilution of approximately $0.54 per share. See
Dilution for more information.
In the formation transactions described in this prospectus, we
will acquire 100.0% of the limited partnership interests of
Fidus Mezzanine Capital, L.P., a Delaware limited partnership
licensed as a small business investment company by the United
States Small Business Administration. We will also acquire
100.0% of the membership interests in Fidus Mezzanine Capital,
GP, LLC, the general partner of Fidus Mezzanine Capital, L.P.
See Summary Formation Transactions for
more information.
Fidus Investment Advisors, LLC will serve as our investment
advisor and as our administrator.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should read the discussion of the
material risks of investing in our common stock, including the
risk of leverage, in Risk Factors beginning on
page 19 of this prospectus.
This prospectus contains important information you should know
before investing in our common stock. Please read it before you
invest and keep it for future reference. Upon completion of this
offering, we will file annual, quarterly and current reports,
proxy statements and other information about us with the
Securities and Exchange Commission (the SEC). This
information will be available free of charge by contacting us at
1603 Orrington Avenue, Suite 820, Evanston, Illinois
60201, Attention: Investor Relations, by accessing our website
at
http://www.fdus.com
or by calling us at
(847) 859-3940.
The SEC also maintains a website at
http://www.sec.gov
that contains such information.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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15.00
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$
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70,050,000
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Sales load (underwriting discounts and commissions) on
4,262,236 shares sold directly to the public
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$
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1.05
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$
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4,475,348
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Sales load (underwriting discounts and commissions) on 151,098
directed
shares(1)
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$
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0.375
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$
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56,662
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Proceeds to us, before
expenses(2)
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$
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14.03
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$
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65,517,990
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(1)
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No underwriting discount or
commission will be paid on 256,666 directed shares sold to our
directors and certain members of our management. A sales load
(underwriting discount and commission) of $0.375 per share will
be paid on 151,098 directed shares sold to certain members of
our management and other parties affiliated with us.
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(2)
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We estimate that we will incur
offering expenses of approximately $1,650,000, or approximately
$0.35 per share, in connection with this offering. All of these
offering expenses will be borne indirectly by investors in this
offering and will immediately reduce the net asset value of each
investors shares. We estimate that the net proceeds to us
after expenses will be approximately $63.9 million, or
approximately $13.68 per share.
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In addition, the underwriters may purchase up to an additional
700,500 shares of our common stock at the public offering
price, less the sales load payable by us, to cover
over-allotments, if any, within 30 days from the date of
this prospectus. If the underwriters exercise this option in
full, the total sales load will be $5,267,535, and total
proceeds, before expenses, will be $75,289,965.
The underwriters reserved up to 10.0% of the common stock being
offered in this offering for sale, directly or indirectly, to
our directors and members of our management, and to certain
other parties affiliated with us.
The underwriters are offering the common stock as set forth in
Underwriting. Delivery of the shares will be made on
or about June 24, 2011.
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Morgan Keegan
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Baird
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BB&T Capital Markets
A Division of Scott &
Stringfellow, LLC
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Oppenheimer & Co.
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The date of this prospectus is June 20, 2011
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date. We will update these documents to reflect material changes
only as required by law.
SUMMARY
This summary highlights some of the information in this
prospectus. It is not complete and may not contain all of the
information that you may want to consider. You should read this
entire prospectus carefully, including, in particular, the more
detailed information set forth under Risk Factors,
the consolidated financial statements and the related notes of
Fidus Mezzanine Capital, L.P. included elsewhere in this
prospectus.
As used in this prospectus, except as otherwise indicated,
the terms we, us and our
refer to Fidus Mezzanine Capital, L.P., a Delaware limited
partnership, for the periods prior to consummation of the
formation transactions (described below) and this offering, and
refer to Fidus Investment Corporation, a Maryland corporation,
and its consolidated subsidiaries, including Fidus Mezzanine
Capital, L.P., for the periods after the consummation of the
formation transactions and this offering. As used in this
prospectus the term our investment advisor refers to
Fidus Capital, LLC prior to the consummation of our formation
transactions and Fidus Investment Advisors, LLC after the
consummation of our formation transactions. The investment
professionals of Fidus Capital, LLC will be the investment
professionals of Fidus Investment Advisors, LLC.
In conjunction with the pricing of this offering, in what we
sometimes refer to in this prospectus as the formation
transactions, Fidus Investment Corporation will acquire
Fidus Mezzanine Capital, L.P. through the merger of Fidus
Mezzanine Capital, L.P. with a wholly-owned subsidiary of Fidus
Investment Corporation and a merger of Fidus Mezzanine Capital
GP, LLC with and into a wholly-owned subsidiary of Fidus
Investment Corporation. For a detailed discussion of such
transactions, see Formation Transactions; Business
Development Company and Regulated Investment Company
Elections. In addition, upon consummation of the formation
transactions, Fidus Mezzanine Capital, L.P. will terminate its
management services agreement with Fidus Capital, LLC, and we
will enter into an investment advisory and management agreement
with Fidus Investment Advisors, LLC. In addition, Fidus
Investment Advisors, LLC will serve as our administrator
pursuant to a separate administration agreement.
When reading this prospectus, it is important to note that
the historical financial statements and other historical
financial information included herein are those of Fidus
Mezzanine Capital, L.P. Prior to the consummation of the
formation transactions and this offering, Fidus Mezzanine
Capital, L.P. was not regulated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act), and therefore was not subject
to certain restrictions imposed by the 1940 Act on business
development companies; and, if Fidus Mezzanine Capital, L.P. had
been regulated as a business development company under the 1940
Act, Fidus Mezzanine Capital, L.P.s performance may have
been adversely affected. Upon consummation of this offering and
the formation transactions, we will be an externally managed,
closed-end, non-diversified management investment company that
has elected to be regulated as a business development company
under the 1940 Act. In addition, for U.S. federal income
tax purposes we intend to elect to be treated as a regulated
investment company (RIC) under the Internal Revenue
Code of 1986, as amended (the Code).
Unless indicated otherwise or the context requires, all
information in this prospectus assumes no exercise of the
underwriters over-allotment option to purchase additional
shares of our common stock and an initial public offering price
of $15.00 per share.
Fidus
Investment Corporation
We provide customized mezzanine debt and equity financing
solutions to lower middle-market companies, which we define as
U.S. based companies having revenues between
$10.0 million and $150.0 million. Our investment
objective is to provide attractive risk-adjusted returns by
generating both current income from our debt investments and
capital appreciation from our equity related investments. We
were formed to continue and expand the business of Fidus
Mezzanine Capital, L.P., a fund formed in February 2007 that is
licensed by the United States Small Business Administration (the
SBA) as a small business investment company (an
SBIC) and to make investments in portfolio companies
directly at the parent level. Upon consummation of this offering
and the formation transactions, we will acquire Fidus Mezzanine
Capital,
-1-
L.P. as our wholly-owned SBIC subsidiary. Our investment
strategy includes partnering with business owners, management
teams and financial sponsors by providing customized financing
for change of ownership transactions, recapitalizations,
strategic acquisitions, business expansion and other growth
initiatives. We seek to maintain a diversified portfolio of
investments in order to help mitigate the potential effects of
adverse economic events related to particular companies, regions
or industries. Since commencing operations in 2007, we have
invested an aggregate of $170.4 million in 21 portfolio
companies.
We invest in companies that possess some or all of the following
attributes: predictable revenues; positive cash flows;
defensible
and/or
leading market positions; diversified customer and supplier
bases; and proven management teams with strong operating
discipline. We target companies in the lower middle-market with
annual earnings, before interest, taxes, depreciation and
amortization, or EBITDA, between $3.0 million and
$20.0 million; however, we may from time to time
opportunistically make investments in larger or smaller
companies. We expect that our investments will typically range
between $5.0 million and $15.0 million per portfolio
company.
As of March 31, 2011, we had debt and equity investments in
16 portfolio companies with an aggregate fair value of
$143.7 million. The weighted average yield on all of our
debt investments as of March 31, 2011 was 14.9%. Yields are
computed using the effective interest rates as of March 31,
2011, including accretion of original issue discount, divided by
the weighted average cost of debt investments. There can be no
assurance that the weighted average yield will remain at its
current level.
Market
Opportunity
We believe that the limited amount of capital available to lower
middle-market companies, coupled with the desire of these
companies for flexible and partnership-oriented sources of
capital, creates an attractive investment environment for us. We
believe the following factors will continue to provide us with
opportunities to grow and deliver attractive returns to
stockholders.
The lower middle-market represents a large, underserved
market. According to Dun & Bradstreet,
as of January 31, 2011, there were approximately
105,000 companies in the lower middle-market, defined as
companies with revenues between $10.0 million and
$150.0 million. We believe that lower middle-market
companies, most of which are privately-held, are relatively
underserved by traditional capital providers such as commercial
banks, finance companies, hedge funds and collateralized loan
obligation funds. Further, we believe that companies of this
size generally are less leveraged relative to their enterprise
value, as compared to larger companies with more financing
options.
Recent credit market dislocation for lower middle-market
companies has created an opportunity for attractive
risk-adjusted returns. We believe the credit
crisis that began in 2007 and the subsequent exit from lower
middle-market lending of traditional capital sources, such as
commercial banks, finance companies, hedge funds and
collateralized loan obligation funds, has resulted in an
increase in opportunities for alternative funding sources. In
addition, we believe that there continues to be less competition
in our market and an increased opportunity for attractive
risk-adjusted returns. The remaining lenders and investors in
the current environment are requiring lower amounts of senior
and total leverage, increased equity commitments and more
comprehensive covenant packages than was customary in the years
leading up to the credit crisis.
Large pools of uninvested private equity capital should drive
future transaction velocity. According to
Pitchbook, as of June 30, 2010, there was approximately
$42 billion of uninvested capital raised by private equity
funds under $500.0 million in fund size with vintage years
from 2005 to 2010. As a result, we expect that private equity
firms will remain active investors in lower middle-market
companies. Private equity funds generally seek to leverage their
investments by combining their equity capital with senior
secured loans
and/or
mezzanine debt provided by other sources, and we believe that
our investment strategy positions us well to partner with such
private equity investors.
Future refinancing activity is expected to create additional
investment opportunities. A high volume of debt
financings completed between the years 2005 and 2008 is expected
to mature in the coming years. Based on Standard &
Poors LCD middle-market statistics, an aggregate of
$113.9 billion middle-market loans were
-2-
issued from 2004 to 2007 and are expected to mature in five to
seven years. We believe this supply of opportunities coupled
with limited financing providers will continue to produce for us
investment opportunities with attractive risk-adjusted returns.
Business
Strategy
We intend to accomplish our goal of becoming the premier
provider of capital to and value-added partner of lower
middle-market companies by:
Leveraging the Experience of Our Investment
Advisor. Our investment advisors investment
professionals have an average of over 20 years of
experience investing in, lending to and advising companies
across changing market cycles. These professionals have diverse
backgrounds with prior experience in senior management positions
at investment banks, specialty finance companies, commercial
banks and privately and publicly held companies and have
extensive experience investing across all levels of the capital
structure of middle-market companies. The members of our
investment advisor have invested more than $750 million in
mezzanine debt, senior secured debt (including unitranche debt)
and equity securities of primarily lower middle-market
companies. We believe this experience provides our investment
advisor with an in-depth understanding of the strategic,
financial and operational challenges and opportunities of lower
middle-market companies. Further, we believe this understanding
positions our investment advisor to effectively identify,
assess, structure and monitor our investments.
Capitalizing on Our Strong Transaction Sourcing
Network. Our investment advisors investment
professionals possess an extensive network of long-standing
relationships with private equity firms, middle-market senior
lenders, junior-capital partners, financial intermediaries and
management teams of privately owned businesses. We believe that
the combination of these relationships and our reputation as a
reliable, responsive and value-added financing partner helps
generate a steady stream of new investment opportunities and
proprietary deal flow. Further, we anticipate that we will
obtain leads from our greater visibility as a publicly-traded
business development company. Since commencing operations in
2007, the investment professionals of our investment advisor
have reviewed over 850 investment opportunities primarily in
lower middle-market companies through March 31, 2011.
Serving as a Value-Added Partner with Customized Financing
Solutions. We follow a partnership-oriented
approach in our investments and focus on opportunities where we
believe we can add value to a portfolio company. We primarily
concentrate on industries or market niches in which the
investment professionals of our investment advisor have prior
experience. The investment professionals of our investment
advisor also have expertise in structuring securities at all
levels of the capital structure, which we believe positions us
well to meet the needs of our portfolio companies. We will
invest in mezzanine debt securities, typically coupled with an
equity interest; however, on a selective basis we may invest in
senior secured or unitranche loans. Further, as a
publicly-traded business development company, we will have a
longer investment horizon without the capital return
requirements of traditional private investment vehicles. We
believe this flexibility will enable us to generate attractive
risk-adjusted returns on invested capital and enable us to be a
better long-term partner for our portfolio companies. We believe
that by leveraging the industry and structuring expertise of our
investment advisor coupled with our long-term investment
horizon, we are well positioned to be a value-added partner for
our portfolio companies.
Employing Rigorous Due Diligence and Underwriting Processes
Focused on Capital Preservation. Our investment
advisor follows a disciplined and credit-oriented approach to
evaluating and investing in companies. We focus on companies
with proven business models, significant free cash flow,
defensible market positions and significant enterprise value
cushion for our debt investments. In making investment
decisions, we seek to minimize the risk of capital loss without
foregoing the opportunity for capital appreciation. Our
investment advisors investment professionals have
developed extensive due diligence and underwriting processes
designed to assess a portfolio companys prospects and to
determine the appropriate investment structure. Our investment
advisor thoroughly analyzes each potential portfolio
companys competitive position, financial performance,
management team, growth potential and industry attractiveness.
As part of this process, our investment advisor also
participates in meetings with management, tours of facilities,
discussions with
-3-
industry professionals and third-party reviews. We believe this
approach enables us to build and maintain an attractive
investment portfolio that meets our return and value criteria
over the long term.
Actively Managing our Portfolio. We believe
that our investment advisors initial and ongoing portfolio
review process allows us to effectively monitor the performance
and prospects of our portfolio companies. We seek to obtain
board observation rights or board seats with respect to our
portfolio companies, and we conduct monthly financial reviews
and regular discussions with portfolio company management. We
structure our investments with a comprehensive set of financial
maintenance, affirmative and negative covenants. We believe that
active monitoring of our portfolio companies covenant
compliance provides us with an early warning of any financial
difficulty and enhances our ability to protect our invested
capital.
Maintaining Portfolio Diversification. We seek
to maintain a portfolio of investments that is diversified among
companies, industries and geographic regions. We have made
investments in portfolio companies in the following industries:
business services, industrial products and services, value-added
distribution, healthcare products and services, consumer
products and services (including retail, food and beverage),
defense and aerospace, transportation and logistics, government
information technology services and niche manufacturing. We
believe that maintaining a diversified portfolio helps mitigate
the potential effects of negative economic events for particular
companies, regions and industries.
Benefiting from Lower Cost of Capital. Fidus
Mezzanine Capital, L.P.s SBIC license allows us to issue
debt securities that are guaranteed by the SBA, which we refer
to as SBA debentures. These SBA debentures carry
long-term fixed rates that are generally lower than rates on
comparable bank and public debt. Because lower-cost SBA leverage
is, and will continue to be, a significant part of our funding
strategy, our relative cost of debt capital should be lower than
many of our competitors. We may also apply for a second SBIC
license through which we may issue more SBA debentures to fund
additional investments; however, we can make no assurances that,
if we do apply, the SBA will approve such application. The SBA
regulations currently limit the amount that is available to be
borrowed by Fidus Mezzanine Capital, L.P. to
$150.0 million. If we apply and are approved by the SBA for
a second SBIC license, the maximum amount of outstanding SBA
debentures for two or more SBICs under common control cannot
exceed $225.0 million.
Investment
Criteria/Guidelines
We use the following criteria and guidelines in evaluating
investment opportunities and constructing our portfolio.
However, not all of these criteria and guidelines have been, or
will be, met in connection with each of our investments.
Value Orientation / Positive Cash
Flow. Our investment advisor places a premium on
analysis of business fundamentals from an investors
perspective and has a distinct value orientation. We focus on
companies with proven business models in which we can invest at
relatively low multiples of operating cash flow. We also
typically invest in companies with a history of profitability
and minimum trailing twelve month EBITDA of $3.0 million.
We do not invest in
start-up
companies, turn-around situations or companies that
we believe have unproven business plans.
Experienced Management Teams with Meaningful Equity
Ownership. We target portfolio companies that
have management teams with significant experience and/or
relevant industry experience coupled with meaningful equity
ownership. We believe management teams with these attributes are
more likely to manage the companies in a manner that protects
our debt investment and enhances the value of our equity
investment.
Niche Market Leaders with Defensible Market
Positions. We invest in companies that have
developed defensible
and/or
leading positions within their respective markets or market
niches and are well positioned to capitalize on growth
opportunities. We favor companies that demonstrate significant
competitive advantages, which we believe helps to protect their
market position and profitability.
Diversified Customer and Supplier Base. We
prefer to invest in companies that have a diversified customer
and supplier base. Companies with a diversified customer and
supplier base are generally better able to endure economic
downturns, industry consolidation and shifting customer
preferences.
-4-
Significant Invested Capital. We believe the
existence of significant underlying equity value provides
important support to our debt investments. With respect to our
debt investments, we look for portfolio companies where we
believe aggregate enterprise value significantly exceeds
aggregate indebtedness, after consideration of our investment.
Viable Exit Strategy. We invest in companies
that we believe will provide a steady stream of cash flow to
repay our loans and reinvest in their respective businesses. In
addition, we also seek to invest in companies whose business
models and expected future cash flows offer attractive exit
possibilities for our equity investments. We expect to exit our
investments typically through one of three scenarios:
(a) the sale of the company resulting in repayment of all
outstanding debt and equity; (b) the recapitalization of
the company through which our investments are replaced with debt
or equity from a third party or parties; or (c) the
repayment of the initial or remaining principal amount of our
debt investment from cash flow generated by the company. In some
investments, there may be scheduled amortization of some portion
of our debt investment which would result in a partial exit of
our investment prior to the maturity of the debt investment.
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Portfolio
Companies
As of March 31, 2011, 76.4% of our investments were
mezzanine debt, 14.1% were senior secured debt and 9.5% were
equity securities based on cost. Based upon information provided
to us by our portfolio companies (which we have not
independently verified), our portfolio had a total net debt to
EBITDA ratio of approximately 3.5 to 1.0 and an EBITDA to
interest expense ratio of 3.0 to 1.0. In calculating these
ratios, we included all portfolio company debt, EBITDA and
interest expense as of December 31, 2010, including debt
junior to our debt investments. If we excluded debt junior to
our debt investments in calculating these ratios, the ratios
would be 3.4 to 1.0 and 3.1 to 1.0, respectively. At
March 31, 2011, we had an equity ownership in 81.3% of our
portfolio companies and the average fully diluted equity
ownership in such portfolio companies was 9.2%.
The following table sets forth the cost and fair value of our
investments by portfolio company as of March 31, 2011.
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Cost of
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Fair Value
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Company
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Nature of Principal Business
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Type
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Investment
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of Investment
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(Dollars in thousands)
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Avrio Technology Group, LLC
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Provider of electronic components and software
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Debt/Equity
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$
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9,185
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$
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9,185
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Brook & Whittle Limited
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Specialty label printer
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Debt/Equity
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8,298
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8,581
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Caldwell & Gregory, LLC
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Laundry room operator
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Debt/Equity
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9,257
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9,753
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Casino Signs & Graphics, LLC
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Sign manufacturer
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Debt
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4,500
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934
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Connect-Air International, Inc.
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Distributor of wire and cable assemblies
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Debt/Equity
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9,106
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9,106
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Fairchild Industrial Products Company
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Manufacturer of pneumatic and mechanical process controls
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Debt
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9,150
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9,150
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Goodrich Quality Theaters, Inc.
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Movie theater operator
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Debt/Equity
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12,647
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14,265
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Interactive Technology Solutions, LLC
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Government information technology services
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Debt/Equity
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5,565
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5,465
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Jan-Pro International, LLC
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Franchisor of commercial cleaning services
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Debt/Equity
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8,136
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7,995
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K2 Industrial Services, Inc.
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Industrial cleaning and coatings
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Debt
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8,000
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8,240
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Paramount Building Solutions, LLC
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Janitorial services provider
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Debt/Equity
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7,553
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9,361
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Simplex Manufacturing Co.
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Provider of helicopter tank systems
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Debt/Equity
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4,924
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4,393
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TBG Anesthesia Management, LLC
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Physician management company
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Debt/Equity
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11,076
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11,456
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Tulsa Inspection Resources, Inc.
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Pipeline inspection services
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Debt/Equity
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4,728
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4,432
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Westminster Cracker Company, Inc.
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Specialty cracker manufacturer
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Debt/Equity
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7,863
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7,863
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Worldwide Express Operations, LLC
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Franchisor of shipping and logistics services
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Debt/Equity
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|
|
|
18,680
|
|
|
|
23,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
$
|
138,668
|
|
|
$
|
143,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-6-
Recent
Developments
On April 6, 2011, we invested $8.1 million of subordinated
debt and equity securities in Nobles Manufacturing, Inc., a
leading manufacturer of ammunition feed systems and components
and centrifugal dryers.
On April 12, 2011, we invested $4.8 million of subordinated
debt and equity securities in Medsurant Holdings, LLC, a
provider of intraoperative monitoring technology and services.
In April 2011, Fidus Mezzanine Capital, L.P. made a
$1.5 million distribution to its general and limited
partners.
About Our
Advisor
The investment activities of Fidus Mezzanine Capital, L.P. are
currently managed by Fidus Capital, LLC. Upon consummation of
the formation transactions and this offering, Fidus Mezzanine
Capital, L.P. will terminate the current management services
agreement with Fidus Capital, LLC, and we will enter into an
investment advisory and management agreement (the
Investment Advisory Agreement) with Fidus Investment
Advisors, LLC, as our investment advisor. The investment
professionals of Fidus Capital, LLC, who are also the investment
professionals of Fidus Investment Advisors, LLC, are responsible
for sourcing potential investments, conducting research and
diligence on potential investments and equity sponsors,
analyzing investment opportunities, structuring our investments
and monitoring our investments and portfolio companies on an
ongoing basis. Fidus Investment Advisors, LLC is a newly formed
Delaware limited liability company that is a registered
investment advisor under the Investment Advisers Act of 1940, as
amended (the Advisers Act). In addition, Fidus
Investment Advisors, LLC will serve as our administrator
pursuant to an administration agreement (the
Administration Agreement). Our investment advisor
has no prior experience managing or administering any business
development company.
Our relationship with our investment advisor will be governed by
and dependent on the Investment Advisory Agreement and may be
subject to conflicts of interest. See Related-Party
Transactions and Certain Relationships Conflicts of
Interest. Pursuant to the terms of the Investment Advisory
Agreement, our investment advisor will provide us with advisory
services in exchange for a base management fee and incentive
fee. See Management and Other Agreements
Investment Advisory Agreement for a discussion of the base
management fee and incentive fee payable by us to our investment
advisor. These fees are based on our total assets (other than
cash or cash equivalents but including assets purchased with
borrowed amounts); therefore, our investment advisor will
benefit when we incur debt or use leverage. See Risk
Factors Our incentive fee structure may create
incentives for our investment advisor that are not fully aligned
with the interests of our stockholders. Our board of
directors is charged with protecting our interests by monitoring
how our investment advisor addresses these and other conflicts
of interest associated with its management services and
compensation. While our board of directors is not expected to
review or approve each borrowing or incurrence of leverage, our
independent directors will periodically review our investment
advisors services and fees as well as its portfolio
management decisions and portfolio performance. In connection
with these reviews, our independent directors will consider
whether the fees and expenses (including those related to
leverage) that we pay to our investment advisor remain
appropriate.
Formation
Transactions
Fidus Investment Corporation is a newly organized Maryland
corporation formed on February 14, 2011, for the purpose of
raising capital in this offering, acquiring 100.0% of the equity
interests in Fidus Mezzanine Capital, L.P. and Fidus Mezzanine
Capital GP, LLC, and thereafter operating as an externally
managed, closed-end, non-diversified management investment
company that elects to be regulated as a business development
company under the 1940 Act. Immediately prior to our election to
be treated as a business
-7-
development company under the 1940 Act and the pricing of this
offering, we will consummate the following formation
transactions:
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|
|
|
|
We will acquire 100.0% of the limited partnership interests in
Fidus Mezzanine Capital, L.P. through the merger of Fidus
Mezzanine Capital, L.P. with a limited partnership that is our
wholly-owned subsidiary. As a result of this merger, Fidus
Mezzanine Capital, L.P. will be the surviving entity and will
become our wholly-owned subsidiary, retain its SBIC license,
continue to hold its existing investments and make new
investments with a portion of the net proceeds of this offering.
Fidus Mezzanine Capital, L.P. will also elect to be regulated as
a business development company under the 1940 Act. The limited
partners hold 91.3% of the partnership interests of Fidus
Mezzanine Capital, L.P. In exchange for their partnership
interests, we will issue 3,702,778 shares of common stock,
at the initial offering price of $15.00 per share, to the
limited partners of Fidus Mezzanine Capital, L.P. having an
aggregate value of $55.5 million (which represents the
limited partners share of the net asset value of Fidus
Mezzanine Capital, L.P. as of the most recent quarter end for
which financial statements have been included in this
prospectus, plus any additional cash contributions to Fidus
Mezzanine Capital, L.P. by the limited partners following such
quarter end but prior to the closing of the merger, less any
cash distributions to the limited partners following such
quarter end but prior to the closing of the merger).
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|
We will acquire 100.0% of the equity interests in Fidus
Mezzanine Capital GP, LLC, the general partner of Fidus
Mezzanine Capital, L.P., from the members of Fidus Mezzanine
Capital GP, LLC through the merger of Fidus Mezzanine Capital
GP, LLC with and into Fidus Investment GP, LLC, our wholly-owned
subsidiary. Fidus Investment GP, LLC will be the surviving
entity and, as a result, we will acquire 100.0% of the general
partnership interest in Fidus Mezzanine Capital, L.P. Fidus
Mezzanine Capital GP, LLC holds 8.7% of the partnership
interests in Fidus Mezzanine Capital, L.P. and no other
interests or assets. The members of Fidus Mezzanine Capital GP,
LLC will not receive any consideration in exchange for their
carried interest in Fidus Mezzanine Capital, L.P. In exchange
for its partnership interests in Fidus Mezzanine Capital, L.P.,
we will issue 353,743 shares of common stock, at the
initial offering price of $15.00 per share, to Fidus Mezzanine
Capital GP, LLC having an aggregate value of $5.3 million
(which consideration has been calculated on the same basis as
the consideration paid to the limited partners of Fidus
Mezzanine Capital, L.P. described above). Such shares will be
distributed to the members of Fidus Mezzanine Capital GP, LLC in
exchange for their equity interest in Fidus Mezzanine Capital
GP, LLC.
|
Fidus Mezzanine Capital GP, LLC and the limited partners of
Fidus Mezzanine Capital, L.P. have each approved the formation
transactions. Prior to consummation of the formation
transactions, we must also receive the approval of the SBA.
Upon consummation of the formation transactions, Fidus Mezzanine
Capital, L.P. will terminate its management services agreement
with Fidus Capital, LLC, and we will enter into the Investment
Advisory Agreement with Fidus Investment Advisors, LLC, our
investment advisor. The investment professionals of Fidus
Capital, LLC are also the investment professionals of Fidus
Investment Advisors, LLC.
-8-
The following diagram depicts our organizational structure upon
completion of this offering (assuming the underwriters do not
exercise their over-allotment option) and the formation
transactions described elsewhere in this prospectus:
-9-
Operating
and Regulatory Structure
Our investment activities will be managed by our investment
advisor under the direction of our board of directors and the
board of directors of Fidus Mezzanine Capital, L.P., a majority
of whom are independent of us, Fidus Mezzanine Capital, L.P.,
our investment advisor and our and their respective affiliates.
We have no prior history of operating as a business development
company, and our investment advisor has no prior experience
managing or administering any business development company.
As business development companies, we and Fidus Mezzanine
Capital, L.P., will be required to comply with certain
regulatory requirements. For example, while we are permitted to
finance investments using leverage, which may include the
issuance of shares of preferred stock, or notes and other
borrowings, our ability to use leverage is limited in
significant respects. See Regulation. Any decision
on our part to use leverage will depend upon our assessment of
the attractiveness of available investment opportunities in
relation to the costs and perceived risks of such leverage. The
use of leverage to finance investments creates certain risks and
potential conflicts of interest. See Risk
Factors Risks Relating to our Business and
Structure Regulations governing our operation as a
business development company will affect our ability to raise,
and the way in which we raise, additional capital which may have
a negative effect on our growth and Risk
Factors Risks Relating to our Business and
Structure Because we borrow money, the potential for
gain or loss on amounts invested in us is magnified and may
increase the risk of investing in us.
We intend to elect to be treated for federal income tax purposes
as a RIC under the Code. In order to be treated as a RIC, we
must satisfy certain source of income, asset diversification and
distribution requirements. See Material U.S. Federal
Income Tax Considerations.
Risk
Factors
The value of our assets, as well as the market price of our
shares, will fluctuate. Our investments may be risky, and you
may lose part of or all of your investment in us. Investing in
our common stock involves other risks, including the following:
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our inexperience operating a business development company;
|
|
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|
our dependence on key personnel of our investment advisor and
our executive officers;
|
|
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|
our ability to maintain or develop referral relationships;
|
|
|
|
our ability to manage our business effectively;
|
|
|
|
our use of leverage;
|
|
|
|
uncertain valuations of our portfolio investments;
|
|
|
|
competition for investment opportunities;
|
|
|
|
potential divergent interests of our investment advisor and our
stockholders arising from our incentive fee structure;
|
|
|
|
actual and potential conflicts of interest with our investment
advisor;
|
|
|
|
constraint on investment due to access to material nonpublic
information;
|
|
|
|
other potential conflicts of interest;
|
|
|
|
SBA regulations affecting our wholly-owned SBIC subsidiary;
|
|
|
|
changes in interest rates;
|
|
|
|
the impact of a protracted decline in the liquidity of credit
markets on our business and portfolio investments;
|
|
|
|
fluctuations in our quarterly operating results;
|
|
|
|
our ability to qualify and maintain our qualification as a RIC
and as a business development company;
|
-10-
|
|
|
|
|
risks associated with the timing, form and amount of any
dividends or distributions;
|
|
|
|
changes in laws or regulations applicable to us;
|
|
|
|
our ability to obtain exemptive relief from the SEC;
|
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possible resignation of our investment advisor;
|
|
|
|
the general economy and its impact on the industries in which we
invest;
|
|
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|
risks associated with investing in lower middle-market companies;
|
|
|
|
our ability to invest in qualifying assets; and
|
|
|
|
our ability to identify and timely close on investment
opportunities.
|
See Risk Factors beginning on page 19 and the
other information included in this prospectus for additional
discussion of factors you should carefully consider before
deciding to invest in shares of our common stock.
Corporate
Information
Our principal executive offices are located at 1603 Orrington
Avenue, Suite 820, Evanston, Illinois 60201, and our
telephone number is
(847) 859-3940.
Our corporate website is located at
http://www.fdus.com.
Information on our website is not incorporated into or a part of
this prospectus.
-11-
The
Offering
|
|
|
Common stock offered by us |
|
4,670,000 shares (or 5,370,500 shares if the
underwriters exercise their over-allotment option in full). |
|
Common stock issued in formation transactions |
|
4,056,521 shares |
|
Common stock to be outstanding after this offering |
|
8,726,521 shares (or 9,427,021 shares if the
underwriters exercise their over-allotment option in full). |
|
Use of proceeds |
|
Our net proceeds from this offering will be approximately
$63.9 million, or approximately $73.6 million if the
underwriters exercise their over-allotment option in full. |
|
|
|
We intend to use the net proceeds of this offering to invest in
portfolio companies through Fidus Mezzanine Capital, L.P. or
directly in accordance with our investment objective and the
strategies described in this prospectus, to make distributions
to our stockholders and for general corporate purposes, which
may include the establishment of a second SBIC, through which we
would make additional investments. We will also pay operating
expenses, including management and administrative fees, and may
pay other expenses from the net proceeds of this offering.
Pending such investments, we intend to invest the net proceeds
of this offering primarily in cash, cash equivalents, U.S.
Government securities and high-quality debt investments that
mature in one year or less from the date of investment. These
temporary investments may have lower yields than our other
investments and, accordingly, may result in lower distributions,
if any, during such period. See Use of Proceeds. |
|
The Nasdaq Global Market Symbol |
|
FDUS |
|
Investment advisory fee |
|
We will pay our investment advisor a fee for its services under
the Investment Advisory Agreement consisting of two
components a base management fee and an incentive
fee. The base management fee is calculated at an annual rate of
1.75% of the average value of our total assets (other than cash
or cash equivalents but including assets purchased with borrowed
amounts). The incentive fee consists of two parts. The first
part is calculated and payable quarterly in arrears and equals
20.0% of our pre-incentive fee net investment income
for the immediately preceding quarter, subject to a 2.0%
preferred return, or hurdle, and a catch
up feature. The second part is determined and payable in
arrears as of the end of each fiscal year in an amount equal to
20.0% of our realized capital gains, on a cumulative basis from
inception through the end of the year, computed net of all
realized capital losses and unrealized capital depreciation on a
cumulative basis, less the aggregate amount of any previously
paid capital gain incentive fees. See Management and Other
Agreements Investment Advisory Agreement. |
|
Distributions |
|
Subsequent to the completion of this offering, and to the extent
we have income and cash available, we intend to distribute
quarterly dividends to our stockholders, beginning with the
first full calendar |
-12-
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|
quarter after the completion of this offering. Our quarterly
dividends, if any, will be determined by our board of directors.
Any dividends to our stockholders will be declared out of assets
legally available for distribution. |
|
Dividend reinvestment plan |
|
We have adopted a dividend reinvestment plan for our
stockholders, which is an opt out dividend
reinvestment plan. Under this plan, if we declare a cash
dividend or other distribution, our stockholders who have not
opted out of our dividend reinvestment plan will have their cash
distribution automatically reinvested in additional shares of
our common stock, rather than receiving the cash distribution.
If a stockholder opts out, that stockholder will receive cash
dividends or other distributions. Stockholders who receive
dividends and other distributions in the form of shares of
common stock generally are subject to the same U.S. federal tax
consequences as stockholders who elect to receive their
distributions in cash; however, since their cash dividends will
be reinvested, such stockholders will not receive cash with
which to pay any applicable taxes on reinvested dividends. See
Dividend Reinvestment Plan. |
|
Taxation |
|
We intend to elect to be treated, and intend to qualify
thereafter, as a RIC under the Code, beginning with our first
taxable year ending December 31, 2011. As a RIC, we
generally will not have to pay corporate-level U.S. federal
income taxes on any net ordinary income or capital gains that we
distribute to our stockholders. To obtain and maintain RIC tax
treatment, we must distribute at least 90.0% of our net ordinary
income and net short-term capital gains in excess of our net
long-term capital losses, if any. See Distributions
and Material U.S. Federal Income Tax Considerations. |
|
Risk factors |
|
An investment in our common stock is subject to risks. See
Risk Factors beginning on page 19 of this
prospectus to read about factors you should consider before
deciding to invest in shares of our common stock. |
|
Effective trading at a discount |
|
Shares of closed-end investment companies, including business
development companies, frequently trade at a discount to their
net asset value. We are not generally able to issue and sell our
common stock at a price below our net asset value per share
unless we have stockholder approval. The risk that our shares
may trade at a discount to our net asset value is separate and
distinct from the risk that our net asset value per share may
decline. We cannot predict whether our shares will trade above,
at or below net asset value. See Risk Factors. |
|
Available information |
|
We have filed with the SEC a registration statement on
Form N-2,
of which this prospectus is a part, under the Securities Act of
1933, as amended (the Securities Act). This
registration statement contains additional information about us
and the shares of our common stock being offered by this
prospectus. After the completion of this offering, we will be
required to file periodic reports, current reports, proxy
statements and other information with the SEC. This information
will be available at the SECs |
-13-
|
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|
public reference room at 100 F. Street, N.E.,
Washington, D.C. 20549 and on the SECs website at
http://www.sec.gov.
Information on the operation of the SECs public reference
room may be obtained by calling the SEC at
1-800-SEC-0330. |
|
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|
We maintain a website at
http://www.fdus.com
and intend to make all of our periodic and current reports,
proxy statements and other information available, free of
charge, on or through our website. Information on our website is
not incorporated into or part of this prospectus. You may also
obtain such information free of charge by contacting us in
writing at 1603 Orrington Avenue, Suite 820, Evanston,
Illinois 60201. |
-14-
Selected
Consolidated Financial and Other Data
The following selected consolidated financial data of Fidus
Mezzanine Capital, L.P. as of December 31, 2009 and 2010
and for the years ended December 31, 2008, 2009 and 2010 is
derived from the consolidated financial statements that have
been audited by McGladrey & Pullen, LLP, independent
auditors. Fidus Mezzanine Capital, L.P.s consolidated
financial data for the period from May 1, 2007 (inception)
through December 31, 2007, statement of assets and
liabilities at December 31, 2008 and
three-month
periods ended March 31, 2010 and 2011, is unaudited.
However, in the opinion of Fidus Mezzanine Capital, L.P., all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation have been made. This financial
data should be read in conjunction with Fidus Mezzanine Capital,
L.P.s consolidated financial statements and the notes
thereto included elsewhere in this prospectus and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
|
|
|
|
Three Months
|
|
|
December 31,
|
|
Year Ended December 31,
|
|
Ended March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Dollars in thousands)
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
1,312
|
|
|
$
|
7,504
|
|
|
$
|
14,184
|
|
|
$
|
17,985
|
|
|
$
|
4,222
|
|
|
$
|
4,794
|
|
Interest expense
|
|
|
272
|
|
|
|
1,994
|
|
|
|
3,688
|
|
|
|
4,962
|
|
|
|
1,089
|
|
|
|
1,324
|
|
Management fees, net
|
|
|
1,787
|
|
|
|
3,087
|
|
|
|
2,969
|
|
|
|
3,436
|
|
|
|
756
|
|
|
|
1,036
|
|
All other expenses
|
|
|
496
|
|
|
|
179
|
|
|
|
431
|
|
|
|
627
|
|
|
|
52
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(1,243
|
)
|
|
|
2,244
|
|
|
|
7,096
|
|
|
|
8,960
|
|
|
|
2,325
|
|
|
|
2,330
|
|
Net realized (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
(5,551
|
)
|
|
|
(3,858
|
)
|
|
|
(2
|
)
|
|
|
(7,935
|
)
|
Net unrealized appreciation (depreciation) on investments
|
|
|
|
|
|
|
(750
|
)
|
|
|
(3,137
|
)
|
|
|
(78
|
)
|
|
|
(5,744
|
)
|
|
|
8,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(1,243
|
)
|
|
$
|
1,494
|
|
|
$
|
(1,592
|
)
|
|
$
|
5,024
|
|
|
$
|
(3,421
|
)
|
|
$
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average annual yield on debt
investments(1)
|
|
|
15.7
|
%
|
|
|
15.0
|
%
|
|
|
15.6
|
%
|
|
|
15.0
|
%
|
|
|
15.5
|
%
|
|
|
14.9
|
%
|
Number of portfolio companies at year end
|
|
|
4
|
|
|
|
9
|
|
|
|
15
|
|
|
|
17
|
|
|
|
16
|
|
|
|
16
|
|
Expense ratios (as percentage of average net assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
23.7
|
%
|
|
|
12.4
|
%
|
|
|
7.5
|
%
|
|
|
8.6
|
%
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
Interest expense
|
|
|
2.8
|
%
|
|
|
7.6
|
%
|
|
|
8.0
|
%
|
|
|
10.5
|
%
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
|
(1) |
|
Yields are computed using the effective interest rates,
including accretion of original issue discount, divided by the
weighted average cost of debt investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
(Dollars in thousands)
|
|
Statement of assets and liabilities data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
33,151
|
|
|
$
|
75,849
|
|
|
$
|
122,900
|
|
|
$
|
141,341
|
|
|
$
|
143,652
|
|
Total assets
|
|
|
34,905
|
|
|
|
79,786
|
|
|
|
129,650
|
|
|
|
147,377
|
|
|
|
157,205
|
|
Borrowings
|
|
|
15,250
|
|
|
|
46,450
|
|
|
|
79,450
|
|
|
|
93,500
|
|
|
|
94,250
|
|
Total net assets
|
|
|
19,591
|
|
|
|
32,573
|
|
|
|
48,481
|
|
|
|
52,005
|
|
|
|
62,348
|
|
-15-
FEES AND
EXPENSES
The following table is intended to assist you in understanding
the costs and expenses that an investor in our common stock will
bear directly or indirectly. We caution you that some of the
percentages indicated in the table below are estimates and may
vary. Except where the context suggests otherwise, whenever this
prospectus contains a reference to fees or expenses paid by
you, us, the Company or
Fidus Investment Corporation, or that we
will pay fees or expenses, stockholders will indirectly bear
such fees or expenses as investors in Fidus Investment
Corporation.
|
|
|
|
|
Stockholder transaction expenses:
|
|
|
|
|
Sales load (as a percentage of offering price)
|
|
|
7.0
|
%(1)
|
Offering expenses borne by us (as a percentage of offering price)
|
|
|
2.4
|
%(2)
|
Dividend reinvestment plan expenses
|
|
|
None
|
(3)
|
|
|
|
|
|
Total stockholder transaction expenses paid by us (as a
percentage of offering price)
|
|
|
9.4
|
%
|
|
|
|
|
|
Estimated annual expenses (as a percentage of net assets
attributable to common stock):
|
|
|
|
|
Base management fee
|
|
|
3.1
|
%(4)
|
Incentive fees payable under Investment Advisory Agreement
|
|
|
|
%(5)
|
Interest payments on borrowed funds
|
|
|
4.0
|
%(6)
|
Other expenses (estimated)
|
|
|
1.1
|
%(7)
|
|
|
|
|
|
Total annual expenses (estimated)
|
|
|
8.2
|
%(8)
|
|
|
|
|
|
|
|
|
(1) |
|
The underwriting discount and commission with respect to shares
of our common stock sold in this offering, which is a one-time
fee paid to the underwriters, is the only sales load paid in
connection with this offering. Pursuant to a directed share
program, the underwriters reserved up to 10.0% of the common
stock being offered in this offering for sale, directly or
indirectly, to our directors, members of our management, and to
certain other parties affiliated with us. See
Underwriting Directed Share Program. No
underwriting discount (sales load) will be paid on directed
shares sold to our directors and certain members of our
management. The underwriting discount (sales load) with respect
to shares sold to certain members of our management and other
parties affiliated with us will be $0.375 per share. |
|
|
|
(2) |
|
Amount reflects estimated offering expenses of approximately
$1,650,000. |
|
(3) |
|
The expenses of the dividend reinvestment plan are included in
other expenses. See Dividend Reinvestment
Plan. |
|
(4) |
|
Our base management fee will be 1.75% of the average value of
our total assets (other than cash and cash equivalents but
including assets purchased with borrowed amounts). For the
purposes of this table, we have assumed that we maintain no cash
or cash equivalents and that the base management fee will remain
at 1.75% as set forth in the Investment Advisory Agreement. We
may from time to time decide it is appropriate to change the
terms of the Investment Advisory Agreement. Under the 1940 Act,
any material change to our Investment Advisory Agreement must be
submitted to stockholders for approval. The 3.1% reflected in
the table is calculated on our net assets (rather than our total
assets). See Management and Other Agreements
Investment Advisory Agreement. |
|
(5) |
|
We may have capital gains and interest income that could result
in the payment of an incentive fee to our investment advisor in
the first year after the completion of this offering. However,
the incentive fee payable to our investment advisor is based on
our performance and will not be paid unless we achieve certain
goals. As we cannot predict whether we will meet the necessary
performance targets, we have assumed an incentive fee of 0.0% in
this chart. |
|
|
|
The incentive fee consists of two parts: |
-16-
|
|
|
|
|
The first, payable quarterly in arrears, equals 20.0% of our
pre-incentive fee net investment income (including interest that
is accrued but not yet received in cash), subject to a 2.0%
quarterly (8.0% annualized) hurdle rate and a
catch-up
provision measured as of the end of each calendar quarter. Under
this provision, in any calendar quarter, our investment advisor
receives no incentive fee until our pre-incentive fee net
investment income equals the hurdle rate of 2.0% but then
receives, as a
catch-up,
100.0% of our pre-incentive fee net investment income with
respect to that portion of such pre-incentive fee net investment
income, if any, that exceeds the hurdle rate but is less than
2.5%. The effect of this provision is that, if pre-incentive fee
net investment income exceeds 2.5% in any calendar quarter, our
investment advisor will receive 20.0% of our pre-incentive fee
net investment income as if a hurdle rate did not apply. |
|
|
|
The second part, payable annually in arrears, equals 20.0% of
our realized capital gains on a cumulative basis from inception
through the end of the fiscal year, if any (or upon the
termination of the Investment Advisory Agreement, as of the
termination date), computed net of all realized capital losses
and unrealized capital depreciation on a cumulative basis, less
the aggregate amount of any previously paid capital gain
incentive fees. We will accrue, but not pay, a capital gains
incentive fee in connection with any net unrealized
appreciation, as appropriate. |
|
|
|
See Management and Other Agreements Investment
Advisory Agreement. |
|
(6) |
|
Interest payments on borrowed funds include interest payments on
the $93.5 million of outstanding SBA debentures of Fidus
Mezzanine Capital, L.P. as of March 31, 2011, which will be
our wholly-owned subsidiary upon the consummation of the
formation transactions and this offering. We have not directly
issued any indebtedness. |
|
(7) |
|
Includes our overhead expenses, including expenses directly
incurred by Fidus Mezzanine Capital, L.P., which will be our
wholly-owned subsidiary upon the consummation of the formation
transactions and this offering payments under the Administration
Agreement based on our allocable portion of overhead and other
expenses incurred by our investment advisor. See
Management and Other Agreements Administration
Agreement. Other expenses are based on
estimated amounts for the current fiscal year. |
|
|
|
(8) |
|
Total annual expenses as a percentage of
consolidated net assets attributable to common stock are higher
than the total annual expenses percentage would be for a company
that is not leveraged. We intend to borrow money to leverage our
net assets and increase our total assets. The SEC requires that
the total annual expenses percentage be calculated
as a percentage of net assets (defined as total assets less
indebtedness and before taking into account any incentive fees
payable during the period), rather than the total assets,
including assets that have been purchased with borrowed amounts.
If the total annual expenses percentage were
calculated instead as a percentage of consolidated total assets,
our total annual expenses would be 4.6% of
consolidated total assets. |
Example
The following example demonstrates the projected dollar amount
of total cumulative expenses over various periods with respect
to a hypothetical investment in our common stock. In calculating
the following expense amounts, we have assumed we would have no
additional leverage, that none of our assets are cash or cash
equivalents and that our annual operating expenses would remain
at the levels set forth in the table above. Transaction expenses
are not included in the following example.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
You would pay the following expenses on a $1,000 investment,
assuming a 5.0% annual return
|
|
$
|
177.6
|
|
|
$
|
337.2
|
|
|
$
|
486.1
|
|
|
$
|
816.3
|
|
The foregoing table is to assist you in understanding the
various costs and expenses that an investor in our common stock
will bear directly or indirectly. While the example assumes, as
required by the SEC, a 5.0% annual return, our performance will
vary and may result in a return greater or less than 5.0%. The
incentive fee under the Investment Advisory Agreement, which,
assuming a 5.0% annual return, would either not be payable or
have an insignificant impact on the expense amounts shown above,
is not included in the example. If we achieve sufficient returns
on our investments, including through the realization of capital
gains,
-17-
to trigger an incentive fee of a material amount, our expenses,
and returns to our investors, would be higher. In addition,
while the example assumes reinvestment of all dividends and
distributions at net asset value, if our board of directors
authorizes and we declare a cash dividend, participants in our
dividend reinvestment plan who have not otherwise elected to
receive cash will receive a number of shares of our common
stock, determined by dividing the total dollar amount of the
dividend payable to a participant by the market price per share
of our common stock at the close of trading on the valuation
date for the dividend. See Dividend Reinvestment
Plan for additional information regarding our dividend
reinvestment plan.
This example and the expenses in the table above should not
be considered a representation of our future expenses, and
actual expenses (including the cost of debt, if any, and other
expenses) may be greater or less than those shown.
-18-
RISK
FACTORS
Investing in our common stock involves a number of
significant risks. Before you invest in our common stock, you
should be aware of various risks associated with the investment,
including those described below. You should carefully consider
these risk factors, together with all of the other information
included in this prospectus, before you decide whether to make
an investment in our common stock. The risks set out below are
not the only risks we face. Additional risks and uncertainties
not presently known to us or not presently deemed material by us
may also impair our operations and performance. If any of the
following events occur, our business, financial condition and
results of operations could be materially and adversely
affected. In such case, our net asset value and the trading
price of our common stock could decline, and you may lose all or
part of your investment.
Risks
Relating to Our Business and Structure
We
have never operated as a business development company or
qualified to be treated as a RIC, and our investment advisor has
never managed a business development company or a RIC, and we
may not be able to operate our business successfully or generate
sufficient revenue to make or sustain distributions to our
stockholders.
Fidus Mezzanine Capital, L.P. commenced operations and obtained
a license to operate as an SBIC in 2007. Prior to this offering
we will have never operated as a business development company or
qualified to be treated as a RIC, and our investment advisor
will have never managed any business development company. In
addition, we have never operated an SBIC as a business
development company. As a result, we have no operating results
under these regulatory frameworks that can demonstrate to you
either their effect on our business or our ability to manage our
business under these frameworks. We will be subject to the
business risks and uncertainties associated with new entities of
these types, including the risk that we will not achieve our
investment objective, or that we will not qualify or maintain
our qualification to be treated as a RIC, and that the value of
your investment could decline substantially.
The 1940 Act and the Code impose numerous constraints on the
operations of business development companies and RICs. Business
development companies are required, for example, to invest at
least 70.0% of their total assets in qualifying assets, which
generally include securities of U.S. private or thinly
traded public companies, cash, cash equivalents,
U.S. government securities and other high-quality debt
instruments that mature in one year or less from the date of
investment. Any failure to comply with the requirements imposed
on business development companies by the 1940 Act could cause
the SEC to bring an enforcement action against us
and/or
expose us to claims of private litigants. Moreover,
qualification for treatment as a RIC requires satisfaction of
source-of-income, asset diversification and distribution
requirements. Neither we nor our investment advisor has any
experience operating under these constraints. These constraints
may hinder our ability to take advantage of attractive
investment opportunities and to achieve our investment objective.
We
will be dependent upon our investment advisors managing
members and our executive officers for our future success. If
our investment advisor were to lose any of its managing members
or we lose any of our executive officers, our ability to achieve
our investment objective could be significantly
harmed.
We depend on the investment expertise, skill and network of
business contacts of the managing members of our investment
advisor, who evaluate, negotiate, structure, execute and monitor
our investments. We also depend upon the expertise of our
executive officers. Our future success will depend to a
significant extent on the continued service and coordination of
the investment professionals of our investment advisor and
executive officers, particularly Edward H. Ross; John J.
Ross, II; B. Bragg Comer, III; Thomas C. Lauer; W.
Andrew Worth; and Cary L. Schaefer. Although Messrs. E.
Ross, Comer, Lauer and Worth and Ms. Schaefer intend to
devote all of their business time to our operations, they may
have other demands on their time in the future. Mr. J. Ross
will not devote all of his business time to our operations and
will have other demands on his time as a result of other
activities. The departure of any of these individuals could have
a material adverse effect on our ability to achieve our
investment objective.
-19-
Our
business model depends to a significant extent upon strong
referral relationships with financial institutions, sponsors and
investment professionals. Any inability of our investment
advisor to maintain or develop these relationships, or the
failure of these relationships to generate investment
opportunities, could adversely affect our
business.
We depend upon the investment professionals of our investment
advisor to maintain their relationships with financial
institutions, sponsors and investment professionals, and we
intend to rely to a significant extent upon these relationships
to provide us with potential investment opportunities. If the
investment professionals of our investment advisor fail to
maintain such relationships, or to develop new relationships
with other sources of investment opportunities, we will not be
able to grow our investment portfolio. In addition, individuals
with whom the investment professionals of our investment advisor
have relationships are not obligated to provide us with
investment opportunities, and, therefore, we can offer no
assurance that these relationships will generate investment
opportunities for us in the future.
Our
financial condition and results of operation depends on our
ability to manage our business effectively.
Our ability to achieve our investment objective and grow depends
on our ability to manage our business and deploy our capital
effectively. This depends, in turn, on our investment
advisors ability to identify, evaluate and monitor
companies that meet our investment criteria. The achievement of
our investment objectives on a cost-effective basis depends upon
our investment advisors execution of our investment
process, its ability to provide competent, attentive and
efficient services to us and, to a lesser extent, our access to
financing on acceptable terms. Our investment advisor will have
substantial responsibilities under the Investment Advisory
Agreement. In addition, our investment advisors investment
professionals may be called upon to provide managerial
assistance to our portfolio companies. These activities may
distract them or slow our rate of investment. Any failure to
manage our business and our future growth effectively could have
a material adverse effect on our business, financial condition
and results of operations.
Even if we are able to grow and build upon our investment
operations in a manner commensurate with the increased capital
available to us as a result of this offering, any failure to
manage our growth effectively could have a material adverse
effect on our business, financial condition, results of
operations and prospects. Our results of operations depend on
many factors, including the availability of opportunities for
investment, readily accessible short and long-term funding
alternatives in the financial markets and economic conditions.
Furthermore, if we cannot successfully operate our business or
implement our investment policies and strategies, it could
negatively impact our ability to pay dividends and cause you to
lose all or part of your investment.
Because
we borrow money, the potential for gain or loss on amounts
invested in us is magnified and may increase the risk of
investing in us.
Borrowings, also known as leverage, magnify the potential for
gain or loss on amounts invested and, therefore, increase the
risks associated with investing in us. Fidus Mezzanine Capital,
L.P. borrows from and issues debt securities to the SBA, and we
may borrow from banks and other lenders in the future. The SBA
has fixed dollar claims on Fidus Mezzanine Capital, L.P.s
assets that are superior to the claims of our stockholders. If
the value of Fidus Mezzanine Capital, L.P.s assets
increases, then leveraging would cause the net asset value
attributable to our common stock to increase more sharply than
it would have had we not used leverage. Conversely, if the value
of Fidus Mezzanine Capital, L.P.s assets decreases,
leveraging would cause net asset value to decline more sharply
than it otherwise would have had we not leveraged. Similarly,
any increase in our income in excess of interest payable on the
borrowed funds would cause our net income to increase more than
it would without the leverage, while any decrease in our income
would cause net income to decline more sharply than it would
have had we not borrowed. Such a decline could negatively affect
our ability to make common stock dividend payments. Leverage is
generally considered a speculative investment technique.
-20-
Our ability to achieve our investment objectives may depend in
part on our ability to achieve additional leverage on favorable
terms by borrowing from the SBA, banks or other lenders, and
there can be no assurance that such additional leverage can in
fact be achieved.
The following table illustrates the effect of leverage on
returns from an investment in our common stock assuming various
annual returns, net of expenses. The calculations in the table
below are hypothetical and actual returns may be higher or lower
than those appearing in the table below.
Assumed
Return on Our Portfolio
(Net of Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.0)%
|
|
(5.0)%
|
|
0.0%
|
|
5.0%
|
|
10.0%
|
|
Corresponding return to common
stockholder(1)
|
|
|
(33.3
|
)%
|
|
|
(20.7
|
)%
|
|
|
(8.1
|
)%
|
|
|
4.5
|
%
|
|
|
17.1
|
%
|
|
|
|
(1) |
|
Assumes $157.2 million in total assets, $93.5 million
in outstanding SBA debentures and $62.3 million in net
assets as of March 31, 2011 and an average cost of funds of
5.4%. |
Many
of our portfolio investments will be recorded at fair value as
determined in good faith by our board of directors, and, as a
result, there may be uncertainty as to the value of our
portfolio investments.
We expect that many of our portfolio investments will take the
form of debt and equity securities that are not publicly-traded.
The debt and equity securities in which we invest for which
market quotations are not readily available will be valued at
fair value as determined in good faith by our board of
directors. As part of the valuation process, we may take into
account the following types of factors, if relevant, in
determining the fair value of our investments:
|
|
|
|
|
a comparison of the portfolio companys securities to
publicly-traded securities;
|
|
|
|
the enterprise value of a portfolio company;
|
|
|
|
the nature and realizable value of any collateral;
|
|
|
|
the portfolio companys ability to make payments and its
earnings and discounted cash flow;
|
|
|
|
the markets in which the portfolio company does
business; and
|
|
|
|
changes in the interest rate environment and the credit markets
generally that may affect the price at which similar investments
may be made in the future and other relevant factors.
|
We will adjust quarterly the valuation of our portfolio to
reflect the determination of our board of directors of the fair
value of each investment in our portfolio. Any changes in fair
value are recorded in our statement of operations as net change
in unrealized appreciation or depreciation.
Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value,
the fair value of our investments may differ significantly from
the values that would have been used had a readily available
market value existed for such investments, and the differences
could be material. Declines in prices and liquidity in the
corporate debt markets may also result in significant net
unrealized depreciation in our debt portfolio. Our net asset
value could be adversely affected if our determinations
regarding the fair value of our investments were materially
higher than the values that we ultimately realize upon the
disposal of such investments.
We
operate in a highly competitive market for investment
opportunities, which could reduce returns and result in
losses.
A number of entities compete with us to make the types of
investments that we plan to make. We will compete with public
and private funds, commercial and investment banks, commercial
financing companies and, to the extent they provide an
alternative form of financing, private equity and hedge funds.
Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing
resources than we do. For example, we believe some of our
competitors may have access to funding sources that are not
-21-
available to us. In addition, some of our competitors may have
higher risk tolerances or different risk assessments. These
characteristics could allow our competitors to consider a wider
variety of investments, establish more relationships and offer
better pricing and more flexible structuring than we offer. We
may lose investment opportunities if we do not match our
competitors pricing, terms and structure. If we match our
competitors pricing, terms and structure, we may
experience a decrease in net investment income or an increase in
risk of capital loss. A significant part of our competitive
advantage stems from the fact that the lower middle-market is
underserved by traditional commercial and investment banks, and
generally has less access to capital. A significant increase in
the number
and/or the
size of our competitors in this target market could force us to
accept less attractive investment terms.
Furthermore, many of our competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company or the source of income, asset
diversification and distribution requirements we must satisfy to
maintain our RIC status. The competitive pressures we face may
have a material adverse effect on our business, financial
condition and results of operations. As a result of this
existing and potentially increasing competition, we may not be
able to take advantage of attractive investment opportunities
from time to time, and we may not be able to identify and make
investments that are consistent with our investment objective.
Our
incentive fee structure may create incentives for our investment
advisor that are not fully aligned with the interests of our
stockholders.
In the course of our investing activities, we will pay
management and incentive fees to our investment advisor. These
fees are based on our total assets (other than cash or cash
equivalents but including assets purchased with borrowed
amounts). As a result, investors in our common stock will invest
on a gross basis and receive distributions on a
net basis after expenses, resulting in a lower rate
of return than one might achieve through direct investments.
Because these fees are based on our total assets (other than
cash or cash equivalents but including assets purchased with
borrowed amounts), our investment advisor will benefit when we
incur debt or use leverage. This fee structure may encourage our
investment advisor to cause us to borrow money to finance
additional investments. Under certain circumstances, the use of
borrowed money may increase the likelihood of default, which
would disfavor our stockholders. Our board of directors is
charged with protecting our interests by monitoring how our
investment advisor addresses these and other conflicts of
interests associated with its management services and
compensation. While our board of directors is not expected to
review or approve each borrowing or incurrence of leverage, our
independent directors will periodically review our investment
advisors services and fees as well as its portfolio
management decisions and portfolio performance. In connection
with these reviews, our independent directors will consider
whether our fees and expenses (including those related to
leverage) remain appropriate. As a result of this arrangement,
our investment advisor may from time to time have interests that
differ from those of our stockholders, giving rise to a conflict.
The part of the incentive fee payable to our investment advisor
that relates to our net investment income will be computed and
paid on income that may include interest income that has been
accrued but not yet received in cash. This fee structure may be
considered to involve a conflict of interest for our investment
advisor to the extent that it may encourage our investment
advisor to favor debt financings that provide for deferred
interest, rather than current cash payments of interest. Our
investment advisor may have an incentive to invest in deferred
interest securities in circumstances where it would not have
done so but for the opportunity to continue to earn the
incentive fee even when the issuers of the deferred interest
securities would not be able to make actual cash payments to us
on such securities. This risk could be increased because our
investment advisor is not obligated to reimburse us for any
incentive fees received even if we subsequently incur losses or
never receive in cash the deferred income that was previously
accrued.
The
valuation process for certain of our portfolio holdings creates
a conflict of interest.
A substantial portion of our portfolio investments are expected
to be made in the form of securities that are not publicly
traded. As a result, our board of directors will determine the
fair value of these securities in good faith pursuant to our
valuation policy. In connection with that determination,
investment professionals
-22-
from our investment advisor prepare portfolio company valuations
based upon the most recent portfolio company financial
statements available and projected financial results of each
portfolio company. In addition, certain members of our board of
directors, including Messrs. E. Ross and Lauer, have a
pecuniary interest in our investment advisor. The participation
of our investment advisors investment professionals in our
valuation process, and the pecuniary interest in our investment
advisor by certain members of our board of directors, would
result in a conflict of interest as the management fee that we
will pay our investment advisor is based on our gross assets.
Our
incentive fee may induce our investment advisor to make
speculative investments.
Our investment advisor will receive an incentive fee based, in
part, upon net capital gains realized on our investments. Unlike
that portion of the incentive fee based on income, there is no
hurdle rate applicable to the portion of the incentive fee based
on net capital gains. As a result, our investment advisor may
have a tendency to invest more capital in investments that are
likely to result in capital gains as compared to income
producing securities. Such a practice could result in our
investing in more speculative securities than would otherwise be
the case, which could result in higher investment losses,
particularly during economic downturns.
We may
be obligated to pay our investment advisor incentive
compensation even if we incur a loss and may pay more than 20.0%
of our net capital gains because we cannot recover payments made
in previous years.
Our investment advisor will be entitled to incentive
compensation for each fiscal quarter in an amount equal to a
percentage of the excess of our net investment income for that
quarter above a threshold return for that quarter. Our
pre-incentive fee net investment income for incentive
compensation purposes excludes realized and unrealized capital
losses that we may incur in the fiscal quarter, even if such
capital losses result in a net loss on our statement of
operations for that quarter. Thus, we may be required to pay our
investment advisor incentive compensation for a fiscal quarter
even if there is a decline in the value of our portfolio or we
incur a net loss for that quarter. Further, if we pay an
incentive fee of 20.0% of our realized capital gains (net of all
realized capital losses and unrealized capital depreciation on a
cumulative basis) and thereafter experience additional realized
capital losses or unrealized capital depreciation, we will not
be able to recover any portion of the incentive fee previously
paid.
We may
have potential conflicts of interest related to obligations that
our investment advisor may have to other clients.
Although our investment advisor currently contemplates that we
will be the only investment vehicle managed by it, we may in the
future have conflicts of interest with our investment advisor or
its respective other clients that elect to invest in similar
types of securities as we will invest. Our investment
advisors investment committee serves or may serve as
officers, directors or principals of entities that operate in
the same or a related line of business as we do, or of
investment funds or other investment vehicles managed by our
investment advisor. In serving in these multiple capacities,
they may have obligations to other clients or investors in those
entities, the fulfillment of which may not be in the best
interests of us or our stockholders. Our investment advisor will
seek to allocate investment opportunities among eligible
accounts in a manner that is fair and equitable over time and
consistent with an allocation policy approved by our board of
directors.
Our
investment advisor or its investment committee may, from time to
time, possess material non-public information, limiting our
investment discretion.
The investment professionals of our investment advisor may serve
as directors of, or in a similar capacity with, companies in
which we invest, the securities of which are purchased or sold
on our behalf. In the event that material non-public information
is obtained with respect to such companies, or we become subject
to trading restrictions under the internal trading policies of
those companies or as a result of applicable law or regulations,
we could be prohibited for a period of time from purchasing or
selling the securities of such companies, and this prohibition
may have an adverse effect on us.
-23-
We may
have conflicts related to other arrangements with our investment
advisor.
We intend to enter into a license agreement with Fidus Partners,
LLC, an affiliate of our investment advisor, under which Fidus
Partners, LLC will grant us a non-exclusive (provided that there
is not a change in control of Fidus Partners, LLC), royalty-free
license to use the name Fidus, See Management
and Other Agreements License Agreement. In
addition, we will rent office space from our investment advisor
and pay to our investment advisor our allocable portion of
overhead and other expenses incurred in performing its
obligations under the Administration Agreement, such as our
allocable portion of the cost of our chief financial officer and
chief compliance officer. This will create conflicts of interest
that our board of directors must monitor.
The
Investment Advisory Agreement and the Administration Agreement
with our investment advisor were not negotiated on an arms
length basis and may not be as favorable to us as if they had
been negotiated with an unaffiliated third party.
The Investment Advisory Agreement and the Administration
Agreement were negotiated between related parties. Consequently,
their terms, including fees payable to our investment advisor,
may not be as favorable to us as if they had been negotiated
with an unaffiliated third party. In addition, we may choose not
to enforce, or to enforce less vigorously, our rights and
remedies under these agreements because of our desire to
maintain our ongoing relationship with our investment advisor.
Our
wholly-owned subsidiary, Fidus Mezzanine Capital, L.P., is
licensed by the SBA, and therefore, subject to SBA
regulations.
Our wholly-owned subsidiary, Fidus Mezzanine Capital, L.P., is
licensed to operate as an SBIC and is regulated by the SBA.
Under current SBA regulations, a licensed SBIC can provide
capital to those entities that have a tangible net worth not
exceeding $18.0 million and an average annual net income
after U.S. federal income taxes not exceeding
$6.0 million for the two most recent fiscal years. In
addition, a licensed SBIC must devote 25.0% of its investment
activity to those entities that have a tangible net worth not
exceeding $6.0 million and an average annual net income
after U.S. federal income taxes not exceeding
$2.0 million for the two most recent fiscal years. The SBA
regulations also provide alternative size standard criteria to
determine eligibility, which depend on the industry in which the
business is engaged and are based on either the number of
employees or the gross sales. The SBA regulations permit
licensed SBICs to make long term loans to small businesses,
invest in the equity securities of such businesses and provide
them with consulting and advisory services. The SBA also places
certain limitations on the financing terms of investments by
SBICs in portfolio companies and prohibits SBICs from providing
funds for certain purposes or to businesses in certain
prohibited industries. Further, the SBA regulations require that
a licensed SBIC be periodically examined and audited by the SBA
staff to determine its compliance with the relevant SBA
regulations. Compliance with these SBA requirements may cause
Fidus Mezzanine Capital, L.P. to forego attractive investment
opportunities that are not permitted under the SBA regulations,
and may cause Fidus Mezzanine Capital, L.P. to make investments
it otherwise would not make in order to remain in compliance
with these regulations.
Failure to comply with the SBA regulations could result in the
loss of the SBIC license and the resulting inability to
participate in the SBA debenture program. The SBA prohibits,
without prior SBA approval, a change of control of
an SBIC or transfers that would result in any person (or a group
of persons acting in concert) owning 10.0% or more of a class of
capital stock of a licensed SBIC. Current SBA regulations
provide the SBA with certain rights and remedies if an SBIC
violates their terms. A key regulatory metric for SBA is the
extent of Capital Impairment, which is the extent of
realized (and, in certain circumstances, net unrealized) losses
compared with the SBICs private capital commitments.
Interest payments, management fees, organization and other
expenses are included in determining realized
losses. SBA regulations preclude the full amount of
unrealized appreciation from portfolio companies
from being considered when calculating Capital Impairment in
certain circumstances. Remedies for regulatory violations are
graduated in severity depending on the seriousness of Capital
Impairment or other regulatory violations. For minor regulatory
infractions, the SBA issues a warning. For more serious
infractions, the use of SBA debentures may be limited
-24-
or prohibited, outstanding debentures can be declared to be
immediately due and payable, restrictions on distributions and
making new investments may be imposed and management fees may be
required to be reduced. In severe cases, the SBA may require the
removal of a general partner of an SBIC or its officers,
directors, managers or partners, or the SBA may obtain
appointment of a receiver for the SBIC.
SBA
regulations limit the amount that may be borrowed from the SBA
by an SBIC.
The SBA regulations currently limit the amount that is available
to be borrowed by any SBIC and guaranteed by the SBA to 300.0%
of an SBICs regulatory capital or $150.0 million,
whichever is less. For two or more SBICs under common control,
the maximum amount of outstanding SBA debentures cannot exceed
$225.0 million. As of March 31, 2011, Fidus Mezzanine
Capital, L.P. had $93.5 million of SBA debentures. With
$75.9 million of regulatory capital as of March 31,
2011, Fidus Mezzanine Capital, L.P. has the current capacity to
issue up to a total of $150.0 million of SBA debentures. If
Fidus Mezzanine Capital, L.P. borrows the maximum amount from
the SBA and thereafter requires additional capital, our cost of
capital may increase, and there is no assurance that we will be
able to obtain additional financing on acceptable terms.
Moreover, Fidus Mezzanine Capital, L.P.s current status as
an SBIC does not automatically assure that it will continue to
receive SBA debenture funding. Receipt of SBA debenture funding
is dependent upon Fidus Mezzanine Capital, L.P. continuing to be
in compliance with SBA regulations and policies and there being
funding available. The amount of SBA debenture funding available
to SBICs is dependent upon annual Congressional authorizations
and in the future may be subject to annual Congressional
appropriations. There can be no assurance that there will be
sufficient SBA debenture funding available at the times desired
by Fidus Mezzanine Capital, L.P.
The debentures issued by Fidus Mezzanine Capital, L.P. to the
SBA have a maturity of ten years and bear interest semi-annually
at fixed rates. Fidus Mezzanine Capital, L.P. will need to
generate sufficient cash flow to make required debt payments to
the SBA. If Fidus Mezzanine Capital, L.P. is unable to generate
such cash flow, the SBA, as a debt holder, will have a superior
claim to our assets over our stockholders in the event it
liquidates or the SBA exercises its remedies under such
debentures as the result of a default by Fidus Mezzanine
Capital, L.P.
Fidus
Mezzanine Capital, L.P., as an SBIC, will be limited in its
ability to make distributions to us, which could result in us
being unable to meet the minimum distribution requirements to
qualify as a RIC.
In order to qualify as a RIC, we will be required to distribute
on an annual basis 90.0% of our taxable income. For this
purpose, our taxable income will include the income of Fidus
Mezzanine Capital, L.P. (and possibly other subsidiaries, if
any). Fidus Mezzanine Capital, L.P.s ability to make
distributions to us may be limited by the Small Business
Investment Act of 1958. As a result, in order to qualify and
maintain our status as a RIC, we may be required to make
distributions attributable to Fidus Mezzanine Capital,
L.P.s income without receiving cash distributions from it
with respect to such income. We can make no assurances that
Fidus Mezzanine Capital, L.P. will be able to make, or not be
limited in making, distributions to us. If we are unable to
satisfy the minimum annual distribution requirements, we may
fail to qualify or maintain our RIC status, which would result
in the imposition of corporate-level U.S. federal
income tax on our entire taxable income without regard to any
distributions made by us. We intend to retain a portion of the
net proceeds of this offering to make cash distributions to
enable us to meet the RIC distribution requirements. See
We will be subject to
corporate-level U.S. federal income tax if we are
unable to qualify or maintain our qualification as a RIC under
Subchapter M of the Code.
Changes
in interest rates will affect our cost of capital and net
investment income.
Most of our debt investments will bear interest at fixed rates
and the value of these investments could be negatively affected
by increases in market interest rates. In addition, to the
extent that we borrow additional funds to make investments, an
increase in interest rates would make it more expensive for us
to use debt to finance our investments. As a result, a
significant increase in market interest rates could both reduce
the value
-25-
of our portfolio investments and increase our cost of capital,
which would reduce our net investment income. Conversely, a
decrease in interest rates may have an adverse impact on our
returns by requiring us to seek lower yields on our debt
investments and by increasing the risk that our portfolio
companies will prepay the debt investments, resulting in the
need to redeploy capital at potentially lower rates.
You should also be aware that a rise in market interest rates
typically leads to higher interest rates applicable to our debt
investments. Accordingly, an increase in interest rates may
result in an increase of the amount of incentive fees payable to
our investment advisor.
An
extended continuation of the disruption in the capital markets
and the credit markets could negatively affect our
business.
As a business development company, it will be essential for us
to maintain our ability to raise additional capital for
investment purposes. Without sufficient access to the capital
markets or credit markets, we may be forced to curtail our
business operations or we may not be able to pursue new business
opportunities. Since the middle of 2007, the capital markets and
the credit markets have been experiencing extreme volatility and
disruption and, accordingly, there has been and will continue to
be uncertainty in the financial markets in general. Ongoing
disruptive conditions in the financial industry and the impact
of new legislation in response to those conditions could
restrict our business operations and could adversely impact our
results of operations and financial condition.
Once we have fully invested the net proceeds of this offering,
we will access the capital markets periodically to issue debt or
equity securities or borrow from financial institutions in order
to obtain such additional capital. Unfavorable economic
conditions could increase our funding costs, limit our access to
the capital markets or result in a decision by lenders not to
extend credit to us. A reduction in the availability of new
capital could limit our ability to pursue new business
opportunities and grow our business. In addition, we will be
required to distribute at least 90.0% of our net ordinary income
and net short-term capital gains in excess of net long-term
capital losses, if any, to our stockholders to qualify for the
tax benefits available to RICs. As a result, these earnings will
not be available to fund new investments. An inability to access
the capital markets successfully could limit our ability to grow
our business and execute our business strategy fully and could
decrease our earnings, if any, which may have an adverse effect
on the value of our securities.
We may
experience fluctuations in our quarterly operating
results.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including our ability or
inability to make investments in companies that meet our
investment criteria, the interest rate payable on the debt
securities we acquire, the default rate on such securities, the
level of our expenses, variations in and the timing of the
recognition of realized and unrealized gains or losses, the
degree to which we encounter competition in our markets and
general economic conditions. As a result of these factors,
results for any period should not be relied upon as being
indicative of performance in future periods.
We
will be subject to corporate-level U.S. federal income tax
if we are unable to qualify or maintain qualification as a RIC
under Subchapter M of the Code.
We intend to elect to be treated as a RIC under Subchapter M of
the Code commencing with our taxable year ending
December 31, 2011; however, no assurance can be given that
we will be able to qualify for and maintain RIC status. To
qualify as a RIC under the Code and to be relieved of liability
for U.S. federal income taxes on income and gains
distributed to our stockholders, we must meet certain
requirements, including source-of-income, asset diversification
and annual distribution requirements. The source-of-income
requirement will be satisfied if we obtain at least 90.0% of our
income for each year from dividends, interest, gains from sale
of securities or similar sources. To qualify and maintain our
status as a RIC, we must also meet certain asset diversification
requirements at the end of each calendar quarter. Failure to
meet these tests may result in our having to dispose of certain
investments quickly in order to prevent the loss of RIC status.
Because most of our investments will be in private or thinly
traded public companies, any such dispositions could be made at
disadvantageous prices and may result in substantial losses. The
annual distribution
-26-
requirement applicable to RICs is satisfied if we distribute at
least 90.0% of our net ordinary income and net short-term
capital gains in excess of net long-term capital losses, if any,
to our stockholders on an annual basis. In addition, we will be
subject to a 4.0% nondeductible federal excise tax to the extent
that we do not satisfy certain additional minimum distribution
requirements on a calendar-year basis. We will be subject, to
the extent we use debt financing, to certain asset coverage
ratio requirements under the 1940 Act and financial covenants
under loan and credit agreements that could, under certain
circumstances, restrict us from making annual distributions
necessary to qualify as a RIC. If we are unable to obtain cash
from other sources, we may fail to qualify and maintain our
qualification for the tax benefits available to RICs and, thus,
may be subject to U.S. federal corporate-level income tax
on our entire taxable income without regard to any distributions
made by us. If we fail to qualify as a RIC for any reason and
become subject to corporate-level income tax, the resulting tax
liability could substantially reduce our net assets, the amount
of income available for distributions to stockholders and the
amount of our distributions and the amount of funds available
for new investments. Such a failure would have a material
adverse effect on us and our stockholders. See Material
U.S. Federal Income Tax Considerations Taxation
as a RIC.
You
may not receive distributions, or our distributions may not grow
over time.
We intend to make distributions on a quarterly basis to our
stockholders out of assets legally available for distribution.
We cannot assure you that we will achieve investment results
that will allow us to make a specified level of cash
distributions or year-to-year increases in cash distributions.
Our ability to pay distributions might be adversely affected by
the impact of one or more of the risk factors described in this
prospectus. Due to the asset coverage test applicable to us
under the 1940 Act as a business development company, we may be
limited in our ability to make distributions. All distributions
will be made at the discretion of our board of directors and
will depend on our earnings, financial condition, maintenance of
RIC status, compliance with applicable business development
company, SBA regulations and such other factors as our board of
directors may deem relative from time to time. We cannot assure
you that we will make distributions to our stockholders in the
future.
We may
have difficulty paying our required distributions if we
recognize income before, or without, receiving cash representing
such income.
For U.S. federal income tax purposes, we will include in
income certain amounts that we have not yet received in cash,
such as original issue discount, which may arise if we receive
warrants in connection with the making of a loan or in other
circumstances, or through contracted
payment-in-kind
interest, which represents contractual interest added to the
loan balance and due at the end of the loan term. Such original
issue discount, or increases in loan balances as a result of
contracted
payment-in-kind
arrangements, will be included in income before we receive any
corresponding cash payments. We also may be required to include
in income certain other amounts that we will not receive in cash.
Since in certain cases we may recognize income before or without
receiving cash representing such income, we may have difficulty
meeting the requirement to distribute on an annual basis at
least 90.0% of our net ordinary income and net short-term
capital gains in excess of net long-term capital losses, if any,
to qualify for the tax benefits available to RICs. In such a
case, we may have to sell some of our investments at times
and/or at
prices we would not consider advantageous, raise additional debt
or equity capital or forgo new investment opportunities to meet
these distribution requirements. If we are not able to obtain
such cash from other sources, we may fail to qualify for the tax
benefits available to RICs and thus be subject to
corporate-level income tax. See Material U.S. Federal
Income Tax Considerations Taxation as a RIC.
If a portfolio company defaults on a loan that is structured to
provide accrued interest, it is possible that accrued interest
previously used in the calculation of the incentive fee will
become uncollectible. Our investment advisor will not be under
any obligation to reimburse us for any part of the incentive fee
it received that was based on accrued income that we never
receive as a result of a default by an entity on the obligation
that resulted in the accrual of such income. That part of the
incentive fee payable by us that relates to our net investment
income will be computed and paid on income that may include
interest that has been
-27-
accrued but not yet received in cash, such as market discount,
debt instruments with
payment-in-kind
interest, preferred stock with
payment-in-kind
dividends and zero coupon securities.
Because
we expect to distribute substantially all of our net investment
income and net realized capital gains to our stockholders, we
will need additional capital to finance our growth, and such
capital may not be available on favorable terms or at
all.
We intend to elect to be taxed for U.S. federal income tax
purposes as a RIC under Subchapter M of the Code. If we meet
certain requirements, including source-of-income, asset
diversification and distribution requirements, and if we
continue to be regulated as a business development company, we
will qualify to be a RIC under the Code and will not have to pay
corporate-level taxes on income we distribute to our
stockholders as dividends, allowing us to substantially reduce
or eliminate our corporate-level tax liability. As a business
development company, we are generally required to meet a
coverage ratio of total assets to total senior securities, which
includes all of our borrowings and any preferred stock we may
issue in the future, of at least 200.0% at the time we issue any
debt or preferred stock. This requirement limits the amount of
our leverage. Because we will continue to need capital to grow
our investment portfolio, this limitation may prevent us from
incurring debt or issuing preferred stock and require us to
raise additional equity at a time when it may be disadvantageous
to do so. We cannot assure you that debt and equity financing
will be available to us on favorable terms, or at all, and debt
financings may be restricted by the terms of any of our
outstanding borrowings. In addition, as a business development
company, we are generally not permitted to issue common stock
priced below net asset value without stockholder approval. If
additional funds are not available to us, we could be forced to
curtail or cease new investment activities, and our net asset
value could decline.
We may
choose to pay a portion of our dividends in our own stock, in
which case you may be required to pay tax in excess of the cash
you receive.
We may distribute taxable dividends that are payable in part in
our stock in order to satisfy the annual distribution
requirement applicable to RICs. Up to 90.0% of any such taxable
dividend paid on or before December 31, 2012, with respect
to a taxable year ending on or before December 31, 2011,
could be payable in our stock. Taxable stockholders receiving
such dividends will be required to include the full amount of
the dividend as ordinary income (or as long-term capital gain or
qualified dividend income to the extent such distribution is
properly reported as such) to the extent of our current and
accumulated earnings and profits for federal income tax
purposes. As a result, a U.S. stockholder may be required
to pay tax with respect to such dividends in excess of any cash
received. If a U.S. stockholder sells the stock it receives
as a dividend in order to pay this tax, the sales proceeds may
be less than the amount included in income with respect to the
dividend, depending on the market price of our stock at the time
of the sale. Furthermore, with respect to
non-U.S. stockholders,
we may be required to withhold U.S. federal tax with
respect to such dividends, including in respect of all or a
portion of such dividend that is payable in shares of our common
stock. In addition, if a significant number of our stockholders
determine to sell shares of our stock in order to pay taxes owed
on dividends, it may put downward pressure on the trading price
of shares of our common stock.
In addition, as discussed above, our loans may contain a
payment-in-kind
interest provision. The
payment-in-kind
interest, computed at the contractual rate specified in each
loan agreement, is added to the principal balance of the loan
and recorded as interest income. To avoid the imposition of
corporate-level tax, we will need to make sufficient
distributions, a portion of which may be paid in shares of our
common stock (as discussed in the preceding paragraph),
regardless of whether our recognition of income is accompanied
by a corresponding receipt of cash. Regulations governing our
operation as a business development company will affect our
ability to and the way in which we could raise additional
capital. As a business development company, we will need to
raise additional capital, which will expose us to risks,
including the typical risks associated with leverage.
-28-
Our
board of directors may change our investment objective,
operating policies and strategies without prior notice or
stockholder approval, the effects of which may be
adverse.
Our board of directors has the authority, except as otherwise
provided by the 1940 Act, to modify or waive certain of our
operating policies and strategies without prior notice and
without stockholder approval. Under Maryland law, we also cannot
be dissolved without prior stockholder approval except by
judicial action. In addition, upon approval of a majority of our
stockholders, we may elect to withdraw our status as a business
development company. If we, or Fidus Mezzanine Capital, L.P.,
decide to withdraw our election, or if we otherwise fail to
qualify, or maintain our qualification, as a business
development company, we may be subject to the substantially
greater regulation under the 1940 Act as a closed-end investment
company. Compliance with such regulations would significantly
decrease our operating flexibility, and could significantly
increase our costs of doing business. We cannot predict the
effect any changes to our current operating policies and
strategies would have on our business, operating results or the
value of our common stock. Nevertheless, any such changes could
adversely affect our business and impair our ability to make
distributions.
Any
failure on our part to maintain our status as a business
development company would reduce our operating
flexibility.
If we, or Fidus Mezzanine Capital, L.P., fail to qualify or
maintain our status as a business development company, we might
be regulated as a closed-end investment company under the 1940
Act, which would subject us to substantially more onerous
regulatory restrictions under the 1940 Act and correspondingly
decrease our operating flexibility.
Regulations
governing our operation as a business development company will
affect our ability to raise, and the way in which we raise,
additional capital which may have a negative effect on our
growth.
We may issue debt securities or preferred stock
and/or
borrow money from banks or other financial institutions, which
we refer to collectively as senior securities, up to
the maximum amount permitted by the 1940 Act. Under the
provisions of the 1940 Act, we will be permitted as a business
development company to issue senior securities in amounts such
that our asset coverage ratio, as defined in the 1940 Act,
equals at least 200.0% of gross assets less all liabilities and
indebtedness not represented by senior securities, after each
issuance of senior securities. If the value of our assets
declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments
and, depending on the nature of our leverage, repay a portion of
our indebtedness at a time when such sales may be
disadvantageous. In addition, issuance of securities could
dilute the percentage ownership of our current stockholders in
us.
No person or entity from which we borrow money will have a veto
power or a vote in approving or changing any of our fundamental
policies. If we issue preferred stock, the preferred stock would
rank senior to common stock in our capital
structure, preferred stockholders would have separate voting
rights on certain matters and might have other rights,
preferences or privileges more favorable than those of our
common stockholders, and the issuance of preferred stock could
have the effect of delaying, deferring or preventing a
transaction or a change of control that might involve a premium
price for holders of our common stock or otherwise be in your
best interest. Holders of our common stock will directly or
indirectly bear all of the costs associated with offering and
servicing any preferred stock that we issue. In addition, any
interests of preferred stockholders may not necessarily align
with the interests of holders of our common stock and the rights
of holders of shares of preferred stock to receive dividends
would be senior to those of holders of shares of our common
stock. In addition, if we raise additional funds by issuing
common stock or senior securities convertible into, or
exchangeable for, our common stock, then the percentage
ownership of our stockholders at that time will decrease, and
you might experience dilution.
We are not generally able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock, or warrants, options or rights to acquire our
common stock, at a price below the then-current net asset value
per share of our common stock if our board of directors,
including independent directors, determines that such sale is in
the best interests of us and our stockholders, and if our
-29-
stockholders approve such sale. In any such case, the price at
which our securities are to be issued and sold may not be less
than a price that, in the determination of our board of
directors, closely approximates the market value of such
securities (less any distributing commission or discount).
Changes
in laws or regulations governing our operations may adversely
affect our business or cause us to alter our business
strategy.
We will be subject to regulation at the local, state and federal
level. New legislation may be enacted or new interpretations,
rulings or regulations could be adopted, including those
governing the types of investments we are permitted to make, any
of which could harm us and, after the consummation of this
offering, our stockholders, potentially with retroactive effect.
In addition, any change to the SBAs current debenture
program could have a significant impact on our ability to obtain
low-cost leverage and, therefore, our competitive advantage over
other funds.
Additionally, any changes to the laws and regulations governing
our operations related to permitted investments may cause us to
alter our investment strategy in order to meet our investment
objectives. Such changes could result in material differences to
the strategies and plans set forth in this prospectus and may
shift our investment focus from the areas of expertise of our
investment advisor to other types of investments in which our
investment advisor may have little or no expertise or
experience. Any such changes, if they occur, could have a
material adverse effect on our results of operations and the
value of your investment.
We
have filed an application with the SEC requesting exemptive
relief from certain provisions of the 1940 Act and the
Securities Exchange Act of 1934, as amended (the Exchange
Act).
On March 15, 2011 we filed an application with the SEC
requesting an SEC order exempting us and Fidus Mezzanine
Capital, L.P. from certain provisions of the 1940 Act (including
an exemptive order granting relief from the asset coverage
requirements for certain indebtedness issued by Fidus Mezzanine
Capital, L.P. as an SBIC) and from certain reporting
requirements mandated by the Exchange Act. While the SEC has
granted exemptive relief in substantially similar circumstances
in the past, no assurance can be given that an exemptive order
will be granted. Delays and costs involved in obtaining
necessary approvals may make certain transactions impracticable
or impossible to consummate, and there is no assurance that the
application for exemptive relief will be granted by the SEC.
Our
investment advisor can resign on 60 days notice, and
we may not be able to find a suitable replacement within that
time, resulting in a disruption in our operations that could
adversely affect our financial condition, business and results
of operations.
Our investment advisor has the right, under the Investment
Advisory Agreement, to resign at any time upon not less than
60 days written notice, whether we have found a
replacement or not. If our investment advisor resigns, we may
not be able to find a new investment advisor or hire internal
management with similar expertise and ability to provide the
same or equivalent services on acceptable terms within
60 days, or at all. If we are unable to do so quickly, our
operations are likely to experience a disruption, our financial
condition, business and results of operations as well as our
ability to pay distributions are likely to be adversely affected
and the market price of our shares may decline. In addition,
investment activities are likely to suffer if we are unable to
identify and reach an agreement with a single institution or
group of executives having the expertise possessed by our
investment advisor and its affiliates. Even if we are able to
retain comparable management, whether internal or external, the
integration of such management and their lack of familiarity
with our investment objective may result in additional costs and
time delays that may adversely affect our financial condition,
business and results of operations.
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Our
investment advisor can resign from its role as our administrator
under the Administration Agreement, and we may not be able to
find a suitable replacement, resulting in a disruption in our
operations that could adversely affect our financial condition,
business and results of operations.
Our investment advisor has the right to resign under the
Administration Agreement, whether we have found a replacement or
not. If our investment advisor resigns, we may not be able to
find a new administrator or hire internal management with
similar expertise and ability to provide the same or equivalent
services on acceptable terms, or at all. If we are unable to do
so quickly, our operations are likely to experience a
disruption, our financial condition, business and results of
operations as well as our ability to pay distributions are
likely to be adversely affected and the market price of our
shares may decline. In addition, administrative activities are
likely to suffer if we are unable to identify and reach an
agreement with a service provider or individuals with the
expertise possessed by our investment advisor. Even if we are
able to retain a comparable service provider or individuals to
perform such services, whether internal or external, their
integration into our business and lack of familiarity with our
investment objective may result in additional costs and time
delays that may adversely affect our financial condition,
business and results of operations.
Efforts
to comply with the Sarbanes-Oxley Act will involve significant
expenditures, and non-compliance with the Sarbanes-Oxley Act may
adversely affect us and the market price of our common
stock.
As a publicly traded company, we will incur legal, accounting
and other expenses, including costs associated with the periodic
reporting requirements applicable to a company whose securities
are registered under the Exchange Act, as well as additional
corporate governance requirements, including requirements under
the Sarbanes-Oxley Act and other rules implemented by the SEC.
Upon completion of this offering, we will be subject to the
Sarbanes-Oxley Act, and the related rules and regulations
promulgated by the SEC. Under current SEC rules, beginning with
its fiscal year ending December 31, 2012, our management
will be required to report on its internal controls over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act and rules and regulations of the SEC
thereunder. We will then be required to review on an annual
basis its internal controls over financial reporting, and on a
quarterly and annual basis to evaluate and disclose changes in
our internal controls over financial reporting. As a result, we
expect to incur significant additional expenses in the near
term, which may negatively impact our financial performance and
our ability to make distributions. This process also will result
in a diversion of our managements time and attention. We
cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the
same on our operations and may not be able to ensure that the
process is effective or that the internal controls are or will
be effective in a timely manner. There can be no assurance that
we will successfully identify and resolve all issues required to
be disclosed prior to becoming a public company or that our
quarterly reviews will not identify additional material
weaknesses. In the event that we are unable to maintain or
achieve compliance with the Sarbanes-Oxley Act and related
rules, our value and results or operations may be adversely
affected.
We are
highly dependent on information systems and systems failures
could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our
ability to pay dividends.
Our business is highly dependent on the communications and
information systems of our investment advisor. Any failure or
interruption of such systems could cause delays or other
problems in our activities. This, in turn, could have a material
adverse effect on our operating results and negatively affect
the market price of our common stock and our ability to pay
dividends to our stockholders.
Risks
Related to Our Investments
Economic
recessions or downturns could impair our portfolio companies and
harm our operating results.
Many of our portfolio companies are susceptible to economic
slowdowns or recessions and may be unable to repay our loans
during these periods. Therefore, our non-performing assets are
likely to increase and the value of our portfolio is likely to
decrease during these periods. Adverse economic conditions may
-31-
decrease the value of collateral securing some of our loans and
the value of our equity investments. Economic slowdowns or
recessions could lead to financial losses in our portfolio and a
decrease in revenues, net income and assets. Unfavorable
economic conditions also could increase our funding costs, limit
our access to the capital markets or result in a decision by
lenders not to extend credit to us. These events could prevent
us from increasing our investments and harm our operating
results.
Our
investments in portfolio companies may be risky, and we could
lose all or part of our investment.
Investing in lower middle-market companies involves a number of
significant risks. Among other things, these companies:
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may have limited financial resources and may be unable to meet
their obligations under their debt instruments that we hold,
which may be accompanied by a deterioration in the value of any
collateral and a reduction in the likelihood of us realizing any
guarantees from subsidiaries or affiliates of portfolio
companies that we may have obtained in connection with our
investment;
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may have shorter operating histories, narrower product lines and
smaller market shares, which tend to render them more vulnerable
to competitors actions and market conditions, as well as
general economic downturns, than larger businesses;
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are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us;
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generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk
of obsolescence, and may require substantial additional capital
to support their operations, finance expansion or maintain their
competitive position; and
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generally have less publicly available information about their
businesses, operations and financial condition. If we are unable
to uncover all material information about these companies, we
may not make a fully informed investment decision, and may lose
all or part of our investment.
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In addition, in the course of providing significant managerial
assistance to certain portfolio companies, certain of our
management and directors may serve as directors on the boards of
such companies. To the extent that litigation arises out of
investments in these companies, our management and directors may
be named as defendants in such litigation, which could result in
an expenditure of funds (through our indemnification of such
officers and directors) and the diversion of management time and
resources.
The
lack of liquidity in our investments may adversely affect our
business.
All of our assets may be invested in illiquid securities, and a
substantial portion of our investments in leveraged companies
will be subject to legal and other restrictions on resale or
will otherwise be less liquid than more broadly traded public
securities. The illiquidity of these investments may make it
difficult for us to sell such investments when desired. In
addition, if we are required to liquidate all or a portion of
our portfolio quickly, we may realize significantly less than
the value at which we have previously recorded these
investments. As a result, we do not expect to achieve liquidity
in our investments in the near-term. However, to maintain the
election to be regulated as a business development company and
as a RIC that we intend to make, we may have to dispose of
investments if they do not satisfy one or more of the applicable
criteria under the respective regulatory frameworks. We may also
face other restrictions on our ability to liquidate an
investment in a portfolio company to the extent that we or our
investment advisor have material nonpublic information regarding
such portfolio company.
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We may
not have the funds to make additional investments in our
portfolio companies which could impair the value of our
portfolio.
After our initial investment in a portfolio company, we may be
called upon from time to time to provide additional funds to
such company or have the opportunity to increase our investment
through the exercise of a warrant to purchase common stock.
There is no assurance that we will make, or will have sufficient
funds to make, follow-on investments. Any decisions not to make
a follow-on investment or any inability on our part to make such
an investment may have a negative impact on a portfolio company
in need of such an investment, may result in a missed
opportunity for us to increase our participation in a successful
operation or may reduce the expected yield on the investment.
Even if we have sufficient capital to make a desired follow-on
investment, we may elect not to make a follow-on investment
because we may not want to increase our level of risk, because
we prefer other opportunities or because we are inhibited by
compliance with business development company requirements or the
desire to maintain our RIC status. Our ability to make follow-on
investments may also be limited by our investment advisors
allocation policy.
Portfolio
companies may incur debt that ranks equally with, or senior to,
our investments in such companies.
We will invest primarily in mezzanine debt as well as equity
issued by lower middle-market companies. The portfolio companies
may have, or may be permitted to incur, other debt that ranks
equally with, or senior to, the debt in which we invest. By
their terms, such senior debt instruments may entitle the
holders to receive payment of interest or principal on or before
the dates on which we are entitled to receive payments with
respect to the mezzanine debt instruments in which we invest.
Also, in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of
debt instruments ranking senior to our investment in that
portfolio company would typically be entitled to receive payment
in full before we receive any distribution. After repaying such
senior creditors, such portfolio company may not have any
remaining assets to use for repaying its obligation to us. In
the case of debt ranking equally with debt instruments in which
we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the
event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy of the relevant portfolio company.
There
may be circumstances where our debt investments could be
subordinated to claims of other creditors or could be subject to
lender liability claims.
Even though we may have structured certain of our investments as
senior loans, if one of our portfolio companies were to go
bankrupt, depending on the facts and circumstances, including
the extent to which we actually provided managerial assistance
to that portfolio company, a bankruptcy court might
recharacterize our debt investment and subordinate all or a
portion of our claim to that of other creditors. We may also be
subject to lender liability claims for actions taken by us with
respect to a borrowers business or instances where we
exercise control over the borrower. It is possible that we could
become subject to a lenders liability claim, including as
a result of actions taken in rendering significant managerial
assistance.
Second
priority liens on collateral securing loans that we make to our
portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and us.
Certain loans we make to portfolio companies are and will be
secured on a second priority basis by the same collateral
securing senior secured debt of such companies. The first
priority liens on the collateral secure the portfolio
companys obligations under any outstanding senior debt and
may secure certain other future debt that may be permitted to be
incurred by the company under the agreements governing the
loans. The holders of obligations secured by the first priority
liens on the collateral will generally control the liquidation
of and be entitled to receive proceeds from any realization of
the collateral to repay their obligations in full before us. In
addition, the value of the collateral in the event of
liquidation will depend on market and economic conditions, the
availability of buyers and other factors. There can be no
assurance that the proceeds, if any, from the sale or sales of
all of the collateral would be sufficient to satisfy the loan
obligations secured by the
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second priority liens after payment in full of all obligations
secured by the first priority liens on the collateral. If such
proceeds are not sufficient to repay amounts outstanding under
the loan obligations secured by the second priority liens, then
we, to the extent not repaid from the proceeds of the sale of
the collateral, will only have an unsecured claim against the
companys remaining assets, if any.
The rights we may have with respect to the collateral securing
the loans we make to portfolio companies with senior debt
outstanding may also be limited pursuant to the terms of one or
more intercreditor agreements entered into with the holders of
senior debt. Under an intercreditor agreement, at any time that
obligations having the benefit of the first priority liens are
outstanding, any of the following actions that may be taken in
respect to the collateral will be at the direction of the
holders of the obligations secured by the first priority liens:
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the ability to cause the commencement of enforcement proceedings
against the collateral;
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the ability to control the conduct of such proceedings;
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the approval of amendments to collateral documents;
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releases of liens on the collateral; and
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waivers of past defaults under collateral documents.
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We may not have the ability to control or direct such actions,
even if our rights are adversely affected.
We may
hold the debt securities of leveraged companies that may, due to
the significant volatility of such companies, enter into
bankruptcy proceedings.
Leveraged companies may experience bankruptcy or similar
financial distress. The bankruptcy process has a number of
significant inherent risks. Many events in a bankruptcy
proceeding are the product of contested matters and adversary
proceedings and are beyond the control of the creditors. A
bankruptcy filing by an issuer may adversely and permanently
affect the issuer. If the proceeding is converted to a
liquidation, the value of the issuer may not equal the
liquidation value that was believed to exist at the time of the
investment. The duration of a bankruptcy proceeding is also
difficult to predict, and a creditors return on investment
can be adversely affected by delays until the plan of
reorganization or liquidation ultimately becomes effective. The
administrative costs in connection with a bankruptcy proceeding
are frequently high and would be paid out of the debtors
estate prior to any return to creditors. Because the standards
for classification of claims under bankruptcy law are vague, our
influence with respect to the class of securities or other
obligations we own may be lost by increases in the number and
amount of claims in the same class or by different
classification and treatment. In the early stages of the
bankruptcy process, it is often difficult to estimate the extent
of, or even to identify, any contingent claims that might be
made. In addition, certain claims that have priority by law (for
example, claims for taxes) may be substantial.
Defaults
by our portfolio companies will harm our operating
results.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans and
foreclosure on its assets. This could trigger cross-defaults
under other agreements and jeopardize the portfolio
companys ability to meet its obligations under the debt or
equity securities that we hold. We may incur expenses to the
extent necessary to seek recovery upon default or to negotiate
new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.
We do
not expect to control many of our portfolio
companies.
We do not expect to control many of our portfolio companies,
even though we may have board representation or board
observation rights, and the debt agreements may contain certain
restrictive covenants. As a result, we are subject to the risk
that a portfolio company in which we invest may make business
decisions with which we disagree and the management of such
company, as representatives of the holders of the companys
common equity, may take risks or otherwise act in ways that do
not serve our interests as debt
-34-
investors. Due to the lack of liquidity for our investments in
private companies in the lower middle-market, we may not be able
to dispose of our interests in our portfolio companies as
readily as we would like or at an appropriate valuation. As a
result, a portfolio company may make decisions that could
decrease the value of our portfolio holdings.
We
will be a non-diversified investment company within the meaning
of the 1940 Act; therefore we will not be limited with respect
to the proportion of our assets that may be invested in
securities of a single issuer.
We will be classified as a non-diversified investment company
within the meaning of the 1940 Act, which means that we will not
be limited by the 1940 Act with respect to the proportion of our
assets that we may invest in securities of a single issuer. To
the extent that we assume large positions in the securities of a
small number of issuers, our net asset value may fluctuate to a
greater extent than that of a diversified investment company as
a result of changes in the financial condition or the
markets assessment of the issuer and the aggregate returns
we realize may be significantly adversely affected if a small
number of investments perform poorly or if we need to write down
the value of any one investment. Additionally, while we are not
targeting any specific industries, our investments may be
concentrated in relatively few industries. As a result, a
downturn in any particular industry in which we are invested
could also significantly impact the aggregate returns we
realize. We may also be more susceptible to any single economic
or regulatory occurrence than a diversified investment company.
Beyond our asset diversification requirements as a RIC under the
Code, we do not have fixed guidelines for diversification, and
our investments could be concentrated in relatively few
portfolio companies.
Prepayments
of our debt investments by our portfolio companies could
adversely impact our results of operations and reduce our return
on equity.
We are subject to the risk that the investments we make in our
portfolio companies may be repaid prior to maturity. When this
occurs, we will generally reinvest these proceeds in temporary
investments, pending their future investment in new portfolio
companies. These temporary investments will typically have
substantially lower yields than the debt being repaid, and we
could experience significant delays in reinvesting these
amounts. In addition, any future investment of such amounts in a
new portfolio company may also be at lower yields than the
investment that was repaid. As a result, our results of
operations could be materially adversely affected if one or more
of our portfolio companies elects to prepay amounts owed to us.
Additionally, prepayments could negatively impact our return on
equity, which could result in a decline in the market price of
our common stock.
We may
not realize gains from our equity investments.
Certain investments that we have made in the past and may make
in the future include warrants or other equity or equity-related
securities. In addition, we may from time to time make
non-control, equity co-investments in companies. Our goal is to
realize gains upon our disposition of such equity interests.
However, the equity interests we receive may not appreciate in
value and, in fact, may decline in value. We also may be unable
to realize any value if a portfolio company does not have a
liquidity event, such as a sale of the business,
recapitalization or public offering, which would allow us to
sell the underlying equity interests. We often seek puts or
similar rights to give us the right to sell our equity
securities back to the portfolio company issuer. We may be
unable to exercise these put rights for the consideration
provided in our investment documents if the issuer is in
financial distress. Accordingly, we may not be able to realize
gains from our equity interests, and any gains that we do
realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience.
If our
primary investments are deemed not to be qualifying assets, we
could be precluded from investing in our desired manner or
deemed to be in violation of the 1940 Act.
In order to maintain our status as a business development
company, we will need to not acquire any assets other than
qualifying assets unless, at the time of and after
giving effect to such acquisition, at least
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70.0% of our total assets are qualifying assets. We believe that
most of the investments that we may acquire in the future will
constitute qualifying assets. However, we may be precluded from
investing in what we believe are attractive investments if such
investments are not qualifying assets for purposes of the 1940
Act. If we do not invest a sufficient portion of our assets in
qualifying assets, we could violate the 1940 Act provisions
applicable to business development companies. As a result of
such violation, specific rules under the 1940 Act could prevent
us, for example, from making follow-on investments in existing
portfolio companies (which could result in the dilution of our
position) or could require us to dispose of investments at
inappropriate times in order to come into compliance with the
1940 Act. If we need to dispose of such investments quickly, it
could be difficult to dispose of such investments on favorable
terms. We may not be able to find a buyer for such investments
and, even if we do find a buyer, we may have to sell the
investments at a substantial loss. Any such outcomes would have
a material adverse effect on our business, financial condition
and results of operations.
The
disposition of our investments may result in contingent
liabilities.
A significant portion of our investments involve private
securities and we expect that a significant portion of our
investments will continue to involve private securities. In
connection with the disposition of an investment in private
securities, we may be required to make representations about the
business and financial affairs of the portfolio company typical
of those made in connection with the sale of a business. We may
also be required to indemnify the purchasers of such investment
to the extent that any such representations turn out to be
inaccurate or with respect to potential liabilities. These
arrangements may result in contingent liabilities that
ultimately result in funding obligations that we must satisfy
through its return of distributions previously made to it.
Our
investment advisors liability will be limited under the
Investment Advisory Agreement, and we have agreed to indemnify
our investment advisor against certain liabilities, which may
lead our investment advisor to act in a riskier manner on our
behalf than it would when acting for its own
account.
Under the Investment Advisory Agreement, our investment advisor
will not assume any responsibility to us other than to render
the services called for under that agreement, and it will not be
responsible for any action of our board of directors in
following or declining to follow our investment advisors
advice or recommendations. Our investment advisor maintains a
contractual relationship, as opposed to a fiduciary relationship
except to the extent specified in section 36(b) of the
Investment Advisory Act concerning loss from a breach of
fiduciary duty with respect to the receipt of compensation for
services, with us. Under the terms of the Investment Advisory
Agreement, our investment advisor and its officers, directors,
members, managers, partners, stockholders and employees will not
be liable to us, any subsidiary of ours, our directors, our
stockholders or any subsidiarys stockholders or partners
for acts or omissions performed in accordance with and pursuant
to the Investment Advisory Agreement, except those resulting
from acts constituting gross negligence, willful misconduct, bad
faith or reckless disregard of our investment advisors
duties under the Investment Advisory Agreement. In addition, we
have agreed to indemnify our investment advisor and its
officers, directors, members, managers, partners, stockholders
and employees from and against any claims or liabilities,
including reasonable legal fees and other expenses reasonably
incurred, arising out of or in connection with our business and
operations or any action taken or omitted on our behalf pursuant
to authority granted by the Investment Advisory Agreement,
except where attributable to gross negligence, willful
misconduct, bad faith or reckless disregard of such
persons duties under the Investment Advisory Agreement.
These protections may lead our investment advisor to act in a
riskier manner when acting on our behalf than it would when
acting for its own account.
-36-
Risks
Relating to This Offering
Prior
to this offering, there has been no public market for our common
stock, and we cannot assure you that a market for our common
stock will develop or that the market price of shares of our
common stock will not decline following the
offering.
We cannot assure you that a trading market will develop for our
common stock after this offering or, if one develops, that such
trading market can be sustained. In addition, we cannot predict
the prices at which our common stock will trade. The initial
public offering price for our common stock will be determined
through our negotiations with the underwriters and may not bear
any relationship to the market price at which it may trade after
our initial public offering. Shares of companies offered in an
initial public offering often trade at a discount to the initial
offering price due to underwriting discounts and commissions and
related offering expenses. Also, shares of closed-end investment
companies, including business development companies, frequently
trade at a discount from their net asset value and our stock may
also be discounted in the market. This characteristic of
closed-end investment companies is separate and distinct from
the risk that our net asset value per share of common stock may
decline. We cannot predict whether our common stock will trade
at, above or below net asset value. The risk of loss associated
with this characteristic of closed-end management investment
companies may be greater for investors expecting to sell shares
of common stock purchased in the offering soon after the
offering. In addition, if our common stock trades below its net
asset value, we will generally not be able to sell additional
shares of our common stock to the public at its market price
without first obtaining the approval of a majority of our
stockholders (including a majority of our unaffiliated
stockholders) and our independent directors for such issuance.
We
have not identified specific investments in which to invest the
proceeds of this offering.
We currently anticipate that upon consummation of this offering,
we will use a portion of the net proceeds from the offering to
provide additional capital to Fidus Mezzanine Capital, L.P. to
optimally utilize SBA guaranteed leverage. We expect to retain
the remaining portion of the net proceeds from the offering to
make investments directly, to make required distributions to
stockholders and for general corporate purposes. Neither we nor
Fidus Mezzanine Capital, L.P. has identified specific
investments in which to invest these proceeds. We may also
establish a second SBIC through which we can make additional
investments; however, we have not yet applied to the SBA for a
second SBIC license and we can make no assurances that, if we do
apply, the SBA will approve such application. As of the date of
this prospectus, neither us nor Fidus Mezzanine Capital, L.P.
has entered into definitive agreements for any specific
investments in which to invest the net proceeds of this
offering. Currently, Fidus Mezzanine Capital, L.P. has a number
of term sheets outstanding, representing potential new
investments. These potential investments, however, are still
subject to further research and due diligence, and may not
materialize. Although we are evaluating and seeking new
investment opportunities and will continue to do so, you will
not be able to evaluate the manner in which we will invest, or
the economic merits of, any investments we will make with the
net proceeds of this offering.
We may
be unable to invest a significant portion of the net proceeds of
this offering on acceptable terms in the timeframe
contemplated.
Delays in investing the net proceeds of this offering may cause
our performance to be worse than that of other fully invested
business development companies or other lenders or investors
pursuing comparable investment strategies. We cannot assure you
that we will be able to identify any investments that meet our
investment objective or that any investment that we make will
produce a positive return. We may be unable to invest the net
proceeds of this offering on acceptable terms within the time
period that we anticipate or at all, which could harm our
financial condition and operating results.
We anticipate that, depending on market conditions, it will take
up to one year to invest substantially all of the net proceeds
of this offering in securities meeting our investment objective.
During this period, we will invest the net proceeds primarily in
cash, cash equivalents, U.S. government securities,
repurchase agreements and high-quality debt instruments maturing
in one year or less from the time of investment, which may
produce returns that are significantly lower than the returns
which we expect to achieve when our portfolio is
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fully invested in securities meeting our investment objective.
As a result, any distributions that we make during this period
may be substantially lower than the distributions that we may be
able to make when our portfolio is fully invested in securities
meeting our investment objective. In addition, until such time
as the net proceeds of the offering are invested in securities
meeting our investment objective, the market price for our
common stock may decline. Thus, the initial return on your
investment may be lower than when, if ever, our portfolio is
fully invested in securities meeting our investment objective.
We may
allocate the net proceeds from this offering in ways with which
you may disagree.
We will have significant flexibility in investing the net
proceeds of this offering and may use the net proceeds from this
offering in ways with which you may disagree or for purposes
other than those contemplated at the time of the offering. Our
ability to achieve our investment objective may be limited to
the extent that net proceeds of our initial public offering,
pending full investment, are used to pay operating expenses.
Investing
in our common stock may involve an above-average degree of
risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk than alternative
investment options and volatility or loss of principal. Our
investments in portfolio companies may be highly speculative and
aggressive; therefore, an investment in our common stock may not
be suitable for someone with lower risk tolerance.
The
market price of our common stock may fluctuate
significantly.
The market price and liquidity of the market for shares of our
common stock that will prevail in the market after this offering
may be higher or lower than the price you pay and may be
significantly affected by numerous factors, some of which are
beyond our control and may not be directly related to our
operating performance. These factors include:
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significant volatility in the market price and trading volume of
securities of business development companies or other companies
in our sector, which is not necessarily related to the operating
performance of these companies;
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changes in regulatory policies or tax guidelines, particularly
with respect to RICs, business development companies or SBICs;
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failure to qualify for treatment as a RIC or loss of RIC or
business development company status;
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loss of status as an SBIC for Fidus Mezzanine Capital, L.P., or
any other SBIC subsidiary we may form;
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changes or perceived changes in earnings or variations in
operating results;
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changes or perceived changes in the value of our portfolio of
investments;
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changes in accounting guidelines governing valuation of our
investments;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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departure of our investment advisors key personnel;
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operating performance of companies comparable to us; and
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general economic trends and other external factors.
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Investors
in this offering will experience immediate dilution upon the
closing of the offering.
If you purchase shares of our common stock in this offering, you
will experience immediate dilution of $0.54 per share because
the price that you pay will be greater than the pro forma net
asset value per share of the common stock you acquire. This
dilution is in large part due to the expenses incurred by us in
connection
-38-
with the consummation of this offering. Investors in this
offering will pay a price per share of common stock that exceeds
the tangible book value per share after the closing of the
offering.
Sales
of substantial amounts of our common stock may have an adverse
effect on the market price of our common stock.
Upon expiration of any applicable
lock-up
periods, 4,056,521 shares issued by us will generally be
freely tradable in the public market, subject to the provisions
and applicable holding periods set forth in Rule 144 under
the Securities Act. This includes 1,162,854 shares that may be
held by an affiliate of ours, as that term is used in Rule 144
under the Securities Act. Sales of substantial amounts of our
common stock, or the availability of such common stock for sale,
could adversely affect the prevailing market prices for our
common stock. If this occurs and continues, it could impair our
ability to raise additional capital through the sale of
securities should we desire to do so.
Provisions
of the Maryland General Corporation Law and our charter and
bylaws could deter takeover attempts and have an adverse effect
on the price of our common stock.
Maryland General Corporation Law contains provisions that may
discourage, delay or make more difficult a change in control of
us or the removal of our directors. In addition, our board of
directors may, without stockholder action, authorize the
issuance of shares of stock in one or more classes or series,
including preferred stock. Our charter and bylaws contain
provisions that limit liability and provide for indemnification
of our directors and officers. These provisions and others also
may have the effect of deterring hostile takeovers or delaying
changes in control or management. We are generally prohibited
from engaging in mergers and other business combinations with
stockholders that beneficially own 15.0% or more of our voting
stock, or with their affiliates, unless our directors or
stockholders approve the business combination in the prescribed
manner. Maryland law may discourage third parties from trying to
acquire control of us and increase the difficulty of
consummating such an offer.
We have also adopted measures that may make it difficult for a
third party to obtain control of us, including provisions of our
charter authorizing our board of directors to classify or
reclassify shares of our stock in one or more classes or series
and to cause the issuance of additional shares of our stock. In
addition, we have adopted a classified board of directors. A
classified board may render a change in control of us or removal
of our incumbent management more difficult. These provisions, as
well as other provisions of our charter and bylaws, may delay,
defer or prevent a transaction or a change in control that might
otherwise be in the best interests of our stockholders.
-39-
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 us, our
current and prospective portfolio investments, our industry, our
beliefs, and our assumptions. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates, would,
should, targets, projects
and variations of these words and similar expressions are
intended to identify forward-looking statements. These
statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which
are beyond our control and difficult to predict and could cause
actual results to differ materially from those expressed or
forecasted in the forward-looking statements, including without
limitation:
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our inexperience operating a business development company;
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our dependence on key personnel of our investment advisor and
our executive officers;
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our ability to maintain or develop referral relationships;
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our ability to manage our business effectively;
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our use of leverage;
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uncertain valuations of our portfolio investments;
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competition for investment opportunities;
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potential divergent interests of our investment advisor and our
stockholders arising from our incentive fee structure;
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actual and potential conflicts of interest with our investment
advisor;
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constraint on investment due to access to material nonpublic
information;
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other potential conflicts of interest;
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SBA regulations affecting our wholly-owned SBIC subsidiary;
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changes in interest rates;
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the impact of a protracted decline in the liquidity of credit
markets on our business and portfolio investments;
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fluctuations in our quarterly operating results;
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our ability to qualify and maintain our qualification as a RIC
and as a business development company;
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risks associated with the timing, form and amount of any
dividends or distributions;
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changes in laws or regulations applicable to us;
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our ability to obtain exemptive relief from the SEC;
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possible resignation of our investment advisor;
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the general economy and its impact on the industries in which we
invest;
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risks associated with investing in lower middle-market companies;
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our ability to invest in qualifying assets; and
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our ability to identify and timely close on investment
opportunities.
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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. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in
this prospectus 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 prospectus. You
should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
The forward-looking statements and projections contained in this
prospectus are excluded from the safe harbor protection provided
by Section 27A of the Securities Act.
-40-
USE OF
PROCEEDS
We estimate that the net proceeds we will receive from the sale
of 4,670,000 shares of our common stock in this offering
will be approximately $63.9 million (or approximately
$73.6 million if the underwriters exercise their
over-allotment option in full), after deducting the underwriting
discounts and commissions and estimated organization and
offering expenses of approximately
$1.7 million payable by us.
We intend to use approximately $19.6 million of the net
proceeds of this offering to invest in portfolio companies in
accordance with our investment objective through Fidus Mezzanine
Capital, L.P., as an SBIC. We intend to use the remainder of the
net proceeds of this offering to invest in portfolio companies
directly in accordance with our investment objectives and the
strategies described in this prospectus, to make distributions
to our stockholders and for general corporate purposes, which
may include the establishment of a second SBIC, through which we
would make additional investments. We will also pay operating
expenses, including management and administrative fees, and may
pay other expenses, from the net proceeds of this offering.
Pending such investments, we intend to invest the remaining net
proceeds of this offering primarily in cash, cash equivalents,
U.S. government securities and high-quality debt
investments that mature in one year or less from the date of
investment. These temporary investments may have lower yields
than our other investments and, accordingly, may result in lower
distributions, if any, during such period. See
Regulation Temporary Investments for
additional information about temporary investments we may make
while waiting to make longer-term investments in pursuit of our
investment objective.
-41-
DISTRIBUTIONS
Subsequent to the completion of this offering, and to the extent
we have income available, we intend to distribute quarterly
dividends to our stockholders out of assets legally available
for distribution, beginning with our first full quarter after
the completion of this offering. The timing and amount of our
quarterly dividends, if any, will be determined by our board of
directors.
We anticipate that this dividend will be paid from income
primarily generated by interest and dividend income earned on
our investment portfolio. The specific tax characteristics of
the dividend will be reported to stockholders after the end of
the calendar year.
We intend to elect to be treated, and intend to qualify annually
thereafter, as a RIC under the Code, beginning with our first
taxable year ending December 31, 2011. To obtain and
maintain RIC tax treatment, we must, among other things,
distribute to our stockholders on an annual basis at least 90.0%
of our net ordinary income and net short-term capital gains in
excess of our net long-term capital losses, if any. In order to
avoid a 4.0% nondeductible U.S. federal excise tax imposed
on RICs, we currently intend to distribute during each calendar
year an amount at least equal to the sum of: (a) 98.0% of
our net ordinary income for such calendar year; (b) 98.2%
of our net capital gains in excess of capital losses for the
one-year period ending on October 31 of the calendar year; and
(c) any net ordinary income and net capital gains for
preceding years that were not distributed during such years and
on which we previously paid no U.S. federal income tax.
We currently intend to distribute net capital gains
(i.e., net long-term capital gains in excess of net
short-term capital losses), if any, at least annually out of the
assets legally available for such distributions. However, we may
decide in the future to retain such capital gains for investment
and elect to treat such gains as deemed distributions to you. If
this happens, you will be treated for U.S. federal income
tax purposes as if you had received an actual distribution of
the capital gains that we retain and reinvested the net after
tax proceeds in us. In this situation, you would be eligible to
claim a tax credit (or, in certain circumstances, a tax refund)
equal to your allocable share of the U.S. federal corporate
income tax we paid on the capital gains deemed distributed to
you. See Material U.S. Federal Income Tax
Considerations. We cannot assure you that we will achieve
results that will permit us to pay any cash distributions, and
if we issue senior securities, we will be prohibited from making
distributions if doing so would cause us to fail to maintain the
asset coverage ratios stipulated by the 1940 Act or if such
distributions are limited by the terms of any of our borrowings.
Unless you elect to receive your dividends in cash, we intend to
make such distributions in additional shares of our common stock
under our dividend reinvestment plan. Although distributions
paid in the form of additional shares of our common stock will
generally be subject to U.S. federal, state and local taxes
in the same manner as cash distributions, investors
participating in our dividend reinvestment plan will not receive
any corresponding cash distributions with which to pay any such
applicable taxes. If you hold shares of our common stock in the
name of a broker or financial intermediary, you should contact
such broker or financial intermediary regarding your election to
receive distributions in cash in lieu of shares of our common
stock. Any dividends reinvested through the issuance of shares
through our dividend reinvestment plan will increase our assets
on which the base management fee and the incentive fee are
determined and paid to our investment advisor. See
Dividend Reinvestment Plan.
-42-
FORMATION
TRANSACTIONS; BUSINESS DEVELOPMENT COMPANY AND REGULATED
INVESTMENT COMPANY ELECTIONS
Formation
Transactions
Fidus Investment Corporation is a newly organized Maryland
corporation formed on February 14, 2011, for the purpose of
acquiring 100.0% of the equity interests in Fidus Mezzanine
Capital, L.P. and Fidus Mezzanine Capital GP, LLC, raising
capital in this offering and thereafter operating as an
externally managed, closed-end, non-diversified management
investment company that has elected to be regulated as a
business development company under the 1940 Act. Immediately
prior to our election to be treated as a business development
company under the 1940 Act and the pricing of this offering, we
will consummate the following formation transactions:
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We will acquire 100.0% of the limited partnership interests in
Fidus Mezzanine Capital, L.P. through the merger of Fidus
Mezzanine Capital, L.P. with a limited partnership that is our
wholly-owned subsidiary. As a result of this merger, Fidus
Mezzanine Capital, L.P. will be the surviving entity and become
our wholly-owned subsidiary, retain its SBIC license, continue
to hold its existing investments and make new investments with a
portion of the net proceeds of this offering. Fidus Mezzanine
Capital, L.P. will also elect to be regulated as a business
development company under the 1940 Act. The limited partners
hold 91.3% of the partnership interests of Fidus Mezzanine
Capital, L.P. In exchange for their partnership interests, we
will issue 3,702,778 shares of common stock, at the initial
offering price of $15.00 per share, to the limited partners of
Fidus Mezzanine Capital, L.P. having an aggregate value of
$55.5 million (which represents the limited partners
share of the net asset value of Fidus Mezzanine Capital, L.P. as
of the most recent quarter end for which financial statements
have been included in this prospectus, plus any additional cash
contributions to Fidus Mezzanine Capital, L.P. by the limited
partners following such quarter end but prior to the closing of
the merger, less any cash distributions to the limited partners
following such quarter end but prior to the closing of the
merger). The capital accounts of the limited partners in Fidus
Mezzanine Capital, L.P. will be closed out upon the consummation
of the merger, and the limited partners will receive the shares
of our common stock in a tax free exchange.
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We will acquire 100.0% of the equity interests in Fidus
Mezzanine Capital GP, LLC, the general partner of Fidus
Mezzanine Capital, L.P., from the members of Fidus Mezzanine
Capital GP, LLC, through the merger of Fidus Mezzanine Capital
GP, LLC with and into Fidus Investment GP, LLC, our wholly-owned
subsidiary. Fidus Investment GP, LLC will be the surviving
entity and, as a result, we will acquire 100.0% of the general
partnership interest in Fidus Mezzanine Capital, L.P. Fidus
Mezzanine Capital GP, LLC holds 8.7% of the partnership
interests in Fidus Mezzanine Capital, L.P. and no other
interests or assets. The members of Fidus Mezzanine Capital GP,
LLC will not receive any consideration in exchange for their
carried partnership interest in Fidus Mezzanine Capital, L.P. In
exchange for its partnership interests in Fidus Mezzanine
Capital, L.P., we will issue 353,743 shares of common
stock, at the initial offering price of $15.00 per share, to
Fidus Mezzanine Capital GP, LLC having an aggregate value of
$5.3 million (which consideration has been calculated on
the same basis as the consideration paid to the limited partners
of Fidus Mezzanine Capital, L.P. described above). Such shares
will be distributed to the members of Fidus Mezzanine Capital
GP, LLC in exchange for their equity interest in Fidus Mezzanine
Capital GP, LLC.
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Fidus Mezzanine Capital GP, LLC and the limited partners of
Fidus Mezzanine Capital, L.P. have each approved the formation
transactions. Prior to consummation of the formation
transactions, we must also receive the approval of the SBA.
We anticipate that the formation transactions and the offering
will be treated as part of a single plan for federal income tax
purposes, qualifying as a tax-free contribution pursuant to
Section 351 of the Code.
In addition, upon consummation of the formation transactions,
Fidus Mezzanine Capital, L.P. will terminate its management
services agreement with Fidus Capital, LLC and we will enter
into the Investment Advisory Agreement with Fidus Investment
Advisors, LLC, as our investment advisor. The investment
professionals of Fidus Capital, LLC are also the investment
professionals of Fidus Investment Advisors, LLC.
-43-
The following diagram depicts our organizational structure upon
completion of this offering (assuming the underwriters do not
exercise their over-allotment option) and the formation
transactions described in this prospectus:
-44-
Business
Development Company and Regulated Investment Company
Elections
In connection with this offering, we and Fidus Mezzanine
Capital, L.P. will each file an election to be regulated as a
business development company under the 1940 Act. In addition, we
intend to elect to be treated as a RIC under Subchapter M of the
Code, effective as of the date of our business development
company election. Our election to be regulated as a business
development company and our election to be treated as a RIC will
have a significant impact on our future operations. Some of the
most important effects on our future operations of our election
to be regulated as a business development company and our
election to be treated as a RIC are outlined below.
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We generally will be required to pay income taxes only on the
portion of our taxable income we do not distribute to
stockholders (actually or constructively).
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As a RIC, so long as we meet certain minimum distribution,
source-of-income and asset diversification requirements, we
generally will be required to pay income taxes only on the
portion of our taxable income and gains we do not distribute
(actually or constructively) and certain built-in gains, if any.
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Our ability to use leverage as a means of financing our
portfolio of investments will be limited.
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As a business development company, we will be required to meet a
coverage ratio of total assets to total senior securities of at
least 200.0% after each issuance of senior securities. For this
purpose, senior securities include all borrowings and any
preferred stock we may issue in the future. Additionally, our
ability to continue to utilize leverage as a means of financing
our portfolio of investments will be limited by this asset
coverage test. In connection with this offering and our intended
election to be regulated as a business development company, we
have filed a request with the SEC for exemptive relief to allow
us to exclude any indebtedness guaranteed by the SBA and issued
by the Fidus Mezzanine Capital, L.P. from the 200.0% asset
coverage requirements applicable to us. While the SEC has
granted exemptive relief in substantially similar circumstances
in the past, no assurance can be given that an exemptive order
will be granted.
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We intend to distribute substantially all of our income to
our stockholders.
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As a RIC, we intend to distribute to our stockholders
substantially all of our income, except possibly for certain net
long-term capital gains. We may make deemed distributions to our
stockholders of some or all of our retained net long-term
capital gains. If this happens, you will be treated as if you
had received an actual distribution of the capital gains and
reinvested the net after-tax proceeds in us. In general, you
also would be eligible to claim a tax credit (or, in certain
circumstances, a tax refund) equal to your allocable share of
the tax we paid on the deemed distribution. See Material
U.S. Federal Income Tax Considerations.
-45-
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2011:
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on an actual basis;
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on a pro forma basis to reflect the completion of the formation
transactions; and
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on a pro forma basis as adjusted to reflect the sale of
4,670,000 shares of our common stock in this offering at an
initial public offering price of $15.00 per share after
deducting the underwriting discounts and commissions and
estimated organization and offering expenses of approximately
$6.2 million payable by us and the completion of the
formation transactions.
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As of March 31, 2011
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Fidus
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Fidus Investment
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Mezzanine
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Corporation
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Capital, L.P.
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Pro
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Pro Forma
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Actual
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Forma(1)
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as
Adjusted(2)
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(Dollars in thousands, except per share data)
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Assets:
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Cash and cash equivalents
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$
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8,997
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$
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8,997
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$
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72,865
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Investments at fair value
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143,652
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143,652
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143,652
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Interest receivable
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1,460
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1,460
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1,460
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Other assets
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3,096
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3,096
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3,096
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Total assets
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$
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157,205
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$
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157,205
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$
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221,073
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Liabilities:
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SBA debentures
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$
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93,500
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$
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93,500
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$
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93,500
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Credit facility
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750
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|
750
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750
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Other liabilities
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|
607
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|
607
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607
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Total liabilities
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$
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94,857
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$
|
94,857
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$
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94,857
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|
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|
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Net assets
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$
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62,348
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|
$
|
62,348
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$
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126,216
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Stockholders equity:
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Common stock, par value $0.001 per share;
100,000,000 shares authorized; 0 shares issued and
outstanding, actual; 4,056,521 shares issued and
outstanding, pro forma; 8,726,521 shares issued and
outstanding, pro forma as adjusted
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$
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4
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$
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9
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Capital in excess of par
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62,344
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|
126,207
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|
|
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Total stockholders equity
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$
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|
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$
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62,348
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$
|
126,216
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|
|
|
|
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|
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Pro forma net asset value per share
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$
|
15.37
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$
|
14.46
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(1) |
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Reflects the completion of the formation transactions, including
the issuance of 3,702,778 shares of common stock to the
limited partners of Fidus Mezzanine Capital, L.P. and
353,743 shares of common stock to the members of Fidus
Mezzanine Capital GP, LLC. See Formation Transactions;
Business Development Company and Regulated Investment Company
Elections. |
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(2) |
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Adjusts the pro forma information to give effect to this
offering (assuming no exercise of the underwriters option
to purchase additional shares). |
-46-
DILUTION
The dilution to investors in this offering is represented by the
difference between the offering price per share and the pro
forma as adjusted net asset value per share after this offering.
Net asset value per share is determined by dividing our net
asset value, which is our total tangible assets less total
liabilities, by the number of outstanding shares of common stock.
After giving effect to the formation transactions, our pro forma
net asset value was $62.3 million, or approximately
$15.37 per share. After giving effect to the sale of our
common stock in this offering at the initial public offering
price of $15.00 per share, our pro forma as adjusted net
asset value as of March 31, 2011 would have been
approximately $126.2 million, or $14.46 per share.
This represents an immediate decrease in our net asset value of
$0.91 per share to existing stockholders and dilution in
net asset value of $0.54 per share to new investors who
purchase shares in this offering.
The following table illustrates the dilution to the shares on a
per share basis:
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Initial public offering price per share
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$
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15.00
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Net asset value per share after the formation transactions
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$
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15.37
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Decrease in net asset value per share attributable to new
stockholders in this offering
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|
$
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0.91
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|
|
|
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|
|
|
|
|
|
|
|
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Pro forma as adjusted net asset value per share after this
offering
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|
$
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14.46
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|
|
|
|
|
|
|
|
|
|
|
|
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Dilution per share to new stockholders (without exercise of the
over-allotment option)
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|
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$
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0.54
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If the underwriters exercise in full their over-allotment option
to purchase additional shares of our 700,500 common stock in
this offering, the pro forma net asset value per share after
this offering would be $14.43 per share, the decrease in the pro
forma net asset value per share to existing stockholders would
be $0.94 per share and the dilution to new stockholders
purchasing shares in this offering would be $0.57 per share.
The following table summarizes the number of shares of common
stock purchased from us, the total consideration paid to us and
the average price per share paid by existing stockholders and to
be paid by new investors purchasing shares of common stock in
this offering at the initial public offering price of $15.00 per
share, before deducting the underwriting discounts and
commissions and estimated offering expenses payable by us
(assuming the underwriters do not exercise their
over-allotment
option).
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Shares
|
|
|
Total
|
|
|
Average
|
|
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|
Purchased
|
|
|
Consideration
|
|
|
Price
|
|
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|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
per Share
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|
Existing
stockholders(1)
|
|
|
4,056,521
|
|
|
|
46.5
|
%
|
|
$
|
60,847,815
|
|
|
|
46.5
|
%
|
|
$
|
15.00
|
|
New stockholders
|
|
|
4,670,000
|
|
|
|
53.5
|
|
|
|
70,050,000
|
|
|
|
53.5
|
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,726,521
|
|
|
|
100.0
|
%
|
|
$
|
130,897,815
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the issuance of shares of our common stock in the
formation transactions. |
-47-
SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data of Fidus
Mezzanine Capital, L.P. as of December 31, 2009 and 2010
and for the years ended December 31, 2008, 2009 and 2010 is
derived from the consolidated financial statements that have
been audited by McGladrey & Pullen, LLP, independent
auditors. Fidus Mezzanine Capital, L.P.s consolidated
financial data for the period from May 1, 2007 (inception)
through December 31, 2007, statement of assets and
liabilities at December 31, 2008 and three-month periods
ended March 31, 2010 and 2011, is unaudited. However, in
the opinion of Fidus Mezzanine Capital, L.P., all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation have been made. This financial data should be read
in conjunction with Fidus Mezzanine Capital, L.P.s
consolidated financial statements and the notes thereto included
elsewhere in this prospectus and with Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
|
|
|
|
Three Months
|
|
|
December 31,
|
|
Year Ended December 31,
|
|
Ended March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Dollars in thousands)
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
1,312
|
|
|
$
|
7,504
|
|
|
$
|
14,184
|
|
|
$
|
17,985
|
|
|
$
|
4,222
|
|
|
$
|
4,794
|
|
Interest expense
|
|
|
272
|
|
|
|
1,994
|
|
|
|
3,688
|
|
|
|
4,962
|
|
|
|
1,089
|
|
|
|
1,324
|
|
Management fees, net
|
|
|
1,787
|
|
|
|
3,087
|
|
|
|
2,969
|
|
|
|
3,436
|
|
|
|
756
|
|
|
|
1,036
|
|
All other expenses
|
|
|
496
|
|
|
|
179
|
|
|
|
431
|
|
|
|
627
|
|
|
|
52
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(1,243
|
)
|
|
|
2,244
|
|
|
|
7,096
|
|
|
|
8,960
|
|
|
|
2,325
|
|
|
|
2,330
|
|
Net realized (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
(5,551
|
)
|
|
|
(3,858
|
)
|
|
|
(2
|
)
|
|
|
(7,935
|
)
|
Net unrealized appreciation (depreciation) on investments
|
|
|
|
|
|
|
(750
|
)
|
|
|
(3,137
|
)
|
|
|
(78
|
)
|
|
|
(5,744
|
)
|
|
|
8,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(1,243
|
)
|
|
$
|
1,494
|
|
|
$
|
(1,592
|
)
|
|
$
|
5,024
|
|
|
$
|
(3,421
|
)
|
|
$
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average annual yield on debt
investments(1)
|
|
|
15.7
|
%
|
|
|
15.0
|
%
|
|
|
15.6
|
%
|
|
|
15.0
|
%
|
|
|
15.5
|
%
|
|
|
14.9
|
%
|
Number of portfolio companies at year end
|
|
|
4
|
|
|
|
9
|
|
|
|
15
|
|
|
|
17
|
|
|
|
16
|
|
|
|
16
|
|
Expense ratios (as percentage of average net assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
23.7
|
%
|
|
|
12.4
|
%
|
|
|
7.5
|
%
|
|
|
8.6
|
%
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
Interest expense
|
|
|
2.8
|
%
|
|
|
7.6
|
%
|
|
|
8.0
|
%
|
|
|
10.5
|
%
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
|
(1) |
|
Yields are computed using the effective interest rates,
including accretion of original issue discount, divided by the
weighted average cost of debt investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of March 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
(Dollars in thousands)
|
|
Statement of assets and liabilities data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
33,151
|
|
|
$
|
75,849
|
|
|
$
|
122,900
|
|
|
$
|
141,341
|
|
|
$
|
143,652
|
|
Total assets
|
|
|
34,905
|
|
|
|
79,786
|
|
|
|
129,650
|
|
|
|
147,377
|
|
|
|
157,205
|
|
Borrowings
|
|
|
15,250
|
|
|
|
46,450
|
|
|
|
79,450
|
|
|
|
93,500
|
|
|
|
94,250
|
|
Total net assets
|
|
|
19,591
|
|
|
|
32,573
|
|
|
|
48,481
|
|
|
|
52,005
|
|
|
|
62,348
|
|
-48-
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data, Fidus Mezzanine Capital, L.P.s consolidated
financial statements and related notes appearing elsewhere in
this prospectus. The information in this section contains
forward-looking statements that involve risks and uncertainties.
Please see Risk Factors and Special Note
Regarding Forward-Looking Statements for a discussion of
the uncertainties, risks and assumptions associated with these
statements.
Overview
We provide customized mezzanine debt and equity financing
solutions to lower middle-market companies, which we define as
U.S. based companies having revenues between
$10.0 million and $150.0 million. We were formed to
continue and to expand the business of Fidus Mezzanine Capital,
L.P., a fund formed in February 2007 that is licensed by the SBA
as an SBIC and to make investments in portfolio companies
directly at the parent level. Our investment objective is to
provide attractive risk-adjusted returns by generating both
current income from our debt investments and capital
appreciation from our equity related investments. Our investment
strategy includes partnering with business owners, management
teams and financial sponsors by providing customized financing
for ownership transactions, recapitalizations, strategic
acquisitions, business expansion and other growth initiatives.
We seek to maintain a diversified portfolio of investments in
order to help mitigate the potential effects of adverse economic
events related to particular companies, regions or industries.
Since commencing investment operations in 2007, Fidus Mezzanine
Capital, L.P. has made an aggregate $170.4 million of
investments in 21 portfolio companies.
Immediately prior to our election to be treated as a business
development company under the 1940 Act and the consummation of
this offering, Fidus Investment Corporation will acquire all of
the interests of Fidus Mezzanine Capital, L.P. and Fidus
Mezzanine Capital GP, LLC, its general partner, through the
formation transactions, resulting in Fidus Mezzanine Capital,
L.P. becoming our wholly-owned SBIC subsidiary. After the
completion of the formation transactions, our investment
activities will be managed by our investment advisor and
supervised by our board of directors, a majority of whom are
independent of us and our investment advisor.
After the completion of the formation transactions, we intend to
continue to operate Fidus Mezzanine Capital, L.P. as an SBIC,
subject to SBA approval, and to utilize the proceeds of the sale
of SBA debentures to enhance returns to our stockholders. We may
also make investments directly though Fidus Investment
Corporation. We believe that utilizing both entities as
investment vehicles may provide us with access to a broader
array of investment opportunities. Given our access to lower
cost capital through the SBAs SBIC debenture program, we
expect that the majority of our investments will initially be
made through Fidus Mezzanine Capital, L.P. As of March 31,
2011, we had investments in 16 portfolio companies with an
aggregate cost of $143.7 million.
Critical
Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions
affecting amounts reported in the financial statements. We have
identified investment valuation and revenue recognition as our
most critical accounting estimates. We continuously evaluate our
estimates, including those related to the matters described
below. These estimates are based on the information that is
currently available to us and on various other assumptions that
we believe to be reasonable under the circumstances. Actual
results could differ materially from those estimates under
different assumptions or conditions. A discussion of our
critical accounting policies follows.
-49-
Valuation
of Portfolio Investments
We will conduct the valuation of our investments, pursuant to
which our net asset value will be determined, at all times
consistent with generally accepted accounting principles, or
GAAP, and the 1940 Act.
Our investments generally consist of illiquid securities
including debt and equity investments in lower middle-market
companies. Investments for which market quotations are readily
available are valued at such market quotations. Because we
expect that there will not be a readily available market for
substantially all of the investments in our portfolio, we value
substantially all of our portfolio investments at fair value as
determined in good faith by our board of directors using a
documented valuation policy and consistently applied valuation
process. Due to the inherent uncertainty of determining the fair
value of investments that do not have a readily available market
value, the fair value of our investments may differ
significantly from the values that would have been used had a
readily available market value existed for such investments, and
the difference could be material.
With respect to investments for which market quotations are not
readily available, our board of directors undertakes a
multi-step valuation process each quarter, as described below:
|
|
|
|
|
our quarterly valuation process begins with each portfolio
company or investment being initially evaluated and rated by the
investment professionals of our investment advisor responsible
for the portfolio investment;
|
|
|
|
preliminary valuation conclusions are then documented and
discussed with the investment committee;
|
|
|
|
our board of directors also engages one or more independent
valuation firms to conduct independent appraisals of our
investments for which market quotations are not readily
available. We will consult with independent valuation firm(s)
relative to each portfolio company at least once in every
calendar year, and for new portfolio companies, at least once in
the twelve-month period subsequent to the initial investment;
|
|
|
|
the audit committee of our board of directors reviews the
preliminary valuations of our investment advisor and of the
independent valuation firms and responds and supplements the
valuation recommendations to reflect any comments; and
|
|
|
|
the board of directors discusses the valuations and determines
the fair value of each investment in our portfolio in good
faith, based on the input of our investment advisor, the
independent valuation firms and the audit committee.
|
In making the good faith determination of the value of portfolio
investments, we start with the cost basis of the security, which
includes the amortized original issue discount and
payment-in-kind interest or dividends, if any. The transaction
price is typically the best estimate of fair value at inception.
When evidence supports a subsequent change to the carrying value
from the original transaction price, adjustments are made to
reflect the expected exit values. We perform detailed valuations
of our debt and equity investments on an individual basis, using
market, income and yield approaches as appropriate.
Under the market approach, we typically use the enterprise value
methodology to determine the fair value of an investment. There
is no one methodology to estimate enterprise value, and, in
fact, for any one portfolio company, enterprise value is
generally best expressed as a range of values, from which we
derive a single estimate of enterprise value. In estimating the
enterprise value of a portfolio company, we analyze various
factors consistent with industry practice, including but not
limited to original transaction multiples, the portfolio
companys historical and projected financial results,
applicable market trading and transaction comparables,
applicable market yields and leverage levels, the nature and
realizable value of any collateral, the markets in which the
portfolio company does business, and comparisons of financial
ratios of peer companies that are public. Typically, the
enterprise value of private companies are based on multiples of
EBITDA, cash flows, net income, revenues, or in limited cases,
book value.
-50-
Under the income approach, we prepare and analyze discounted
cash flow models based on projections of the future free cash
flows (or earnings) of the portfolio company. In determining the
fair value under the income approach, we consider various
factors, including but not limited to the portfolio
companys projected financial results, applicable market
trading and transaction comparables, applicable market yields
and leverage levels, the markets in which the portfolio company
does business, and comparisons of financial ratios of peer
companies that are public.
Under the yield approach, we use discounted cash flow models to
determine the present value of the future cash flow streams of
our debt investments, based on future interest and principal
payments as set forth in the associated loan agreements. In
determining fair value under the yield approach, we also
consider the following factors: applicable market yields and
leverage levels, credit quality, prepayment penalties, the
nature and realizable value of any collateral, the portfolio
companys ability to make payments and changes in the
interest rate environment and the credit markets that generally
may affect the price at which similar investments may be made.
We classify our investments in accordance with the 1940 Act. See
Note 2 to the consolidated financial statements for
definitions of Control, Affiliate and Non-Control Non-Affiliate
included elsewhere in this prospectus. For our Control
investments, we determine the fair value of debt and equity
investments using a combination of market and income approaches.
The valuation approaches for our Control investments estimate
the value of the investment if we were to sell, or exit, the
investment, assuming the highest and best use of the investment
by market participants. In addition, these valuation approaches
consider the value associated with our ability to influence the
capital structure of the portfolio company, as well as the
timing of a potential exit.
For our Affiliate or Non-Control/Non-Affiliate equity
investments, we use a combination of market and income
approaches as described above to determine the fair value. For
our Affiliate or Non-Control/Non-Affiliate debt investments, we
generally use the yield approach to determine fair value, as
long as it is appropriate. If there is deterioration in credit
quality or a debt investment is in workout status, we may
consider other factors in determining the fair value, including
the value attributable to the debt investment from the
enterprise value of the portfolio company or the proceeds that
would be received in a liquidation analysis.
Determination of fair value involves subjective judgments and
estimates. Accordingly, the notes to our financial statements
express the uncertainties with respect to the possible effect of
such valuations, and any changes in such valuations, on the
financial statements.
Revenue
Recognition
Investments and related investment
income. Realized gains or losses on portfolio
investments are calculated based upon the difference between the
net proceeds from the disposition and the cost basis of the
investment. Changes in the fair value of investments, as
determined by our board of directors through the application of
our valuation policy, are included as changes in unrealized
appreciation or depreciation of investments in the Statement of
Operations.
Interest and dividend income. Interest and
dividend income is recorded on the accrual basis to the extent
that we expect to collect such amounts. Interest and dividend
income is accrued based upon the outstanding principal amount
and contractual terms of debt and preferred equity investments.
Distributions of earnings from portfolio companies are evaluated
to determine if the distribution is income or a return of
capital.
Warrants. In connection with our debt
investments, we will sometimes receive warrants or other
equity-related securities (Warrants). We determine
the cost basis of Warrants based upon their respective fair
values on the date of receipt in proportion to the total fair
value of the debt and Warrants received. Any resulting
difference between the face amount of the debt and its recorded
fair value resulting from the assignment of value to the
Warrants are treated as original issue discount
(OID), and accreted into interest income based on
the effective interest method over the life of the debt security.
-51-
Fee income. Upon the prepayment of a loan or
debt security, any prepayment penalties are recorded as fee
income when received. In accordance with Fidus Mezzanine
Capital, L.P.s limited partnership agreement, we have
historically recorded transaction fees for structuring and
advisory services provided in connection with our investments as
a direct offset to management fee expense. After completion of
the formation transactions, all transaction fees received in
connection with our investments will be recognized as income. We
anticipate that such fees will include fees for services,
including structuring and advisory services, provided to our
portfolio companies. We expect to recognize income from fees for
providing such structuring and advisory services when the
services are rendered or the transactions are completed. We also
anticipate that we will receive upfront debt origination or
closing fees in connection with our debt investments. We expect
that such upfront debt origination and closing fees will be
capitalized as unearned income on our balance sheet and
amortized as additional interest income over the life of the
investment.
Payment-in-kind
interest. We have investments in our portfolio
that contain a
payment-in-kind
interest or dividends provision, which represents contractual
interest or dividends that are added to the principal balance
and is recorded as income. We will stop accruing
payment-in-kind
interest when it is determined that
payment-in-kind
interest is no longer collectible. To maintain RIC tax
treatment, substantially all of this income must be paid out to
stockholders in the form of distributions, even though we have
not yet collected the cash.
Non-accrual. Loans or preferred equity
securities are placed on non-accrual status when principal,
interest or dividend payments become materially past due, or
when there is reasonable doubt that principal, interest or
dividends will be collected. Interest payments received on
non-accrual loans may be recognized as income or applied to
principal depending upon managements judgment. Non-accrual
loans are restored to accrual status when past due principal,
interest or dividends are paid and, in managements
judgment, are likely to remain current.
Portfolio
Composition, Investment Activity and Yield
During the three months ended March 31, 2011, we invested
$0.3 million in one existing portfolio company with
borrowings obtained under a revolving credit agreement. This
borrowing was subsequently repaid during the quarter. During the
year ended December 31, 2010, we invested
$31.7 million in three new and five existing portfolio
companies. The new investments consisted primarily of
subordinated notes ($25.4 million, or 80.4%), senior
secured loans ($4.0 million, or 12.5%), warrants
($0.8 million, or 2.4%) and equity securities
($1.5 million, or 4.7%). Additionally, we received proceeds
from repayments of principal of $14.3 million during the
year ended December 31, 2010.
As of March 31, 2011, our investment portfolio totaled
$143.7 million and consisted of 16 portfolio companies. As
of March 31, 2011, our debt portfolio was entirely
comprised of fixed rate investments. Overall, the portfolio had
a net unrealized appreciation of $5.0 million as of
March 31, 2011. Our average portfolio company investment at
amortized cost was $8.7 million as of March 31, 2011.
As of December 31, 2010, our investment portfolio totaled
$141.3 million and consisted of 17 portfolio companies. As
of December 31, 2010, our debt portfolio was entirely
comprised of fixed-rate investments. Overall, the portfolio had
a net unrealized depreciation of $4.0 million as of
December 31, 2010. Our average portfolio company investment
at amortized cost was $8.5 million as of December 31,
2010.
As of December 31, 2009, our investment portfolio totaled
$122.9 million and consisted of 15 portfolio companies. As
of December 31, 2009, our debt portfolio was entirely
comprised of fixed-rate investments. Overall, the portfolio had
a net unrealized depreciation of $3.9 million as of
December 31, 2009. Our average portfolio company investment
at amortized cost was $8.5 million as of December 31,
2009.
The weighted average yield on debt investments at their cost
basis at March 31, 2011, December 31, 2010 and
December 31, 2009 was 14.9%, 15.0% and 15.6%, respectively.
Yields are computed using interest rates as of the balance sheet
date and include amortization of original issue discount. Yields
do not include debt investments that were on non-accrual status
as of the balance sheet date.
-52-
The following table shows the portfolio composition by
investment type at cost and fair value as a percentage of total
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans
|
|
|
14.1
|
%
|
|
|
13.4
|
%
|
|
|
15.8
|
%
|
Subordinated notes
|
|
|
76.4
|
|
|
|
72.2
|
|
|
|
69.9
|
|
Equity
|
|
|
7.9
|
|
|
|
12.0
|
|
|
|
12.1
|
|
Warrants
|
|
|
1.6
|
|
|
|
2.4
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans
|
|
|
11.2
|
%
|
|
|
11.6
|
%
|
|
|
12.0
|
%
|
Subordinated notes
|
|
|
74.7
|
|
|
|
75.2
|
|
|
|
72.6
|
|
Equity
|
|
|
9.4
|
|
|
|
9.6
|
|
|
|
14.4
|
|
Warrants
|
|
|
4.7
|
|
|
|
3.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by
geographic region at cost and fair value as a percentage of
total investments. The geographic composition is determined by
the location of the corporate headquarters of the portfolio
company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
29.5
|
%
|
|
|
28.1
|
%
|
|
|
12.7
|
%
|
Southwest
|
|
|
22.3
|
|
|
|
20.8
|
|
|
|
21.2
|
|
Northeast
|
|
|
15.7
|
|
|
|
20.3
|
|
|
|
27.1
|
|
Southeast
|
|
|
19.1
|
|
|
|
18.2
|
|
|
|
22.1
|
|
West
|
|
|
13.4
|
|
|
|
12.6
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
30.0
|
%
|
|
|
30.7
|
%
|
|
|
13.0
|
%
|
Southwest
|
|
|
25.9
|
|
|
|
24.7
|
|
|
|
23.7
|
|
Northeast
|
|
|
15.3
|
|
|
|
15.4
|
|
|
|
27.7
|
|
Southeast
|
|
|
18.7
|
|
|
|
19.0
|
|
|
|
22.9
|
|
West
|
|
|
10.1
|
|
|
|
10.2
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-53-
The following tables show the industry composition of our
portfolio at cost and fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation services
|
|
|
13.5
|
%
|
|
|
12.4
|
%
|
|
|
12.3
|
%
|
Movie theaters
|
|
|
9.1
|
|
|
|
8.7
|
|
|
|
|
|
Healthcare services
|
|
|
8.0
|
|
|
|
7.6
|
|
|
|
6.3
|
|
Niche manufacturing
|
|
|
3.2
|
|
|
|
3.1
|
|
|
|
6.5
|
|
Retail cleaning
|
|
|
5.4
|
|
|
|
5.1
|
|
|
|
5.7
|
|
Laundry services
|
|
|
6.7
|
|
|
|
6.3
|
|
|
|
7.2
|
|
Industrial products
|
|
|
6.6
|
|
|
|
6.3
|
|
|
|
8.7
|
|
Electronic components supplier
|
|
|
6.6
|
|
|
|
6.3
|
|
|
|
|
|
Specialty distribution
|
|
|
6.6
|
|
|
|
6.2
|
|
|
|
6.6
|
|
Printing services
|
|
|
6.0
|
|
|
|
5.6
|
|
|
|
6.2
|
|
Industrial cleaning & coatings
|
|
|
5.8
|
|
|
|
5.5
|
|
|
|
6.3
|
|
Commercial cleaning
|
|
|
5.9
|
|
|
|
5.6
|
|
|
|
6.3
|
|
Specialty cracker manufacturer
|
|
|
5.7
|
|
|
|
5.4
|
|
|
|
5.9
|
|
Government information technology services
|
|
|
4.0
|
|
|
|
3.8
|
|
|
|
|
|
Oil & gas services
|
|
|
3.4
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Aerospace manufacturing
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
3.8
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
8.9
|
|
Environmental services
|
|
|
|
|
|
|
5.5
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation services
|
|
|
16.3
|
%
|
|
|
14.5
|
%
|
|
|
13.0
|
%
|
Movie theaters
|
|
|
9.9
|
|
|
|
10.3
|
|
|
|
|
|
Healthcare services
|
|
|
8.0
|
|
|
|
8.1
|
|
|
|
6.5
|
|
Niche manufacturing
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
2.2
|
|
Retail cleaning
|
|
|
6.5
|
|
|
|
7.0
|
|
|
|
7.4
|
|
Laundry services
|
|
|
6.8
|
|
|
|
6.8
|
|
|
|
7.7
|
|
Industrial products
|
|
|
6.4
|
|
|
|
6.5
|
|
|
|
8.9
|
|
Electronic components supplier
|
|
|
6.4
|
|
|
|
6.5
|
|
|
|
|
|
Specialty distribution
|
|
|
6.3
|
|
|
|
6.4
|
|
|
|
6.5
|
|
Printing services
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.4
|
|
Industrial cleaning & coatings
|
|
|
5.7
|
|
|
|
5.8
|
|
|
|
6.5
|
|
Commercial cleaning
|
|
|
5.6
|
|
|
|
5.7
|
|
|
|
6.3
|
|
Specialty cracker manufacturer
|
|
|
5.5
|
|
|
|
5.5
|
|
|
|
6.1
|
|
Government information technology services
|
|
|
3.8
|
|
|
|
3.9
|
|
|
|
|
|
Oil & gas services
|
|
|
3.1
|
|
|
|
3.2
|
|
|
|
3.3
|
|
Aerospace manufacturing
|
|
|
3.1
|
|
|
|
3.0
|
|
|
|
4.0
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
9.2
|
|
Environmental services
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-54-
Portfolio
Asset Quality
We utilize an internally developed investment rating system for
our portfolio of investments. Investment Rating 1 is used for
investments that involve the least amount of risk in our
portfolio and the portfolio company is performing above
expectations. Investment Rating 2 is used for investments that
are performing substantially within our expectations and the
portfolio companys risk factors are neutral or favorable.
Each new portfolio investment enters our portfolio with
Investment Rating 2. Investment Rating 3 is used for investments
performing below expectations and require closer monitoring, but
with respect to which we expect a full return of original
capital invested and collection of all interest. Investment
Rating 4 is used for investments performing materially below
expectations, and have the potential for some loss of investment
return. Investment Rating 5 is used for investments performing
substantially below our expectations and where we expect a loss
of principal.
The following table shows the distribution of our investments on
the 1 to 5 investment rating scale at fair value as of
March 31, 2011, December 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Investments at
|
|
|
Percent of
|
|
|
Investments at
|
|
|
Percent of
|
|
|
Investments at
|
|
|
Percent of
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
|
(Dollars in thousands)
|
|
|
1
|
|
$
|
26,751
|
|
|
|
18.6
|
%
|
|
$
|
27,330
|
|
|
|
19.3
|
%
|
|
$
|
20,365
|
|
|
|
16.6
|
%
|
2
|
|
|
100,374
|
|
|
|
69.9
|
|
|
|
97,739
|
|
|
|
69.2
|
|
|
|
67,517
|
|
|
|
54.9
|
|
3
|
|
|
15,593
|
|
|
|
10.9
|
|
|
|
15,108
|
|
|
|
10.7
|
|
|
|
25,506
|
|
|
|
20.8
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,840
|
|
|
|
5.6
|
|
5
|
|
|
934
|
|
|
|
0.6
|
|
|
|
1,164
|
|
|
|
0.8
|
|
|
|
2,672
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
143,652
|
|
|
|
100.0
|
%
|
|
$
|
141,341
|
|
|
|
100.0
|
%
|
|
$
|
122,900
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon our investment rating system, the weighted average
rating of our portfolio as of March 31, 2011,
December 31, 2010 and December 31, 2009 was 1.9, 1.9
and 2.2, respectively. As of March 31, 2011, we had no
investments on
non-accrual
status. As of December 31, 2010, the fair value of our
non-accrual investments comprised 0.0% of the total fair value
of our portfolio, and the cost of our non-accrual investments
comprised 5.5% of the total cost of our portfolio. As of
December 31, 2009, the fair value of our non-accrual
investments comprised 2.2% of the total fair value of our
portfolio, and the cost of our non-accrual investments comprised
6.5% of the total cost of our portfolio.
Discussion
and Analysis of Results of Operations
Comparison
of the three months ended March 31, 2011 and March 31,
2010
Investment
Income
For the three months ended March 31, 2011, total investment
income was $4.8 million, an increase of $0.6 million,
or 13.5% over the $4.2 million of total investment income
for the three months ended March 31, 2010. The increase was
attributable to a $0.7 million increase in interest and fee
income from investments, partially offset by a $0.1 million
decrease in dividend income. The increase in interest and fee
income is primarily due to higher average levels of outstanding
debt investments, resulting from the closing of seven new
investments totaling $29.4 million during 2010, partially
offset by the repayment of $14.3 million of debt
securities. The decrease in dividend income is primarily
attributable to one equity investment in a portfolio company
that was placed on non-accrual status in 2010.
Expenses
For the three months ended March 31, 2011, total expenses
were $2.5 million, an increase of $0.6 million, or
29.9%, over the $1.9 million of total expenses for the
three months ended March 31, 2010. The increase in total
expenses was primarily attributable to increases in interest
expense and the management fee paid to Fidus Capital, LLC.
Interest expense increased $0.2 million as a result of
higher average balances
-55-
of SBA debentures outstanding during the three months ended
March 31, 2011 than the comparable period in 2010. The
management fee after management fee offset increased
$0.3 million, or 37.1%, primarily due to a decrease in
management fee offset resulting from lower new investment
activity during the three months ended March 31, 2011 than
the comparable period in 2010.
Net
Investment Income
As a result of the $0.6 million increase in total
investment income as compared to the $0.6 million increase
in total expenses, net investment income for the three months
ended March 31, 2011 was $2.3 million, or essentially
unchanged from the comparable period in 2010.
Net
Increase in Net Assets Resulting From Operations
For the three months ended March 31, 2011, the total
realized loss on investments was $7.9 million resulting
from one non-control/non-affiliate investment. For the three
months ended March 31, 2010, the total realized loss on
investments was nominal.
During the three months ended March 31, 2011, we recorded
net unrealized appreciation on investments of $8.9 million
comprised of unrealized appreciation on seven investments
totaling $2.6 million and unrealized depreciation on 11
other investments totaling $1.5 million. In addition, we
recorded net unrealized depreciation reclassification
adjustments of $7.9 million related to a realized loss on
the non-control/non-affiliate investment noted above.
As a result of these events, our net increase in net assets
resulting from operations during the three months ended
March 31, 2011, was $3.3 million, or an increase of
$6.8 million compared to a net decrease in net assets
resulting from operations of $3.4 million during the three
months ended March 31, 2010.
Comparison
of fiscal years ended December 31, 2010 and
December 31, 2009
Investment
Income
For the year ended December 31, 2010, total investment
income was $18.0 million, an increase of $3.8 million,
or 26.8%, over the $14.2 million of total investment income
for the year ended December 31, 2009. The increase was
attributable to a $4.6 million increase in interest and fee
income from investments, partially offset by a $0.8 million
decrease in dividend income. The increase in interest and fee
income is primarily attributable to higher average levels of
outstanding debt investments, which was principally due to the
closing of seven new debt investments totaling
$29.4 million during 2010, partially offset by the
repayment of $14.3 million of debt securities. The decrease
in dividend income is primarily attributable to one equity
investment in a portfolio company that was placed on non-accrual
status during 2010.
Expenses
For the year ended December 31, 2010, total expenses were
$9.0 million, an increase of $1.9 million, or 27.3%,
over the $7.1 million of total expenses for the year ended
December 31, 2009. The increase in total expenses was
primarily attributable to a $1.3 million increase in
interest expense as a result of higher average balances of SBA
debentures outstanding during the year ended December 31,
2010 than the comparable period in 2009. The management fees
paid to Fidus Capital, LLC after management fee offset increased
$0.5 million, or 15.7%, primarily attributable to a
decrease in management fee offset due to lower new investment
activity during the year ended December 31, 2010 than the
comparable period in 2009. Other expenses increased
$0.3 million, or 179.9%, primarily attributable to a loss
on dividend receivable of $0.3 million related to one
portfolio investment that was placed on non-accrual status
during 2010.
Net
Investment Income
As a result of the $3.8 million increase in total
investment income as compared to the $1.9 million increase
in total expenses, net investment income for the year ended
December 31, 2010, was $9.0 million, or
-56-
a 26.3% increase, compared to net investment income of
$7.1 million during the year ended December 31, 2009.
Net
Increase in Net Assets Resulting from Operations
For the year ended December 31, 2010, the total realized
loss on investments was $3.9 million, all of such realized
loss was on non-control/non-affiliate investments, which was
primarily the result of the restructuring of one debt
investment. For the year ended December 31, 2009, total
realized losses on investments totaled $5.6 million.
Realized losses on control investments for 2009 was
$3.8 million, which primarily consisted of realized losses
on two investments. Realized losses on affiliate investments for
2009 was $1.8 million, which primarily consisted of
realized losses on two investments.
During the year ended December 31, 2010, we recorded net
unrealized depreciation on investments in the amount of
$0.1 million, comprised primarily of unrealized
depreciation on 11 investments totaling $10.2 million and
unrealized appreciation on 13 other investments totaling
$6.3 million. In addition, we recorded net unrealized
depreciation reclassification adjustments of $3.9 million
related to a realized loss on the non-control/non-affiliate
investment noted above.
As a result of these events, our net increase in net assets
resulting from operations during the year ended
December 31, 2010, was $5.0 million, or an increase of
$6.6 million compared to a net decrease in net assets
resulting from operations of $1.6 million during the year
ended December 31, 2009.
Comparison
of fiscal years ended December 31, 2009 and
December 31, 2008
Investment
Income
For the year ended December 31, 2009, total investment
income was $14.2 million, an increase of $6.7 million,
or 89.0%, over the $7.5 million of total investment income
for the year ended December 31, 2008. The increase was
primarily attributable to a $6.3 million increase in
interest and fee income from investments. The increase in
interest and fee income is primarily attributable to higher
average levels of outstanding debt investments, which was
principally due to the closing of ten new debt investments
totaling $48.8 million during 2009.
Expenses
For the year ended December 31, 2009, total expenses were
$7.1 million, an increase of $1.8 million, or 34.8%,
over the $5.3 million of total expenses for the year ended
December 31, 2008. The increase in total expenses was
primarily attributable to a $1.7 million increase in
interest expense as a result of higher average balances of SBA
debentures outstanding during the year ended December 31,
2009 than the comparable period in 2008. The management fees
paid to Fidus Capital, LLC after management fee offset decreased
$0.1 million, primarily attributable to an increase in the
management fee offset due to greater new investment activity
during the year ended December 31, 2009 than the comparable
period in 2008.
Net
Investment Income
As a result of the $6.7 million increase in total
investment income as compared to the $1.8 million increase
in total expenses, net investment income for the year ended
December 31, 2009 was $7.1 million, or a 216.2%
increase, compared to net investment income of $2.2 million
during the year ended December 31, 2008.
Net
Decrease in Net Assets Resulting from Operations
For the year ended December 31, 2009, total realized losses
on investments was $5.6 million. Realized losses on control
investments for 2009 was $3.8 million, which primarily
consisted of realized losses on two investments. Realized losses
on affiliate investments for 2009 was $1.8 million, which
primarily consisted of realized losses on two investments.
During the year ended December 31, 2008, we did not record
any realized gains or losses.
-57-
During the year ended December 31, 2009, we recorded net
unrealized depreciation on investments in the amount of
$3.1 million, comprised primarily of unrealized
depreciation on ten investments totaling $7.5 million and
unrealized appreciation on six other investments totaling
$3.1 million. In addition, we recorded net unrealized
depreciation reclassification adjustments of $1.3 million
related to the realized losses on affiliate investments noted
above. During the year ended December 31, 2008, we recorded
net unrealized depreciation on investments in the amount of
$0.8 million, comprised of unrealized depreciation on one
investment.
As a result of these events, our net decrease in net assets
resulting from operations during the year ended
December 31, 2009, was $1.6 million, or a decrease of
$3.1 million compared to a net increase in net assets
resulting from operations of $1.5 million during the year
ended December 31, 2008.
Liquidity
and Capital Resources
Cash
Flows
For the three months ended March 31, 2011, we experienced a
net increase in cash and cash equivalents in the amount of
$7.2 million. During that period, we used $0.5 million
in cash from operating activities, primarily due to cash
payments for interest on borrowings of approximately
$2.4 million, the management fee of $1.0 million and
other expenses partially offset by cash interest receipts on
investments of $3.2 million. During the same period, we
generated $7.8 million from financing activities,
consisting of net borrowings under our credit facility totaling
$0.8 million and capital contributions totaling
$7.0 million.
For the three months ended March 31, 2010, we experienced a
net increase in cash and cash equivalents in the amount of
$0.1 million. During that period, we used
$12.1 million in cash from operating activities primarily
to fund $12.8 million in new investments which were
partially offset by $1.1 million in repayments. During the
same period, we generated $12.2 million from financing
activities consisting of $12.5 million in new SBA debenture
borrowing partially offset by the payment of $0.3 million
in deferred financing costs.
For the year ended December 31, 2010, we experienced a net
decrease in cash and cash equivalents in the amount of
$0.9 million. During that period, we used
$12.8 million in cash in operating activities, primarily
for the funding of $31.7 million of investments, partially
offset by $14.3 million of principal payments received and
$9.0 million of net investment income. During the same
period, we generated $11.9 million from financing
activities, consisting of borrowings under SBA debentures in the
amount of $14.0 million, partially offset by deferred
financing costs paid by us in the amount of $0.6 million
and a capital distribution in the amount of $1.5 million.
For the year ended December 31, 2009, we experienced a net
increase in cash and cash equivalents in the amount of
$1.3 million. During that period, we used
$48.4 million in cash in operating activities, primarily
for the funding of $50.8 million of investments, partially
offset by $7.1 million of net investment income. During the
same period, we generated $49.7 million from financing
activities, consisting of borrowings under SBA debentures in the
amount of $33.0 million and partners capital
contributions in the amount of $17.5 million. These amounts
were partially offset by financing fees paid by us in the amount
of $0.8 million.
For the year ended December 31, 2008, we experienced a net
increase in cash and cash equivalents in the amount of
$1.1 million. During that period, we used
$40.5 million in cash in operating activities, primarily
for the funding of $42.6 million of investments, partially
offset by $2.0 million of principal payments received and
$2.2 million of net investment income. During the same
period, we generated $41.6 million from financing
activities, consisting of borrowings under SBA debentures in the
amount of $46.5 million and partners capital
contributions in the amount of $11.5 million. These amounts
were partially offset by financing fees paid by us in the amount
of $1.1 million and repayment of outstanding borrowings on
our line of credit in the amount of $15.3 million.
Capital
Resources
As of March 31, 2011, we had $9.0 million in cash and cash
equivalents, and our net assets totaled $62.3 million. We
intend to generate additional cash primarily from net proceeds
of this offering and any
-58-
future offerings of securities, future borrowings as well as
cash flows from operations, including income earned from
investments in our portfolio companies and, to a lesser extent,
from the temporary investment of cash in U.S. government
securities and other high-quality debt investments that mature
in one year or less. Our primary use of funds will be
investments in portfolio companies and cash distributions to
holders of our common stock.
In order to satisfy the Code requirements applicable to a RIC,
we intend to distribute to our stockholders substantially all of
our income except for certain net capital gains. In addition, as
a business development company, we generally will be required to
meet a coverage ratio of total assets to total senior
securities, which include all of our borrowings and any
preferred stock we may issue in the future, of at least 200.0%.
This requirement will limit the amount that we may borrow. Upon
the receipt of the net proceeds from this offering, we
anticipate that we will be in compliance with the asset coverage
ratio under the 1940 Act.
We anticipate that we will continue to fund our investment
activities through a combination of debt and additional equity
capital. Due to Fidus Mezzanine Capital, L.P.s status as a
licensed SBIC, it has the ability to issue debentures guaranteed
by the SBA at favorable interest rates. Under the Small Business
Investment Act and the SBA rules applicable to SBICs, an SBIC
can have outstanding at any time debentures guaranteed by the
SBA in an amount up to twice its regulatory capital, which
generally is the amount raised from private investors. The
maximum statutory limit on the dollar amount of outstanding
debentures guaranteed by the SBA issued by a single SBIC as of
March 31, 2011, was $150.0 million. Debentures
guaranteed by the SBA have fixed interest rates that approximate
prevailing
10-year
Treasury Note rates plus a spread and have a maturity of ten
years with interest payable semi-annually. The principal amount
of the debentures is not required to be paid before maturity but
may be pre-paid at any time. As of March 31, 2011, Fidus
Mezzanine Capital, L.P. had $93.5 million of outstanding
SBA debentures, which had a weighted average interest rate of
5.4%. Based on its $75.9 million of regulatory capital,
Fidus Mezzanine Capital, L.P. has the current capacity to issue
up to an additional $56.5 million of debentures guaranteed
by the SBA.
Recently
Issued Accounting Standards
In January 2010, the FASB issued an update to ASC Topic 820,
Fair Value Measurements and Disclosures Topic, which
requires additional disclosures about inputs into valuation
techniques, disclosures about significant transfers into or out
of Levels 1 and 2, and disaggregation of purchases, sales,
issuances and settlements in the Level 3 roll forward
disclosure. The guidance is effective for interim and annual
reporting periods beginning after December 15, 2009 except
for the disclosures about purchases, sales issuances, and
settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of these updates
did not have a material impact on our financial statements.
Off-Balance
Sheet Arrangements
We may be a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financial needs of our portfolio companies. As of March 31,
2011 and December 31, 2010, our only off-balance sheet
arrangements consisted of $0.5 million of an unfunded
commitment to provide debt financing to one of our portfolio
companies. As of December 31, 2009, our only off-balance
sheet arrangement consisted of a $50,000 unfunded commitment to
provide debt financing to one of our portfolio companies. Such
commitments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in our balance sheets.
-59-
Contractual
Obligations
As of March 31, 2011, our future fixed commitments for cash
payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 and
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
(Dollars in thousands)
|
|
|
SBA debentures
|
|
$
|
93,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
93,500
|
|
Interest due on SBA Debentures
|
|
|
40,226
|
|
|
|
2,537
|
|
|
|
5,057
|
|
|
|
5,044
|
|
|
|
5,044
|
|
|
|
5,044
|
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,726
|
|
|
$
|
2,537
|
|
|
$
|
5,057
|
|
|
$
|
5,044
|
|
|
$
|
5,044
|
|
|
$
|
5,044
|
|
|
$
|
111,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have certain contracts under which we have material future
commitments. We intend to enter into the Investment Advisory
Agreement with our investment advisor in accordance with the
1940 Act. The Investment Advisory Agreement will become
effective upon the closing of this offering. Under the
Investment Advisory Agreement, our investment advisor has agreed
to provide us with investment advisory and management services.
We have agreed to pay the following amounts for these services
(a) a management fee equal to a percentage of the average
of our total assets (excluding cash and cash equivalents) and
(b) an incentive fee based on our performance. See
Management and Other Agreements Investment
Advisory Agreement Management Fee.
We also intend to enter into the Administration Agreement with
our investment advisor. The Administration Agreement will become
effective upon the closing of the formation transactions and
this offering. Under the Administration Agreement, our
investment advisor has agreed to furnish us with office
facilities and equipment, provide us clerical, bookkeeping and
record keeping services at such facilities and provide us with
other administrative services necessary to conduct our
day-to-day operations. See Management and Other
Agreements Administration Agreement.
If any of the contractual obligations discussed above are
terminated, our costs under any new agreements that we enter
into may increase. In addition, we would likely incur
significant time and expense in locating alternative parties to
provide the services we expect to receive under our Investment
Advisory Agreement and our Administration Agreement. Any new
investment advisory agreement would also be subject to approval
by our independent board members. Upon the completion of this
offering, the existing management services agreement of Fidus
Mezzanine Capital, L.P. will terminate with no continuing
payment or other obligations on the part of either party.
Quantitative
and Qualitative Disclosure about Market Risk
We are subject to financial market risks, including changes in
interest rates. Changes in interest rates affect both our cost
of funding and the valuation of our investment portfolio. Our
risk management systems and procedures are designed to identify
and analyze our risk, to set appropriate policies and limits and
to continually monitor these risks and limits by means of
reliable administrative and information systems and other
policies and programs. In the future, our investment income may
also be affected by changes in various interest rates, including
LIBOR and prime rates, to the extent of any debt investments
that include floating interest rates. As of March 31, 2011,
all of our debt investments bore interest at fixed rates and all
of our pooled SBA debentures bore interest at fixed rates.
Assuming that the balance sheets as of March 31, 2011,
December 31, 2010 and December 31, 2009 were to remain
constant, a hypothetical 1.0% change in interest rates would not
have a material effect on our level of interest income from debt
investments.
Because we currently borrow, and plan to borrow in the future,
money to make investments, our net investment income is
dependent upon the difference between the rate at which we
borrow funds and the rate at which we invest the funds borrowed.
Accordingly, there can be no assurance that a significant change
in market interest rates will not have a material adverse effect
on our net investment income. In periods of rising interest
rates, our cost of funds would increase, which could reduce our
net investment income if there is not a corresponding increase
in interest income generated by our investment portfolio.
-60-
SENIOR
SECURITIES
Information about our senior securities is shown in the
following table as of March 31, 2011 and December 31 for
the years indicated in the table. We have derived the
information as of December 31, 2007, December 31, 2008
and March 31, 2011 from unaudited financial data. The
information as of December 31, 2009 and December 31,
2010 has been derived from our consolidated financial
statements, which have been audited by our independent
registered public accounting firm and are included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Involuntary
|
|
|
|
|
Exclusive of
|
|
Asset
|
|
Liquidation
|
|
Average
|
|
|
Treasury
|
|
Coverage
|
|
Preference
|
|
Market Value
|
Class and Year
|
|
Securities(1)
|
|
per
Unit(2)
|
|
per
Unit(3)
|
|
per
Unit(4)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
SBA debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
N/A
|
|
2008
|
|
|
46,450
|
|
|
|
1,701
|
|
|
|
|
|
|
|
N/A
|
|
2009
|
|
|
79,450
|
|
|
|
1,610
|
|
|
|
|
|
|
|
N/A
|
|
2010
|
|
|
93,500
|
|
|
|
1,556
|
|
|
|
|
|
|
|
N/A
|
|
2011 (as of March 31, unaudited)
|
|
|
93,500
|
|
|
|
1,662
|
|
|
|
|
|
|
|
N/A
|
|
Credit facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
15,250
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
N/A
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
2011 (as of March 31, unaudited)
|
|
|
750
|
|
|
|
1,662
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Total amount of each class of senior securities outstanding at
the end of the period presented. |
|
(2) |
|
Asset coverage per unit is the ratio of the carrying value of
our total consolidated assets, less all liabilities and
indebtedness not represented by senior securities, to the
aggregate amount of senior securities representing indebtedness.
Asset coverage per unit is expressed in terms of dollar amounts
per $1,000 of indebtedness. |
|
(3) |
|
The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it. The
indicates information which the SEC
expressly does not require to be disclosed for certain types of
senior securities. |
|
(4) |
|
Not applicable because senior securities are not registered for
public trading. |
-61-
THE
COMPANY
General
We provide customized mezzanine debt and equity financing
solutions to lower middle-market companies, which we define as
U.S.-based
companies having revenues between $10.0 million and
$150.0 million. Our investment objective is to provide
attractive risk-adjusted returns by generating both current
income from our debt investments and capital appreciation from
our equity related investments. We were formed to continue and
expand the business of Fidus Mezzanine Capital, L.P., a fund
formed in February 2007 that is licensed by the SBA as an SBIC
and to make investments in portfolio companies directly at the
parent level. Upon consummation of this offering and the
formation transactions, we will acquire Fidus Mezzanine Capital,
L.P. as our wholly-owned SBIC subsidiary. Our investment
strategy includes partnering with business owners, management
teams and financial sponsors by providing customized financing
for change of ownership transactions, recapitalizations,
strategic acquisitions, business expansion and other growth
initiatives. We seek to maintain a diversified portfolio of
investments in order to help mitigate the potential effects of
adverse economic events related to particular companies, regions
or industries. Since commencing operations in 2007, we have
invested an aggregate of $170.4 million in 21 portfolio
companies.
We invest in companies that possess some or all of the following
attributes: predictable revenues; positive cash flows;
defensible
and/or
leading market positions; diversified customer and supplier
bases; and accomplished and operationally-focused management
teams. We target companies in the lower middle-market with
EBITDA between $3.0 million and $20.0 million;
however, we may from time to time opportunistically make
investments in larger or smaller companies. We expect that our
investments will typically range between $5.0 million and
$15.0 million per portfolio company.
As of March 31, 2011, we had debt and equity investments in
16 portfolio companies with an aggregate fair value of
$143.7 million. The weighted average yield on all of our
debt investments as of March 31, 2011 was 14.9%. Yields are
computed using the effective interest rates as of March 31,
2011, including accretion of original issue discount, divided by
the weighted average cost of debt investments. There can be no
assurance that the weighted average yield will remain at its
current level.
Market
Opportunity
We believe that the limited amount of capital available to lower
middle-market companies, coupled with the desire of these
companies for flexible and partnership-oriented sources of
capital, creates an attractive investment environment for us. We
believe the following factors will continue to provide us with
opportunities to grow and deliver attractive returns to
stockholders.
The lower middle-market represents a large, underserved
market. According to Dun & Bradstreet,
as of January 31, 2011, there were approximately
105,000 companies in the lower middle-market, defined as
companies with revenues between $10.0 million and
$150.0 million. We believe that lower middle-market
companies, most of which are privately-held, are relatively
underserved by traditional capital providers such as commercial
banks, finance companies, hedge funds and collateralized loan
obligation funds. Further, we believe that companies of this
size generally are less leveraged relative to their enterprise
value, as compared to larger companies with more financing
options.
Recent credit market dislocation for lower middle-market
companies has created an opportunity for attractive
risk-adjusted returns. We believe the credit
crisis that began in 2007 and the subsequent exit from lower
middle-market lending of traditional capital sources, such as
commercial banks, finance companies, hedge funds and
collateralized loan obligation funds, has resulted in an
increase in opportunities for alternative funding sources. In
addition, we believe that there continues to be less competition
in our market and an increased opportunity for attractive
risk-adjusted returns. The remaining lenders and investors in
the current environment are requiring lower amounts of senior
and total leverage, increased equity commitments and more
comprehensive covenant packages than was customary in the years
leading up to the credit crisis.
-62-
Large pools of uninvested private equity capital should drive
future transaction velocity. According to
Pitchbook, as of June 30, 2010, there was approximately
$42 billion of uninvested capital raised by private equity
funds under $500.0 million in fund size with vintage years
from 2005 to 2010. As a result, we expect that private equity
firms will remain active investors in lower middle-market
companies. Private equity funds generally seek to leverage their
investments by combining their equity capital with senior
secured loans
and/or
mezzanine debt provided by other sources, and we believe that
our investment strategy positions us well to partner with such
private equity investors.
Future refinancing activity is expected to create additional
investment opportunities. A high volume of debt
financings completed between the years 2005 and 2008 is expected
to mature in the coming years. Based on Standard &
Poors LCD middle-market statistics, an aggregate of
$113.9 billion middle-market loans were issued from 2004 to
2007 and are expected to mature in five to seven years. We
believe this supply of opportunities coupled with limited
financing providers focused on lower middle-market companies
will continue to produce for us investment opportunities with
attractive risk-adjusted returns.
Business
Strategy
We intend to accomplish our goal of becoming the premier
provider of capital to and value-added partner of lower
middle-market companies by:
Leveraging the Experience of Our Investment
Advisor. Our investment advisors investment
professionals have an average of over 20 years of
experience investing in, lending to and advising companies
across changing market cycles. These professionals have diverse
backgrounds with prior experience in senior management positions
at investment banks, specialty finance companies, commercial
banks and privately and publicly held companies and have
extensive experience investing across all levels of the capital
structure of lower middle-market companies. The members of our
investment advisor have invested more than $750 million in
mezzanine debt, senior secured debt (including unitranche debt)
and equity securities of primarily lower middle-market
companies. We believe this experience provides our investment
advisor with an in-depth understanding of the strategic,
financial and operational challenges and opportunities of lower
middle-market companies. Further, we believe this understanding
positions our investment advisor to effectively identify,
assess, structure and monitor our investments.
Capitalizing on Our Strong Transaction Sourcing
Network. Our investment advisors investment
professionals possess an extensive network of long-standing
relationships with private equity firms, middle-market senior
lenders, junior-capital partners, financial intermediaries and
management teams of privately owned businesses. We believe that
the combination of these relationships and our reputation as a
reliable, responsive and value-added financing partner helps
generate a steady stream of new investment opportunities and
proprietary deal flow. Further, we anticipate that we will
obtain leads from our greater visibility as a publicly-traded
business development company. Since commencing operations in
2007, the investment professionals of our investment advisor
have reviewed over 850 investment opportunities primarily in
lower middle-market companies through March 31, 2011.
Serving as a Value-Added Partner with Customized Financing
Solutions. We follow a partnership-oriented
approach in our investments and focus on opportunities where we
believe we can add value to a portfolio company. We primarily
concentrate on industries or market niches in which the
investment professionals of our investment advisor have prior
experience. The investment professionals of our investment
advisor also have expertise in structuring securities at all
levels of the capital structure, which we believe positions us
well to meet the needs of our portfolio companies. We will
invest in mezzanine debt securities, typically coupled with an
equity interest; however, on a selective basis we may invest in
senior secured or unitranche loans. Further, as a
publicly-traded business development company, we will have a
longer investment horizon without the capital return
requirements of traditional private investment vehicles. We
believe this flexibility will enable us to generate attractive
risk-adjusted returns on invested capital and enable us to be a
better long-term partner for our portfolio companies. We believe
that by leveraging the industry and structuring expertise of our
investment advisor coupled with our long-term investment
horizon, we are well positioned to be a value-added partner for
our portfolio companies.
-63-
Employing Rigorous Due Diligence and Underwriting Processes
Focused on Capital Preservation. Our investment
advisor follows a disciplined and credit-oriented approach to
evaluating and investing in companies. We focus on companies
with proven business models, significant free cash flow,
defensible market positions and significant enterprise value
cushion for our debt investments. In making investment
decisions, we seek to minimize the risk of capital loss without
foregoing the opportunity for capital appreciation. Our
investment advisors investment professionals have
developed extensive due diligence and underwriting processes
designed to assess a portfolio companys prospects and to
determine the appropriate investment structure. Our investment
advisor thoroughly analyzes each potential portfolio
companys competitive position, financial performance,
management team, growth potential and industry attractiveness.
As part of this process, our investment advisor also
participates in meetings with management, tours of facilities,
discussions with industry professionals and third-party reviews.
We believe this approach enables us to build and maintain an
attractive investment portfolio that meets our return and value
criteria over the long term.
Actively Managing our Portfolio. We believe
that our investment advisors initial and ongoing portfolio
review process allows us to effectively monitor the performance
and prospects of our portfolio companies. We seek to obtain
board observation rights or board seats with respect to our
portfolio companies and we conduct monthly financial reviews and
regular discussions with portfolio company management. We
structure our investments with a comprehensive set of financial
maintenance, affirmative and negative covenants. We believe that
active monitoring of our portfolio companies covenant
compliance provides us with an early warning of any financial
difficulty and enhances our ability to protect our invested
capital.
Maintaining Portfolio Diversification. We seek
to maintain a portfolio of investments that is diversified among
companies, industries and geographic regions. We have made
investments in portfolio companies in the following industries:
business services, industrial products and services, value-added
distribution, healthcare products and services, consumer
products and services (including retail, food and beverage),
defense and aerospace, transportation and logistics, government
information technology services and niche manufacturing. We
believe that investing across various industries helps mitigate
the potential effects of negative economic events for particular
companies, regions and industries.
Benefiting from Lower Cost of Capital. Fidus
Mezzanine Capital, L.P.s SBIC license allows us to issue
SBA debentures. These SBA debentures carry long-term fixed rates
that are generally lower than rates on comparable bank and
public debt. Because lower-cost SBA leverage is, and will
continue to be, a significant part of our funding strategy, our
relative cost of debt capital should be lower than many of our
competitors. We may also apply for a second SBIC license through
which we may issue more SBA debentures to fund additional
investments; however, we can make no assurances that, if we do
apply, the SBA will approve such application. The SBA
regulations currently limit the amount that is available to be
borrowed by Fidus Mezzanine Capital, L.P. to
$150.0 million. If we apply and are approved by the SBA for
a second SBIC license, the maximum amount of outstanding SBA
debentures for two or more SBICs under common control cannot
exceed $225.0 million.
About Our
Advisor
The investment activities of Fidus Mezzanine Capital, L.P. are
currently managed by Fidus Capital, LLC. Upon consummation of
the formation transactions, Fidus Mezzanine Capital, L.P. will
terminate the current management services agreement with Fidus
Capital, LLC and we will enter into the Investment Advisory
Agreement with Fidus Investment Advisors, LLC, as our investment
advisor. The investment professionals of Fidus Capital, LLC, who
are also the investment professionals of Fidus Investment
Advisors, LLC, are responsible for sourcing potential
investments, conducting research and diligence on potential
investments and equity sponsors, analyzing investment
opportunities, structuring our investments and monitoring our
investments and portfolio companies on an ongoing basis. Fidus
Investment Advisors, LLC is a newly formed Delaware limited
liability company that is a registered investment advisor under
the Advisers Act. In addition, Fidus Investment Advisors, LLC
will serve as our administrator pursuant to the Administration
Agreement. Our investment advisor has no prior experience
managing or administering any business development company.
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Our relationship with our investment advisor will be governed by
and dependent on the Investment Advisory Agreement and may be
subject to conflicts of interest. See Related-Party
Transactions and Certain Relationships Conflicts of
Interest. Pursuant to the terms of the Investment Advisory
Agreement, our investment advisor will provide us with advisory
services in exchange for a base management fee and incentive
fee. See Management and Other Agreements
Investment Advisory Agreement for a discussion of the base
management fee and incentive fee payable by us to our investment
advisor. These fees are based on our total assets (other than
cash or cash equivalents but including assets purchased with
borrowed amounts) and, therefore, our investment advisor will
benefit when we incur debt or use leverage. See Risk
Factors Our incentive fee structure may create
incentives for our investment advisor that are not fully aligned
with the interests of our stockholders. Our board of
directors is charged with protecting our interests by monitoring
how our investment advisor addresses these and other conflicts
of interest associated with its management services and
compensation. While our board of directors is not expected to
review or approve each borrowing or incurrence of leverage, our
independent directors will periodically review our investment
advisors services and fees as well as its portfolio
management decisions and portfolio performance. In connection
with these reviews, our independent directors will consider
whether the fees and expenses (including those related to
leverage) that we pay to our investment advisor remain
appropriate.
Our investment advisors investment professionals will
continue to capitalize on their significant deal origination and
sourcing, credit underwriting, due diligence, investment
structuring, execution, portfolio management and monitoring
experience. These professionals have developed a broad network
of contacts within the investment community and have an average
of over 20 years of experience investing in, lending to and
advising lower middle-market companies. In addition, our
investment advisors investment professionals have gained
extensive experience investing in assets that constitute our
primary focus and have expertise in investing across all levels
of the capital structure of lower middle-market companies.
Investments
We seek to create a diversified investment portfolio that will
primarily include mezzanine loans and equity securities. We
intend to invest between $5.0 million to $15.0 million
per transaction in the securities of lower middle-market
companies, although this investment size may vary
proportionately with the size of our capital base. Our
investment objective is to provide attractive risk-adjusted
returns by generating both current income from our mezzanine
debt investments and capital appreciation from our equity
related investments. We may invest in the equity securities of
our portfolio companies, such as preferred stock, common stock,
warrants and other equity interests, either directly or in
conjunction with our mezzanine debt investments. As of
March 31, 2011, 76.4% of our investments were mezzanine
loans, 14.1% were senior secured loans and 9.5% were equity
securities based on cost.
Mezzanine Debt Investments. We typically
invest in mezzanine debt, which includes senior subordinated
notes and junior secured loans. These loans typically will have
relatively high, fixed interest rates (often representing a
combination of cash pay and
payment-in-kind
interest), prepayment penalties and amortization of principal
deferred to maturity. Subordinated loans generally allow the
borrower to make a large lump sum payment of principal at the
end of the loan term, and there is a risk of loss if the
borrower is unable to pay the lump sum or refinance the amount
owed at maturity. Subordinated investments are generally more
volatile than secured loans and may involve a greater risk of
loss of principal. In certain situations where we are able to
structure an investment as a junior, secured loan, we will
obtain a junior security interest in the assets of these
portfolio companies that will serve as collateral in support of
the repayment of such loan. This collateral may take the form of
second-priority liens on the assets of a portfolio company.
Senior Secured Loans. We will also
opportunistically structure some of our future debt investments
as senior secured or unitranche loans. Senior secured loans will
typically provide for a fixed interest rate and may contain some
minimum principal amortization, excess cash flow sweep features
and prepayment penalties. Senior secured loans are secured by a
first or second priority lien in all existing and future assets
of the borrower and may take the form of term loans or revolving
lines of credit. Unitranche debt financing involves issuing one
debt security that blends the risk and return profiles of both
secured and subordinated
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debt. We believe that unitranche debt can be attractive for many
lower middle-market companies given their size in order to
reduce structural complexity and potential conflicts among
creditors.
Equity Securities. Our equity securities
typically consist of either a direct minority equity investment
in common or preferred stock of a portfolio company, or we may
receive warrants to buy a minority equity interest in a
portfolio company in connection with a debt investment. Warrants
we receive with our debt investments typically require only a
nominal cost to exercise, and thus, as a portfolio company
appreciates in value, we may achieve additional investment
return from this equity interest. Our equity investments are
typically not control-oriented investments, and in many cases,
we acquire equity securities as part of a group of private
equity investors in which we are not the lead investor. We may
structure such equity investments to include provisions
protecting our rights as a minority-interest holder, as well as
a put, or right to sell such securities back to the
issuer, upon the occurrence of specified events. In many cases,
we may also seek to obtain registration rights in connection
with these equity interests, which may include demand and
piggyback registration rights. Our equity
investments typically are made in connection with debt
investments in the same portfolio companies.
We generally seek to invest in companies from the broad range of
industries in which our investment advisor has direct
experience. The following is a representative list of the
industries in which we may elect to invest; however, we may
invest in other industries if we are presented with attractive
opportunities:
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business services;
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industrial products and services;
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value-added distribution;
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healthcare products and services;
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consumer products and services (including retail, food and
beverage);
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defense and aerospace;
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transportation and logistics;
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government information technology services; and
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niche manufacturing.
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Investment
Criteria/Guidelines
We use the following criteria and guidelines in evaluating
investment opportunities and constructing our portfolio.
However, not all of these criteria and guidelines have been, or
will be, met in connection with each of our investments.
Value Orientation / Positive Cash
Flow. Our investment advisor places a premium on
analysis of business fundamentals from an investors
perspective and has a distinct value orientation. We focus on
companies with proven business models in which we can invest at
relatively low multiples of operating cash flow. We also
typically invest in companies with a history of profitability
and minimum trailing twelve month EBITDA of $3.0 million.
We do not invest in
start-up
companies, turn-around situations or companies that
we believe have unproven business plans.
Experienced Management Teams with Meaningful Equity
Ownership. We target portfolio companies that
have management teams with significant experience and/or
relevant industry experience coupled with meaningful equity
ownership. We believe management teams with these attributes are
more likely to manage the companies in a manner that protects
our debt investment and enhances the value of our equity
investment.
Niche Market Leaders with Defensible Market
Positions. We invest in companies that have
developed defensible
and/or
leading positions within their respective markets or market
niches and are well positioned to capitalize on growth
opportunities. We favor companies that demonstrate significant
competitive advantages, which we believe helps to protect their
market position and profitability.
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Diversified Customer and Supplier Base. We
prefer to invest in companies that have a diversified customer
and supplier base. Companies with a diversified customer and
supplier base are generally better able to endure economic
downturns, industry consolidation and shifting customer
preferences.
Significant Invested Capital. We believe the
existence of significant underlying equity value provides
important support to our debt investments. With respect to our
debt investments, we look for portfolio companies where we
believe aggregate enterprise value significantly exceeds
aggregate indebtedness, after consideration of our investment.
Viable Exit Strategy. We invest in companies
that we believe will provide a steady stream of cash flow to
repay our loans and reinvest in their respective businesses. In
addition, we also seek to invest in companies whose business
models and expected future cash flows offer attractive exit
possibilities for our equity investments. We expect to exit our
investments typically through one of three scenarios:
(a) the sale of the company resulting in repayment of all
outstanding debt and equity; (b) the recapitalization of
the company through which our investments are replaced with debt
or equity from a third party or parties; or (c) the
repayment of the initial or remaining principal amount of our
debt investment from cash flow generated by the company. In some
investments, there may be scheduled amortization of some portion
of our debt investment which would result in a partial exit of
our investment prior to the maturity of the debt investment.
Investment
Committees
The purpose of the investment committees is to evaluate and
approve as deemed appropriate all investments by our investment
advisor, subject at all times to the oversight and approval of
our board of directors. The investment committee process is
intended to bring the diverse experience and perspectives of the
committees members to the analysis and consideration of
each investment. The investment committees will also serve to
provide investment consistency and adherence to our investment
advisors core investment philosophy and policies. The
investment committees will also determine appropriate investment
sizing and suggest ongoing monitoring requirements.
Our investment advisor has formed an investment committee to
evaluate and approve all of our direct investments and an
investment committee to evaluate and approve all our investments
through Fidus Mezzanine Capital, L.P. The members of each
committee and the approval requirements to make a new
investment, or to exit or sell an existing investment, are as
follows:
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Investment Committee:
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Fidus Investment Corporation
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Fidus Mezzanine Capital, L.P.
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Members of Committee:
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Edward H. Ross
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Edward H. Ross
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Thomas C. Lauer
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John J. Ross, II
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John J. Ross, II
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B. Bragg Comer, III
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B. Bragg Comer, III
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Paul E. Tierney, Jr.
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Paul E. Tierney, Jr.
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John H. Grigg
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John H. Grigg
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W. Andrew Worth
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Approval:
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Affirmative vote of five of the seven members
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Affirmative vote of four of the five members
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Our investment advisor intends to apply for approval by the SBA
to appoint Messrs. Lauer and Worth to the investment
committee for Fidus Mezzanine Capital, L.P.; however, we can
offer no assurances as to when, or if, we will receive such
approval from the SBA. For purposes of discussion herein, any
reference to investment committee refers to both our
investment committee and the investment committee of Fidus
Mezzanine Capital, L.P.
Our investment advisors investment strategy involves a
team approach, whereby potential transactions are screened by
several members of our investment advisors investment team
before being presented to the investment committee. The
investment committee meets on an as-needed basis depending on
transaction volume. The investment professionals of our
investment advisor, including the members of the investment
committee, hold weekly meetings to review deal flow and
potential transactions. These meetings serve as a forum to
discuss credit views and outlooks and deal team members are
encouraged to share information and
-67-
views on potential investments early in their analysis. We
believe this process improves the quality of the analysis and
assists the deal team members in working more efficiently.
Investment
Process Overview
Our investment advisor has developed the following investment
process based on the experience of its investment professionals
to identify investment opportunities and to structure
investments quickly and effectively. Furthermore, our investment
advisor seeks to identify those companies exhibiting superior
fundamental risk-reward profiles and strong defensible business
franchises while focusing on the relative value of the security
in the portfolio companys capital structure. The
investment process consists of five distinct phases:
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Investment Generation/Origination;
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Initial Evaluation;
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Due Diligence and Underwriting;
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Documentation and Closing; and
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Active Portfolio Management.
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Each of the phases is described in more detail below.
Investment Generation/Origination. Our
investment originating efforts are focused on leveraging our
investment advisors extensive network of long-standing
relationships with private equity firms, middle-market senior
lenders, junior-capital partners, financial intermediaries and
management teams of privately owned businesses. Since commencing
operations in 2007, we have reviewed over 850 potential
investment opportunities primarily in lower middle-market
companies through March 31, 2011. We believe that our
investment advisors investment professionals have
reputations as reliable, responsive and value-added partners for
lower middle-market companies. Our investment advisors
focus and reputation as a valued added partner generates a
balanced mix of proprietary deal flow and a steady stream of new
deal opportunities. In addition, we anticipate that we will
obtain leads from our greater visibility as a publicly-traded
business development company.
Initial Evaluation. After a potential
transaction is received by our investment advisor, at least one
of its investment professionals will conduct an initial review
of the transaction materials to determine whether it meets our
investment criteria and complies with SBA and other regulatory
compliance requirements.
If the potential transaction initially meets our investment
criteria, at least two members of the investment committee,
referred to as the deal team, will conduct a preliminary due
diligence review, taking into consideration some or all of the
following factors:
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A comprehensive financial model based on quantitative analysis
of historical financial performance, projections and pro forma
adjustments to determine a range of estimated internal rates of
return.
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An initial call or meeting with the management team, owner,
private equity sponsor or other deal partner.
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A brief industry and market analysis, leveraging direct industry
expertise from other investment professionals of our investment
advisor.
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Preliminary qualitative analysis of the management teams
competencies and backgrounds.
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Potential investment structures and pricing terms.
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Upon successful completion of the screening process, the deal
team will prepare a screening memorandum and make a
recommendation to the investment committee. At this time, the
investment committee will also consider whether the investment
would be made by us or through our SBIC subsidiary. If the
investment committee supports the deal teams
recommendation, the deal team will issue a non-binding term
sheet to the company. Such a term sheet will typically include
the key economic terms based on our
-68-
analysis conducted during the screening process as well as a
proposed timeline. Upon agreement on a term sheet with the
company, our investment advisor will begin a formal diligence
and underwriting process.
Due Diligence and Underwriting. Our investment
advisor has developed a rigorous and disciplined due diligence
process which includes a comprehensive understanding of a
borrowers industry, market, operational, financial,
organizational and legal positions and prospects. We expect our
investment advisor to continue the same systematic, consistent
approach historically employed by Fidus Capital, LLC. The due
diligence review will take into account information that the
deal team deems necessary to make an informed decision about the
creditworthiness of the borrower and the risks of the
investment, which includes some or all of the following:
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Initial or additional site visits and facility tours with
management and key personnel.
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Review of the business history, operations and strategy.
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In depth review of industry and competition.
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Analysis of key customers and suppliers, including review of any
concentrations and key contracts.
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Detailed review of historical and projected financial
statements, including a review of at least three years of
performance (annual and monthly), key financial ratios, revenue,
expense and profitability drivers and sensitivities to
managements financial projections.
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Detailed evaluation of company management, including background
checks.
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Third party reviews of accounting, environmental, legal,
insurance, interviews with customers and suppliers, material
contracts, competition, industry and market studies (each as
appropriate).
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Financial sponsor diligence, if applicable, including portfolio
company and other reference checks.
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During the due diligence process, significant attention is given
to sensitivity analyses and how the company might be expected to
perform given various scenarios, including downside, base
case and upside. Upon satisfactory completion of the due
diligence review process, the deal team will present their
findings and a recommendation to the investment committee. If
the investment committee supports the deal teams
recommendation, the deal team will proceed with negotiating and
documenting the investment.
Documentation and Closing. Our investment
advisor works with the management of the company and its other
capital providers, including as applicable, senior, junior and
equity capital providers to structure an investment. Our
investment advisor structures each investment with an acute
focus on capital preservation and will tailor the terms of each
investment to the facts and circumstances of the transaction and
the prospective portfolio company. We will seek to limit the
downside potential of our investments by:
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Targeting an optimal total return on our investments (including
a combination of current and deferred interest, prepayment
penalties and equity participation) that compensates us for
credit risk.
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Negotiating covenants in connection with our investments that
afford our portfolio companies as much flexibility in managing
their businesses as possible, yet consistent with preservation
of our capital. Such restrictions may include affirmative and
negative covenants, default penalties, lien protection, change
of control provisions and board rights, including either board
observation or rights to a seat on the board under some
circumstances.
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Structuring financial covenants and terms in our debt
investments that require the portfolio company to reduce
leverage over time, thereby enhancing the investments
credit quality. These methods may include, among others:
maintenance leverage covenants requiring a decreasing ratio of
debt to cash flow; maintenance cash flow covenants requiring an
increasing ratio of cash flow to interest expense and possibly
other cash expenses such as capital expenditures, cash taxes and
mandatory principal payments; and debt incurrence prohibitions,
limiting a companys ability to relever its balance sheet.
In addition, limitations on asset sales and capital expenditures
prevent a company from changing the nature of its business or
capitalization without our consent.
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-69-
We expect to hold most of our investments to maturity or
repayment, but may exit our investments earlier if a liquidity
event takes place, such as a sale or recapitalization of a
portfolio company or if we determine that a sale of one or more
of our investments is in our best interest.
Active Portfolio Management. We view active
portfolio monitoring as a vital part of the investment process
and continuously monitor the status and progress of the
portfolio companies. The same deal team that was involved in the
investment process will continue its involvement in the
portfolio company post-investment. This provides for continuity
of knowledge and allows the deal team to maintain a strong
business relationship with key management of its portfolio
companies for post-investment assistance and monitoring purposes.
As part of the monitoring process, the deal team will conduct a
comprehensive review of the financial and operating results of
each portfolio company that includes a review of the
monthly/quarterly financials relative to prior year and budget,
review financial projections including cash flow and liquidity
needs, meet with management, attend board meetings and review
compliance certificates and covenants. We will maintain an
on-going dialogue with the management and any controlling equity
holders of a portfolio company that will include discussions
about the companys business plans and growth opportunities
and any changes industry and competitive dynamics. While we
maintain limited involvement in the ordinary course operations
of our portfolio companies, we may maintain a higher level of
involvement in non-ordinary course financing or strategic
activities and any non-performing scenarios. Our investment
advisors portfolio management will also include quarterly
portfolio reviews with all investment professionals and
investment committee members.
Investment
Rating System
In addition to various risk management and monitoring tools, our
investment advisor will also use an internally developed
investment rating system to characterize and monitor the credit
profile and our expected level of returns on each investment in
our portfolio. We will use a five-level numeric rating scale.
The following is a description of the conditions associated with
each investment rating:
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Investment Rating 1: Investments that involve
the least amount of risk in our portfolio. The company is
performing above expectations and the trends and risk factors
are favorable, and may include an expected capital gain.
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Investment Rating 2: Investments that involve
a level of risk similar to the risk at the time of origination.
The company is performing substantially within our expectations,
and the risks factors are neutral or favorable. All new
investments are initially rated 2.
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Investment Rating 3: Investments that are
performing below our expectations and indicates the
investments risk has increased somewhat since origination.
The company requires closer monitoring, but where we expect no
loss of investment return (interest
and/or
dividends) or principal. Companies with a rating of 3 may
be out of compliance with financial covenants, but payments are
generally not past due.
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Investment Rating 4: Investments that are
performing materially below our expectations and the risk has
increased materially since origination. We expect some loss of
investment return, but no loss of principal.
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Investment Rating 5: Investments that are
performing substantially below our expectations and whose risks
have increased substantially since origination. Investments with
a rating of 5 are those for which some loss of principal is
expected.
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As of March 31, 2011, the weighted average investment grade
of the investments in our portfolio was 1.9. The following table
shows the distribution of our investments on the 1 to 5
investment rating scale at fair value.
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As of
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March 31, 2011
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Percent of
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Investments at
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Total
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Investment Rating
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Fair Value
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Portfolio
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(Dollars in thousands)
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1
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$
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26,751
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18.6
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%
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2
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100,374
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69.9
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3
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15,593
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10.9
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4
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5
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934
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0.6
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Totals
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$
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143,652
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100.0
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%
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Determination
of Net Asset Value and Valuation Process
We will determine the net asset value per share of our common
stock on a quarterly basis. The net asset value per share is
equal to the fair value of our total assets minus liabilities
divided by the total number of shares of common stock
outstanding.
In calculating the value of our total assets, investment
transactions are recorded on the trade date. Realized gains or
losses are computed using the specific identification method.
Investments for which market quotations are readily available
are valued at such market quotations. Because we expect that
there will not be a readily available market for substantially
all of the investments in our portfolio, we value substantially
all of our portfolio investments at fair value as determined in
good faith by our board of directors using a documented
valuation policy and consistently applied valuation process. Due
to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value,
the fair value of our investments may differ significantly from
the values that would have been used had a readily available
market value existed for such investments, and the differences
could be material.
With respect to investments for which market quotation are not
readily available, our board of directors undertakes a
multi-step valuation process each quarter, as describe below:
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our quarterly valuation process begins with each portfolio
company or investment being initially evaluated and rated by the
investment professionals of our investment advisor responsible
for the portfolio investment;
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preliminary valuation conclusions are then documented and
discussed with the investment committee;
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our board of directors also engages one or more independent
valuation firms to conduct independent appraisals of our
investments for which market quotations are not readily
available. We will consult with independent valuation firm(s)
relative to each portfolio company at least once in every
calendar year, and for new portfolio companies, at least once in
the twelve-month period subsequent to the initial investment;
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the audit committee of our board of directors reviews the
preliminary valuations of our investment advisor and of the
independent valuation firms and responds to and supplements the
valuation recommendations to reflect any comments; and
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the board of directors discusses the valuations and determines
the fair value of each investment in our portfolio in good
faith, based on the input of our investment advisor, the
independent valuation firms and the audit committee.
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In making the good faith determination of the value of portfolio
investments, we start with the cost basis of the security, which
includes the amortized original issue discount and
payment-in-kind interest or dividends,
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if any. The transaction price is typically the best estimate of
fair value at inception. When evidence supports a subsequent
change to the carrying value from the original transaction
price, adjustments are made to reflect the expected exit values.
We perform detailed valuations of our debt and equity
investments on an individual basis, using market, income and
yield approaches as appropriate.
Under the market approach, we typically use the enterprise value
methodology to determine the fair value of an investment. There
is no one methodology to estimate enterprise value and, in fact,
for any one portfolio company, enterprise value is generally
best expressed as a range of values, from which we derive a
single estimate of enterprise value. In estimating the
enterprise value of a portfolio company, we analyze various
factors consistent with industry practice, including but not
limited to original transaction multiples, the portfolio
companys historical and projected financial results,
applicable market trading and transaction comparables,
applicable market yields and leverage levels, the nature and
realizable value of any collateral, the markets in which the
portfolio company does business, and comparisons of financial
ratios of peer companies that are public. Typically, the
enterprise value of private companies are based on multiples of
EBITDA, cash flows, net income, revenues or, in limited cases,
book value.
Under the income approach, we prepare and analyze discounted
cash flow models based on projections of the future free cash
flows (or earnings) of the portfolio company. In determining the
fair value under the income approach, we consider various
factors, including but not limited to the portfolio
companys projected financial results, applicable market
trading and transaction comparables, applicable market yields
and leverage levels, the markets in which the portfolio company
does business and comparisons of financial ratios of peer
companies that are public
Under the yield approach, we use discounted cash flow models to
determine the present value of the future cash flow streams of
our debt investments, based on future interest and principal
payments as set forth in the associated loan agreements. In
determining fair value under the yield approach, we also
consider the following factors: applicable market yields and
leverage levels, credit quality, prepayment penalties, estimated
remaining life, the nature and realizable value of any
collateral, the portfolio companys ability to make
payments and changes in the interest rate environment and the
credit markets that generally may affect the price at which
similar investments may be made. We estimate the remaining life
of our debt investments to generally be the legal maturity date
of the instrument, as we generally intend to hold our loans to
maturity. However, if we have information available to us that
the loan is expected to be repaid in the near term, we would use
an estimated remaining life based on the expected repayment date.
We classify our investments in accordance with the 1940 Act. See
Note 2 to the consolidated financial statements for
definitions of Control, Affiliate and
Non-Control
Non-Affiliate
included elsewhere in this prospectus. For our Control
investments, we determine the fair value of debt and equity
investments using a combination of market and income approaches.
The valuation approaches for our Control investments estimate
the value of the investment if we were to sell, or exit, the
investment, assuming the highest and best use of the investment
by market participants. In addition, these valuation approaches
consider the value associated with our ability to influence the
capital structure of the portfolio company, as well as the
timing of a potential exit.
For our Affiliate or Non-Control/Non-Affiliate equity
investments, we use a combination of market and income
approaches as described above to determine the fair value. For
our Affiliate or Non-Control/Non-Affiliate debt investments, we
generally use the yield approach to determine fair value, as
long as it is appropriate. If there is deterioration in credit
quality or a debt investment is in workout status, we may
consider other factors in determining the fair value, including
the value attributable to the debt investment from the
enterprise value of the portfolio company or the proceeds that
would be received in a liquidation analysis.
Determination of fair value involves subjective judgments and
estimates. Accordingly, the notes to our financial statements
express the uncertainties with respect to the possible effect of
such valuations, and any changes in such valuations, on the
financial statements.
-72-
Managerial
Assistance
As a business development company, we will offer, and must
provide upon request, managerial assistance to our portfolio
companies. This assistance could involve monitoring the
operations of our portfolio companies, participating in board
and management meetings, consulting with and advising officers
of portfolio companies and providing other organizational and
financial guidance. Our investment advisor will provide such
managerial assistance on our behalf to portfolio companies that
request this assistance. We may receive fees for these services
and will reimburse our investment advisor for its allocated
costs in providing such assistance, subject to the review and
approval by our board of directors, including our independent
directors.
Competition
Our primary competitors in providing financing to lower
middle-market companies include public and private funds, other
business development companies, small business investment
companies, commercial and investment banks, commercial financing
companies and, to the extent they provide an alternative form of
financing, private equity and hedge funds. Many of our
competitors are substantially larger and have considerably
greater financial, technical and marketing resources than we do.
For example, we believe some competitors may have access to
funding sources that are not available to us. In addition, some
of our competitors may have higher risk tolerances or different
risk assessments, which could allow them to consider a wider
variety of investments and establish more relationships than us.
Furthermore, many of our competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company or to the distribution and other
requirements we must satisfy to maintain our RIC status.
We expect to use the expertise of the investment professionals
of our investment advisor to assess investment risks and
determine appropriate pricing for our investments in portfolio
companies. In addition, we expect that the relationships of the
investment professionals of our investment advisor will enable
us to learn about, and compete effectively for, financing
opportunities with attractive lower middle-market companies in
the industries in which we seek to invest. For additional
information concerning the competitive risks we face, see
Risk Factors Risks Relating to our Business
and Structure We operate in a highly competitive
market for investment opportunities, which could reduce returns
and result in losses.
Administration
We will not have any direct employees, and our day-to-day
investment operations will be managed by our investment advisor,
which is also acting as our administrator. We have a chief
executive officer, chief financial officer and chief compliance
officer and, to the extent necessary, our board of directors may
elect to hire additional personnel going forward. Some of our
executive officers described under Management are
also officers of our investment advisor. See Management
and Other Agreements Administration Agreement.
Properties
We do not own any real estate or other physical properties
materially important to our operation. Our headquarters are
located at 1603 Orrington Avenue, Suite 820, Evanston,
Illinois 60201, and are provided by our investment advisor
pursuant to the Administration Agreement. We believe that our
office facilities are suitable and adequate to our business as
we contemplate conducting it.
Legal
Proceedings
We are not, and our investment advisor is not, currently subject
to any material legal proceedings against them.
-73-
PORTFOLIO
COMPANIES
Table of
Investments
The following table sets forth certain information as of
March 31, 2011, for each portfolio company in which we had
a debt or equity investment. Other than these investments, our
only formal relationships with our portfolio companies are the
managerial assistance ancillary to our investments and the board
observation or participation rights we may receive.
Based upon information provided to us by our portfolio companies
(which we have not independently verified), our portfolio had a
total net debt to EBITDA ratio of approximately 3.5 to 1.0 and
an EBITDA to interest expense ratio of 3.0 to 1.0. In
calculating these ratios, we included all portfolio company
debt, EBITDA and interest expense as of December 31, 2010,
including debt junior to our debt investments. If we excluded
debt junior to our debt investments in calculating these ratios,
the ratios would be 3.4 to 1.0 and 3.1 to 1.0, respectively. At
March 31, 2011, we had an equity ownership in 81.3% of our
portfolio companies and the average fully diluted equity
ownership in such portfolio companies was 9.2%.
The following table sets forth certain information about our
investments by portfolio company as of March 31, 2011.
|
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Nature of
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Percentage
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Fair
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Name and Address of
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Its Principal
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Type of
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of Class
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Cost of
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Value of
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Portfolio Company
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Business
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Investment
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Held
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Investment
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Investment
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(Dollars in thousands)
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Avrio Technology Group, LLC
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Provider of electronic
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Subordinated Notes
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$
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8,185
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$
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8,185
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8840 N. Greenview Drive
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components and
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Common Units
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7.0
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%
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1,000
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1.000
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Middleton, WI 53562
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software
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Brook & Whittle Limited
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Specialty label
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Subordinated Notes
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6,094
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6,094
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P.O. Box 409
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printer
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Subordinated Notes
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1,919
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2,087
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260 Branford Road
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Warrants
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1.5
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%
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285
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400
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North Branford, CT 06471
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Caldwell & Gregory, LLC
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Laundry room
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Subordinated Notes
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8,090
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8,090
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129 Broad Street Road
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operator
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Preferred Units
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1,163
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1,404
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Manakin-Sabot, VA 23103
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Common Units
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4.0
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%
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4
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259
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Casino Signs & Graphics, LLC
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Sign manufacturer
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Senior Secured Loan
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4,500
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934
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3655 W. Diablo Drive, #1
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Las Vegas, NV 89118
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Connect-Air International, Inc.
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Distributor of wire
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Subordinated Notes
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4,347
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4,347
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4240 B Street N.W.
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and cable
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Preferred Units
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27.0
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%
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4,759
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4,759
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Auburn, WA 98001
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assemblies
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Fairchild Industrial Products Company
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Manufacturer of
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Subordinated Notes
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650
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650
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3920 Westpoint Blvd.
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pneumatic and
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Subordinated Notes
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8,500
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8,500
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Winston-Salem, NC 27103
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mechanical process
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controls
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Goodrich Quality Theaters, Inc.
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Movie theater
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Subordinated Notes
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11,897
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12,500
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4417 Broadmoor Ave. S.E.
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operator
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Warrants
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4.5
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%
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750
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1,765
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Grand Rapids, MI 49512
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Interactive Technology Solutions, LLC
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Government information
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Subordinated Notes
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5,065
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5,065
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8757 Georgia Ave. Suite 500
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technology services
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Common Units
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0.5
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%
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500
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400
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Silver Spring, MD 20910
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Jan-Pro International, LLC
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Franchisor of
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Subordinated Notes
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7,386
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7,386
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11605 Haynes Bridge Road,
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commercial cleaning
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Preferred Equity
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2.1
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%
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750
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609
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Suite 425
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services
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Alpharetta, GA 30004
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K2 Industrial Services, Inc.
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Industrial cleaning
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Subordinated Notes
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8,000
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8,240
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5233 Hohman Avenue
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and coatings
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Hammond, IN 46320
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Paramount Building Solutions, LLC
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Janitorial services
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Subordinated Notes
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6,053
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6,053
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401 W. Baseline Road, #209
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provider
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Common Units
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6.0
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%
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1,500
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3,308
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Tempe, AZ 85283
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-74-
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Nature of
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Percentage
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Fair
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Name and Address of
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Its Principal
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Type of
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of Class
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Cost of
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|
|
Value of
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Portfolio Company
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Business
|
|
Investment
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Held
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|
Investment
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|
Investment
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(Dollars in thousands)
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Simplex Manufacturing Co.
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Provider of
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Senior Secured Loans
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$
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$
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13340 NE Whitaker Way
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helicopter tank systems
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Senior Secured Loans
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4,214
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4,205
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Portland, OR 97230
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Warrants
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23.7
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%
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710
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188
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TBG Anesthesia Management, LLC
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Physician
|
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Senior Secured Loan
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10,800
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11,000
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1770 1st Street, Suite 703
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management company
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Warrants
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2.5
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%
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276
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456
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Highland Park, IL 60035
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Tulsa Inspection Resources, Inc.
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Pipeline inspection
|
|
Subordinated Notes
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3,887
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3,784
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|
4111 S. Darlington Ave.,
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|
services
|
|
Subordinated Notes
|
|
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648
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648
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Suite 1000
|
|
|
|
Warrants
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4.7
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%
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193
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Tulsa, OK 74135
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Westminster Cracker Company, Inc.
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Specialty cracker
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|
Subordinated Notes
|
|
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|
|
6,863
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|
|
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6,863
|
|
1 Scale Avenue, Suite 81,
|
|
manufacturer
|
|
Common Units
|
|
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11.3
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%
|
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|
1,000
|
|
|
|
1,000
|
|
Building 14
Rutland, VT 05701
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Worldwide Express Operations, LLC
|
|
Franchisor of
|
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Subordinated Notes
|
|
|
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|
8,637
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|
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|
8,637
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|
2828 Routh Street, Suite 400
|
|
shipping and
|
|
Subordinated Notes
|
|
|
|
|
|
|
9,773
|
|
|
|
10,094
|
|
Dallas, TX 75201
|
|
logistics services
|
|
Warrants
|
|
|
21.4
|
%
|
|
|
|
|
|
|
3,939
|
|
|
|
|
|
Common Units
|
|
|
3.5
|
%
|
|
|
270
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
$
|
138,668
|
|
|
$
|
143,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is a brief description of each portfolio company
in which we have made an investment that represents greater than
5.0% of our total assets:
Avrio Technology Group, LLC is a leading supplier of
frequency control components, integrated
sub-assemblies
and software engineering solutions serving the commercial,
industrial, aviation, military and space end markets.
Brook & Whittle Limited is a leading provider
of printing and packaging solutions. The company produces
pressure sensitive labels for consumer products across all
industries including personal care, beverage, food and household.
Caldwell & Gregory, LLC is a leading provider
of laundry equipment and facility management services primarily
for colleges, universities, apartments and condominiums.
Connect-Air International, Inc. is a leading distributor
of specialty low-voltage wire and cable products in the United
States. The companys primary focus is on control and
signal wire for HVAC, security and fire alarm systems. In
addition, the company designs and distributes custom cable
assemblies and adapters.
Fairchild Industrial Products Company is the leading
designer and manufacturer of pneumatic and electro-pneumatic
industrial control products and power transmission products. The
companys customer base spans multiple end markets,
including food processing, pharmaceutical, pulp and paper, oil
and gas, textile and automotive.
Goodrich Quality Theaters, Inc. is one of the largest
regional theater companies in the United States, operating
30 theaters in the Midwest.
Jan-Pro International, LLC is a leading franchisor of
commercial cleaning services in the United States and
internationally. The company focuses on light commercial
businesses, including automotive dealerships, offices, schools
and medical facilities.
K2 Industrial Services, Inc. is an independent provider
of outsourced mission-critical industrial cleaning, coating, and
maintenance services. Its six business units operate out of 24
facilities and serve more than 500 companies in a variety
of markets, including steel, power generation, oil and gas,
paper production and government.
-75-
Paramount Building Solutions, LLC is a leading provider
of outsourced janitorial and floor care services to big
box retailers nationwide, including grocery, club stores,
etc.
TBG Anesthesia Management, LLC is an outsourced
anesthesiology practice management company. The company provides
services to hospitals and medical centers in the Midwest under
exclusive contracts.
Westminster Cracker Company, Inc. is a manufacturer of
premium, all-natural oyster crackers and other baked goods. The
companys products are served nationally in restaurants and
other foodservice establishments and are also sold in grocery
stores.
Worldwide Express Operations, LLC is one of the largest
authorized resellers of UPS express and ground shipping
services. In addition, the company has partnered with more than
30 freight carriers. Through its network of more than 150
franchisees, the company services the shipping needs of small-
and medium-sized businesses nationwide.
Recent
Developments
On April 6, 2011, we invested $8.1 million of subordinated
debt and equity securities in Nobles Manufacturing, Inc., a
leading manufacturer of ammunition feed systems and components
and centrifugal dryers.
On April 12, 2011, we invested $4.8 million of subordinated
debt and equity securities in Medsurant Holdings, LLC, a
provider of intraoperative monitoring technology and services.
-76-
MANAGEMENT
Our business and affairs will be managed under the direction of
our board of directors. In addition, the business and affairs of
Fidus Mezzanine Capital, L.P. will be managed under the
direction of its board of directors, which will consist of the
same individuals as our board of directors. Upon completion of
this offering, the board of directors is expected to consist of
five members, three of whom are not interested
persons of Fidus Investment Corporation, our investment
advisor or their respective affiliates as defined in
Section 2(a)(19) of the 1940 Act. We refer to these
individuals as our independent directors. Our board
of directors elects our officers, who will serve at the
discretion of the board of directors. The responsibilities of
our board of directors include, among other things, oversight of
our investment activities, quarterly valuation of our assets,
oversight of our financing arrangements and corporate governance
activities.
Our board of directors will establish an audit committee and a
nominating and corporate governance committee, and may establish
additional committees from time to time as necessary. The scope
of each committees responsibilities is discussed in
greater detail below. Edward H. Ross, an interested person of
Fidus Investment Corporation, serves as chairman of our board of
directors. Our board of directors believes that it is in the
best interests of our investors for Mr. Ross to lead our
board of directors because of his broad experience with the
day-to-day
management and operation of other investment funds and his
significant background in the financial services industry, as
described below. Our board of directors does not have a lead
independent director. However, Wayne F. Robinson, the chairman
of the audit committee, is an independent director and acts as a
liaison between the independent directors and management between
meetings of our board of directors and is involved in the
preparation of agendas for board and committee meetings. Our
board of directors believes that its leadership structure is
appropriate in light of the characteristics and circumstances of
Fidus Investment Corporation because the structure allocates
areas of responsibility among the individual directors and the
committees in a manner that encourages effective oversight. Our
board of directors also believes that its small size creates a
highly efficient governance structure that provides ample
opportunity for direct communication and interaction between our
investment advisor and our board of directors.
Board of
Directors
Under our charter, our directors will be divided into three
classes. Each class of directors will hold office for a
three-year term. However, the initial members of the three
classes will have initial terms of one, two and three years,
respectively. At each annual meeting of our stockholders, the
successors to the class of directors whose terms expire at such
meeting will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year
following the year of their election. This classification of our
board of directors may have the effect of delaying or preventing
a change in control of our management. Each director will hold
office for the term to which he or she is elected and until his
or her successor is duly elected and qualifies. Our charter, to
be effective immediately prior to the completion of this
offering, permits the board of directors to elect directors to
fill vacancies that are created either through an increase in
the number of directors or due to the resignation, removal or
death of any director. These persons will serve as directors of
Fidus Mezzanine Capital, L.P. having terms that run concurrently
with their terms on our board of directors.
The following individuals will serve on our board of directors
immediately prior to the completion of this offering:
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Director
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Expiration
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Name
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Age
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Position
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Since
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of Term
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Interested Directors:
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Edward H. Ross
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45
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Chairman of the Board and Chief Executive Officer
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2011
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2014
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Thomas C. Lauer
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43
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Director
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2011
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2013
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Independent Directors:
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Wayne F. Robinson
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57
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Director
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2011
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2014
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Charles D. Hyman
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52
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Director
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2011
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2012
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Charles G. Phillips
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63
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Director
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2011
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2013
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The address for each of our directors is
c/o Fidus
Investment Corporation, 1603 Orrington Avenue, Suite 820,
Evanston, Illinois 60201.
Executive
Officers Who Are Not Directors
Information regarding our executive officers who are not
directors is as follows:
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Name
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Age
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Position
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Cary L. Schaefer
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35
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Chief Financial Officer and Chief Compliance Officer
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The address for each of our executive officers is
c/o Fidus
Investment Corporation, 1603 Orrington Avenue, Suite 820,
Evanston, Illinois 60201.
Biographical
Information
For purposes of this presentation, our directors have been
divided into two groups independent directors and
interested directors. Interested directors are interested
persons as defined in the 1940 Act.
Independent
Directors
Wayne F. Robinson served as a managing director and head
of global capital finance of Wachovia Capital Markets, LLC, a
division of Wachovia Securities, from 2002 until his retirement
in 2009. Mr. Robinson previously served as managing
director and head of leveraged finance of First Union Securities
from 1983 until the firms merger with Wachovia Securities
in 2002. Mr. Robinson is currently on the board of
directors of one private company. Mr. Robinson will bring
to our board of directors extensive senior executive management
experience in corporate finance and investment banking.
Charles D. Hyman is the founder and chief executive
officer of Charles D. Hyman & Co., a private,
registered investment management firm located in Ponte Vedra
Beach, Florida. Prior to forming Charles D. Hyman &
Co. in 1994, Mr. Hyman served as a senior vice president of
St. Johns Investment Management Company. Mr. Hyman has
served on the board of directors for several
not-for-profit
companies in the past five years. Mr. Hyman will bring to
our board of directors extensive investment management
experience.
Charles G. Phillips was employed by Prentice Capital
Management, LLC, an investment management firm, from 2005 until
his retirement in 2008. Mr. Phillips was previously a
managing director from 1991 to 2002 and president from 1998 to
2001 of Gleacher & Co., an investment banking and
management firm. Mr. Phillips is currently a member of the
board of directors of California Pizza Kitchen, Inc. (Nasdaq:
CPKI), and has served on the boards of several public and
private companies and private investment funds, including
Whitehall Jewelers Holdings, Inc. Mr. Phillips will bring
to our board of directors extensive senior executive management
experience in corporate finance and investment banking and
experience gained from his service on the board of directors of
several public and private companies and private investment
funds.
Interested
Directors
Edward H. Ross will serve as our chairman of the board
and chief executive officer and as chairman of our investment
advisors investment committees. Mr. Ross has more
than 19 years of alternative asset investing experience
with middle-market companies. Mr. Ross co-founded Fidus
Capital, LLC in 2005. Mr. Ross was a managing director and
the head of the Chicago office for Allied Capital Corporation, a
publicly-traded business development company, where he focused
on making debt and equity investments in middle-market companies
from 2002 to 2005. Prior to joining Allied Capital Corporation,
Mr. Ross co-founded Middle Market Capital, a merchant
banking group of Wachovia Securities and its predecessor, First
Union Securities, Inc. Mr. Ross earned a bachelor of arts
from Southern Methodist University and a master of business
administration from the University of Notre Dames Mendoza
College of Business. Mr. Ross is the brother of John J.
Ross, II, a member of our investment committee.
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Mr. Ross was elected and is qualified to serve on our board
of directors due to his significant experience in alternative
asset investing with middle-market companies, which provides our
board of directors with valuable experience, insight and
perspective.
Thomas C. Lauer will serve as our director and as a
member of the investment committee of our investment advisor
responsible for advising us. Mr. Lauer has more than
15 years of experience investing debt and equity capital in
lower middle-market companies. Mr. Lauer has served as a
managing partner of Fidus Partners, LLC since 2008.
Mr. Lauer was a managing director of Allied Capital
Corporation from 2004 to 2008, where he was a member of the
firms Management Committee from 2006 to 2008, Private
Finance Investment Committee from 2005 to 2008, and Senior Debt
Fund Investment Committee from 2007 to 2008. Prior to
joining Allied Capital Corporation, Mr. Lauer worked with
GE Capitals Global Sponsor Finance Group, the Leveraged
Capital Group at Wachovia Securities and its predecessor, First
Union Securities, Inc. and the Platform Components Division of
Intel Corporation. Mr. Lauer earned a bachelor of business
administration and master of business administration from the
University of Notre Dame.
Mr. Lauer was selected and is qualified to serve on our
board of directors due to his experience with investing debt and
equity capital in middle-market companies, which provides our
board of directors with valuable investment knowledge,
experience and insight.
Executive
Officers Who Are Not Directors
Cary L. Schaefer will serve as our chief financial
officer and chief compliance officer. Ms. Schaefer has more
than eleven years of credit and finance experience. Since
joining Fidus Capital, LLC in 2006, Ms. Schaefer has served
in a variety of roles, including vice president.
Ms. Schaefer was an associate in investment banking at
Credit Suisse First Boston from 2004 to 2006, where she executed
advisory, debt and equity transactions in the Global
Industrial & Services Group. Prior to joining Credit
Suisse First Boston, Ms. Schaefer worked at Wachovia
Securities and its predecessor, First Union Securities, Inc.
Ms. Schaefer earned a bachelor of science in analytical
finance from Wake Forest University and a master of business
administration with honors from the University of Chicago
Graduate School of Business.
Board
Committees
Audit
Committee
The members of our audit committee are Messrs. Robinson,
Hyman and Phillips, each of whom meets the independence
standards established by the SEC and Nasdaq for audit committees
and is not an interested person of us or our
investment advisor for purposes of the 1940 Act.
Mr. Robinson serves as chairman of the audit committee. Our
board of directors has determined that Mr. Robinson is an
audit committee financial expert as that term is
defined under Item 407 of
Regulation S-K
of the Exchange Act. The audit committee is responsible for
approving our independent accountants, reviewing with our
independent accountants the plans and results of the audit
engagement, approving professional services provided by our
independent accountants, reviewing the independence of our
independent accountants and reviewing the adequacy of our
internal accounting controls. The audit committee is also
responsible for aiding our board of directors in determining the
fair value of debt and equity securities that are not
publicly-traded or for which current market values are not
readily available. The board of directors and audit committee
will utilize the services of an independent valuation firm to
help them determine the fair value of these securities.
Nominating
and Corporate Governance Committee
The members of the nominating and corporate governance committee
are Messrs. Hyman, Robinson and Phillips, each of whom is
independent for purposes of the 1940 Act and the Nasdaq
corporate governance regulations. Mr. Hyman serves as
chairman of the nominating and corporate governance committee.
The nominating and corporate governance committee is responsible
for selecting, researching and nominating directors for election
by our stockholders, selecting nominees to fill vacancies on the
board or a committee of the board, developing and recommending
to the board a set of corporate governance principles and
overseeing the evaluation of the board and our management.
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The nominating and corporate governance committee will consider
nominees to the board of directors recommended by a stockholder,
if such stockholder complies with the advance notice provisions
of our bylaws. Our bylaws provide that a stockholder who wishes
to nominate a person for election as a director at a meeting of
stockholders must deliver written notice to our corporate
secretary. This notice must contain, as to each nominee, all of
the information relating to such person as would be required to
be disclosed in a proxy statement meeting the requirements of
Regulation 14A under the Exchange Act, and certain other
information set forth in the bylaws. In order to be eligible to
be a nominee for election as a director by a stockholder, such
potential nominee must deliver to our corporate secretary a
written questionnaire providing the requested information about
the background and qualifications of such person and a written
representation and agreement that such person is not and will
not become a party to any voting agreements, any agreement or
understanding with any person with respect to any compensation
or indemnification in connection with service on the board of
directors, and would be in compliance with all of our publicly
disclosed corporate governance, conflict of interest,
confidentiality and stock ownership and trading policies and
guidelines.
Compensation
Committee
We do not have a compensation committee because our executive
officers do not receive any direct compensation from us. Our
executive officers are paid by our investment advisor.
Compensation
of Directors
Prior to the completion of this offering, our directors are not
entitled to compensation. Following the completion of this
offering, each independent director will receive an annual fee
of $50,000 for serving on the board of directors. In addition,
each independent director will receive $5,000 for each quarterly
meeting that they attend. The chairman of our audit committee
receives an annual fee of $10,000 and the chairman of the
nominating and corporate governance committee receives an annual
fee of $5,000 for their additional services in these capacities.
Directors who are employees of our investment advisor do not
receive additional compensation for service as a member of our
board of directors. We will also reimburse each of the above
directors for all reasonable and authorized business expenses in
accordance with our policies as in effect from
time-to-time.
Compensation
of Executive Officers
None of our executive officers receive direct compensation from
us. The compensation of our chief financial officer and chief
compliance officer, will be paid by our investment advisor.
Compensation paid to our chief financial officer and chief
compliance officer is set by our investment advisor and subject
to reimbursement by us of an allocable portion of such
compensation for services rendered to us.
Investment
Committee
The investment committees of our investment advisor responsible
for our investments will meet regularly to consider our
investments, direct our strategic initiatives and supervise the
actions taken by our investment advisor on our behalf. In
addition, the investment committees will review and determine
whether to make prospective investments identified by our
investment advisor and monitor the performance of our investment
portfolio. Our investment advisors investment committee
that advises us will consist of Messrs. E. Ross, J. Ross,
Comer, Tierney, Grigg, Lauer and Worth. Our investment
advisors investment committee that advises Fidus Mezzanine
Capital, L.P. will consist of Messrs. E. Ross, J. Ross,
Comer, Tierney and Grigg. Upon approval by the SBA, we expect to
appoint Messrs. Lauer and Worth to the investment committee
that advises Fidus Mezzanine Capital, L.P.
Information regarding members of the investment committee who
are not also directors is as follows:
John J. Ross, II will serve as a member of the
investment committee of our investment advisor responsible for
advising us and will also serve as a member of the investment
committee responsible for advising Fidus Mezzanine Capital, L.P.
upon consummation of this offering. Mr. Ross has over
16 years experience advising clients on mergers and
acquisitions. Mr. Ross currently serves as a member of the
-80-
investment committee of Fidus Mezzanine Capital GP, LLC. In
2004, Mr. Ross co-founded Fidus Partners, LLC, an
investment banking firm. Prior to co-founding Fidus Partners,
LLC, Mr. Ross served as a managing director at Wachovia
Securities and its predecessors, First Union Securities, Inc.
and Bowles Hollowell Conner & Co, from 1999 to 2002.
Mr. Ross earned a bachelor of science from Southern
Methodist University and a master of business administration
from the Harvard Business School. Mr. Ross is the brother
of Edward H. Ross, our chairman of the board and chief
executive officer, and chairman of the investment committees.
B. Bragg Comer, III will serve as a member of
the investment committee of our investment advisor responsible
for advising us and will also serve as a member of the
investment committee responsible for advising Fidus Mezzanine
Capital, L.P. upon consummation of this offering. Mr. Comer
has over 20 years of broad leveraged finance experience,
including experience related to senior debt, mezzanine debt, and
bridge loans. Mr. Comer currently serves as a member of the
investment committee of Fidus Mezzanine Capital GP, LLC.
Mr. Comer co-founded Fidus Capital, LLC, the investment
advisor of Fidus Mezzanine Capital, L.P., in 2006. Prior to
co-founding and joining Fidus Capital, LLC, Mr. Comer
served as a managing director within Wachovia Securities
Leveraged Finance Group from 2003 to 2006. Prior to 2003,
Mr. Comer was a managing director in the Leveraged Capital
Group, a merchant banking group of Wachovia Securities and its
predecessor, First Union Securities, Inc. Mr. Comer earned
a bachelor of arts from the University of North Carolina at
Chapel Hill and a master of business administration from Duke
Universitys Fuqua School of Business.
Paul E. Tierney, Jr. will serve as a member of the
investment committee of our investment advisor responsible for
advising us and will also serve as a member of the investment
committee responsible for advising Fidus Mezzanine Capital, L.P.
upon consummation of this offering. Mr. Tierney has over
35 years of debt and equity investing experience in a
variety of industries. Mr. Tierney currently serves as a
member of the investment committee for Fidus Mezzanine Capital
GP, LLC. Since 1999, Mr. Tierney has served as the general
partner of Development Capital, LLC, a diversified private
investment company. He has also served as a senior principal of
Aperture Venture Partners, a firm that primarily manages two
venture capital funds that focus on investing in early- stage
healthcare and healthy living businesses since 2002. In 1999,
Mr. Tierney was the founding principal of Darwin Capital
Partners, L.P. From 1996 through 1999, Mr. Tierney was the
managing member of the general partner of Corporate Value
Partners, L.P. In 1978, Mr. Tierney co-founded Gollust,
Tierney and Oliver, the general partner of Coniston Partners and
other investment entities. Mr. Tierney serves on the boards
of directors of Nina McLemore, Inc., Altea Therapeutics,
Prosperity Voskhod Fund and The Protective Group, Inc. He was
previously a director of a number of public companies, including
United Airlines, Inc. and Liz Claiborne, Inc. Mr. Tierney
also serves on the Advisory Board of the U.S. Committee for
Refugees and was chairman of the Foreign Policy School (SIPA) of
Columbia University. He is chairman of TechnoServe, Inc., a
not-for-profit
economic development company serving Africa and Latin America.
He is also an adjunct professor at Columbia Business School.
Mr. Tierney earned a bachelor of arts from the University
of Notre Dame and a master of business administration as a Baker
Scholar from the Harvard Business School.
John H. Grigg will serve as a member of the investment
committee of our investment advisor responsible for advising us,
will serve as a member of the investment committee responsible
for advising Fidus Mezzanine Capital, L.P. and will be a senior
origination professional of our investment advisor upon
consummation of this offering. Mr. Grigg has over
21 years of experience advising clients on mergers and
acquisitions. Mr. Grigg currently serves as a member of the
investment committee of Fidus Mezzanine Capital GP, LLC and as a
senior origination professional for Fidus Capital, LLC. Prior to
co-founding Fidus Partners, LLC, an investment banking firm, in
2004, Mr. Grigg served as managing director and partner at
First Union Securities, Inc. and its predecessor, Bowles
Hollowell Conner & Co., from 1989 to 2000. Prior to
joining Bowles Hollowell Conner & Co., Mr. Grigg
worked in the investment banking group of Merrill
Lynch & Co. Mr. Grigg earned a bachelor of arts
from the University of North Carolina and a master of business
administration from the University of Virginias Darden
School of Business.
W. Andrew Worth will serve as a member of the
investment committee of our investment advisor responsible for
advising us upon consummation of this offering. Mr. Worth
has over 13 years of experience
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investing in debt and equity securities of lower middle-market
companies. Mr. Worth is a principal of Fidus Capital, LLC.
Prior to joining Fidus Capital, LLC in 2008, Mr. Worth
served as a principal with Allied Capital Corporation from 2002
to 2008, where he was responsible for all aspects of the
investment process including origination, execution and
portfolio management. From 1996 to 2002, Mr. Worth was an
associate in Credit Suisse First Bostons Global
Industrials and Services investment banking practice and an
analyst in the Leveraged Finance Group of First Union
Securities, Inc. Mr. Worth earned a bachelor of arts from
the University of North Carolina at Chapel Hill and a master of
business administration from the University of Chicago Graduate
School of Business.
Senior
Origination Professionals
The following individuals currently serve as senior origination
professionals of Fidus Capital, LLC. Upon the closing of this
offering, in addition to the members of the investment
committee, these individuals will be senior origination
professionals of our investment advisor. Brief summaries of the
backgrounds of these individuals are provided below:
Edward P. Imbrogno will serve as a senior origination
professional of our investment advisor. Mr. Imbrogno has
over 25 years of experience advising clients on mergers and
acquisitions. In 2004, Mr. Imbrogno co-founded Fidus
Partners, LLC, an investment banking firm. Prior to co-founding
Fidus Partners, LLC, Mr. Imbrogno served as a managing
director and partner at Wachovia Securities and its
predecessors, First Union Securities, Inc. and Bowles Hollowell
Conner & Co, from 1985 to 2004. Mr. Imbrogno also
served as the head of Wachovia Securities private equity
group coverage effort from 1998 to 2002. Mr. Imbrogno
earned a bachelor of arts from Davidson College and a master of
business administration from the University of Virginias
Darden School of Business.
J. Stephen Dockery will serve as a senior origination
professional of our investment
advisor. Mr. Dockery has over 21 years of
experience advising clients on mergers and acquisitions and
corporate finance transactions. Prior to joining Fidus Partners,
LLC, an investment banking firm, in 2006, Mr. Dockery
served in various capacities at Wachovia Securities and its
predecessors, First Union Securities, Inc. and Bowles Hollowell
Conner & Co., including managing director and officer
from 1997 to 2006. Prior to joining Bowles Hollowell
Conner & Co., Mr. Dockery worked as a corporate
attorney for Robinson Bradshaw & Hinson, P.A.
Mr. Dockery earned a bachelor of arts from Davidson College
and a juris doctor from Yale Law School.
Michael Miller will serve as a senior origination
professional of our investment advisor. Mr. Miller has over
21 years of leveraged finance and corporate lending and
origination experience. Prior to joining Fidus Partners, LLC, an
investment banking firm, in 2010, Mr. Miller served in
various capacities, including managing director and head of
business development, at Allied Capital Corporation from 2005
until 2010. Prior to joining Allied Capital Corporation,
Mr. Miller spent more than 16 years with JPMorgan
Chase and its predecessors where he worked in their
middle-market leveraged finance, asset based and corporate
lending groups. Mr. Miller earned his bachelor of science
in industrial and labor relations from Cornell University and
his master of business administration from The Stern School at
New York University.
Portfolio
Management
Each investment opportunity requires the approval of five of the
seven members of the investment committee responsible for
advising us, or four of the five members of the investment
committee for Fidus Mezzanine Capital, L.P., and generally
receives the unanimous approval of the investment committee.
Follow-on investments in existing portfolio companies will
require the investment committees approval in addition to
what was obtained when the initial investment in the company was
made. In addition, temporary investments, such as those in cash
equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less, may
require approval by the appropriate investment committee. The
day-to-day
management of investments approved by the investment committees
will be overseen by the members of the investment committee.
Biographical information with respect to the members of the
investment committee is set out under
Biographical Information and
Investment Committee.
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Each of our investment committee members has ownership and
financial interests in, and may receive compensation
and/or
profit distributions from, our investment advisor. None of the
members of the investment committee receive any direct
compensation from us. The following table shows the dollar range
of our common stock to be beneficially owned by each member of
our investment advisors investment committees upon
consummation of this offering based on the $15.00 initial public
offering price:
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Dollar Range of Equity Securities
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Portfolio Managers of Our Investment Advisor
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in Fidus Investment
Corporation(1)(2)
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Edward H. Ross
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Over $1,000,000
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John J. Ross, II
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$500,001-$1,000,000
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B. Bragg Comer, III
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$500,000-$1,000,000
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Thomas C. Lauer
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$500,000-$1,000,000
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Paul E. Tierney, Jr.
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Over $1,000,000
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John H. Grigg
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$100,001-$500,000
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W. Andrew Worth
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$500,000-$1,000,000
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(1) |
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Dollar ranges are as follows: None, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or Over
$1,000,000.
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(2) |
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Amounts reflect shares acquired in the Formation Transactions
and any shares purchased in the directed share program. See
Underwriting Directed Share Program.
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MANAGEMENT
AND OTHER AGREEMENTS
Our investment advisor is located at 1603 Orrington Avenue,
Suite 820, Evanston, Illinois 60201. Our investment advisor
is registered as an investment adviser under the Advisers Act.
Subject to the overall supervision of our board of directors and
in accordance with the 1940 Act, our investment advisor will
manage our day-to-day operations and provide investment advisory
services to us. Under the terms of the Investment Advisory
Agreement, our investment advisor will:
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determine the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes;
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assist us in determining what securities we purchase, retain or
sell;
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identify, evaluate and negotiate the structure of the
investments we make (including performing due diligence on our
prospective portfolio companies); and
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execute, close, service and monitor the investments we make.
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Investment
Advisory Agreement
Management
Fee
Pursuant to the Investment Advisory Agreement with our
investment advisor and subject to the overall supervision of our
board of directors, our investment advisor provides investment
advisory services to us. For providing these services, our
investment advisor receives a fee from us, consisting of two
components a base management fee and an incentive
fee. The base management fee is calculated at an annual rate of
1.75% based on the average value of our total assets (other than
cash or cash equivalents but including assets purchased with
borrowed amounts) at the end of the two most recently completed
calendar quarters. The base management fee is payable quarterly
in arrears.
The incentive fee has two parts. One part is calculated and
payable quarterly in arrears based on our pre-incentive fee net
investment income for the quarter. Pre-incentive fee net
investment income means interest income, dividend income and any
other income (including any other fees such as commitment,
origination, structuring, diligence and consulting fees or other
fees that we receive from portfolio companies but excluding fees
for providing managerial assistance) accrued during the calendar
quarter, minus operating expenses for the quarter (including the
base management fee, any expenses payable under the
Administration Agreement and any interest expense and dividends
paid on any outstanding preferred stock, but excluding the
incentive fee and any organizing and offering costs).
Pre-incentive fee net investment income includes, in the case of
investments with a deferred interest feature (such as market
discount, debt instruments with
payment-in-kind
interest, preferred stock with
payment-in-kind
dividends and zero-coupon securities), accrued income that we
have not yet received in cash. Our investment advisor is not
under any obligation to reimburse us for any part of the
incentive fee it receives that was based on accrued interest
that we never actually receive.
Pre-incentive fee net investment income does not include any
realized capital gains, realized capital losses or unrealized
capital appreciation or depreciation. Because of the structure
of the incentive fee, it is possible that we may pay an
incentive fee in a quarter where we incur a loss. For example,
if we receive pre-incentive fee net investment income in excess
of the hurdle rate (as defined below) for a quarter, we will pay
the applicable incentive fee even if we have incurred a loss in
that quarter due to realized and unrealized capital losses.
Pre-incentive fee net investment income, expressed as a rate of
return on the value of our net assets (defined as total assets
less indebtedness and before taking into account any incentive
fees payable during the period) at the end of the immediately
preceding calendar quarter, is compared to a fixed hurdle
rate of 2.0% per quarter. If market interest rates rise,
we may be able to invest our funds in debt instruments that
provide for a higher return, which would increase our
pre-incentive fee net investment income and make it easier for
our investment advisor to surpass the fixed hurdle rate and
receive an incentive fee based on such net investment income.
Our pre-incentive fee net investment income used to calculate
this part of the incentive fee
-84-
is also included in the amount of our total assets (other than
cash and cash equivalents but including assets purchased with
borrowed amounts) used to calculate the 1.75% base management
fee.
We pay our investment advisor an incentive fee with respect to
our pre-incentive fee net investment income in each calendar
quarter as follows:
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no incentive fee in any calendar quarter in which the
pre-incentive fee net investment income does not exceed the
hurdle rate of 2.0%;
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100.0% of our pre-incentive fee net investment income with
respect to that portion of such pre-incentive fee net investment
income, if any, that exceeds the hurdle rate but is less than
2.5% in any calendar quarter. We refer to this portion of our
pre-incentive fee net investment income (which exceeds the
hurdle rate but is less than 2.5%) as the
catch-up
provision. The
catch-up is
meant to provide our investment advisor with 20.0% of the
pre-incentive fee net investment income as if a hurdle rate did
not apply if this net investment income exceeds 2.5% in any
calendar quarter; and
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20.0% of the amount of our pre-incentive fee net investment
income, if any, that exceeds 2.5% in any calendar quarter.
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The following is a graphical representation of the calculation
of the income-related portion of the incentive fee:
Quarterly
Incentive Fee Based on Net Investment Income
Pre-incentive
fee net investment income (expressed as a percentage of the
value of net assets)
Percentage
of pre-incentive fee net investment income allocated to
income-related portion of incentive fee
These calculations will be appropriately prorated for any period
of less than three months and adjusted for any share issuances
or repurchases during the current quarter.
The second part of the incentive fee is a capital gains
incentive fee that is determined and payable in arrears as of
the end of each fiscal year (or upon termination of the
Investment Advisory Agreement, as of the termination date), and
equals 20.0% of our net realized capital gains as of the end of
the fiscal year. In determining the capital gains incentive fee
payable to our investment advisor, we calculate the cumulative
aggregate realized capital gains and cumulative aggregate
realized capital losses since our inception, and the aggregate
unrealized capital depreciation as of the date of the
calculation, as applicable, with respect to each of the
investments in our portfolio. For this purpose, cumulative
aggregate realized capital gains, if any, equal the sum of the
differences between the net sales price of each investment, when
sold, and the original cost of such investment. Cumulative
aggregate realized capital losses equals the sum of the amounts
by which the net sales price of each investment, when sold, is
less than the original cost of such investment. Aggregate
unrealized capital depreciation equals the sum of the
difference, if negative, between the valuation of each
investment as of the applicable calculation date and the
original cost of such investment. At the end of the applicable
year, the amount of capital gains that serves as the basis for
our calculation of the capital gains incentive fee equals the
cumulative aggregate realized capital gains less cumulative
aggregate realized capital losses, less aggregate unrealized
capital depreciation, with respect to our portfolio of
investments. If this number is positive at the end of such year,
then the capital gains incentive fee for such year equals 20.0%
of such amount, less the aggregate amount of any capital gains
incentive fees paid in respect of our portfolio in all prior
years.
-85-
Examples
of Quarterly Incentive Fee Calculation
Example
1: Income Related Portion of Incentive Fee
Alternative
1
Assumptions
Investment income (including interest, dividends, fees, etc.) =
1.25%
Hurdle
rate(1) =
2.0%
Management
fee(2) =
0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)
= 0.2%
Pre-incentive fee net investment income
(investment income (management fee + other
expenses)) = 0.6125%
Pre-incentive fee net investment income does not exceed hurdle
rate, therefore there is no income-related incentive fee.
Alternative
2
Assumptions
Investment income (including interest, dividends, fees, etc.) =
2.9%
Hurdle
rate(1) =
2.0%
Management
fee(2) =
0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)
= 0.2%
Pre-incentive fee net investment income
(investment income (management fee + other
expenses)) = 2.2625%
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Incentive fee
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= 100.0% × pre-incentive fee net investment income (subject
to
catch-up)(4)
= 100.0% × (2.2625% 2.0%)
= 0.2625%
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Pre-incentive fee net investment income exceeds the hurdle rate,
but does not fully satisfy the
catch-up
provision, therefore the income related portion of the incentive
fee is 0.2625%.
Alternative
3
Assumptions
Investment income (including interest, dividends, fees, etc.) =
3.5%
Hurdle
rate(1) =
2.0%
Management
fee(2) =
0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)
= 0.2%
Pre-incentive fee net investment income
(investment income (management fee + other
expenses)) = 2.8625%
Incentive fee = 100.0% × pre-incentive fee net investment
income (subject to
catch-up)(4)
Incentive fee = 100.0% ×
catch-up
+ (20.0% × (pre-incentive fee net investment
income 2.5%))
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Catch-up
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= 2.5% 2.0%
= 0.5%
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Incentive fee
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= (100.0% × 0.5%) + (20.0% × (2.8625%
2.5%))
= 0.5% + (20.0% × 0.3625%)
= 0.5% + 0.0725%
= 0.575%
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Pre-incentive fee net investment income exceeds the hurdle rate,
and fully satisfies the
catch-up
provision, therefore the income related portion of the incentive
fee is 0.575%.
-86-
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(1) |
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Represents 8.0% annualized hurdle rate. |
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(2) |
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Represents 1.75% annualized base management fee. |
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(3) |
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Excludes organizational and offering expenses. |
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(4) |
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The
catch-up
provision is intended to provide our investment advisor with an
incentive fee of 20.0% on all pre-incentive fee net investment
income as if a hurdle rate did not apply when our net investment
income exceeds 2.5% in any fiscal quarter. |
Example
2: Capital Gains Portion of Incentive Fee(*):
Alternative
1:
Assumptions
Year 1: $5.0 million investment made in
Company A (Investment A), and $7.5 million
investment made in Company B (Investment B)
Year 2: Investment A sold for
$12.5 million and fair market value (FMV) of
Investment B determined to be $8.0 million
Year 3: FMV of Investment B determined to be
$6.25 million
Year 4: Investment B sold for
$7.75 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of
$1.5 million ($7.5 million realized
capital gains on sale of Investment A multiplied by 20.0%)
Year 3: None $1.25 million
(20.0% multiplied by ($7.5 million cumulative capital gains
less $1.25 million cumulative capital depreciation)) less
$1.5 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of
$50,000 $1.55 million ($7.75 million
cumulative realized capital gains multiplied by 20.0%) less
$1.5 million (capital gains incentive fee taken in Year 2)
Alternative
2
Assumptions
Year 1: $4.0 million investment made in
Company A (Investment A), $7.5 million
investment made in Company B (Investment B) and
$6.25 million investment made in Company C
(Investment C)
Year 2: Investment A sold for
$12.5 million, FMV of Investment B determined to be
$6.25 million and FMV of Investment C determined to be
$6.25 million
Year 3: FMV of Investment B determined to be
$6.75 million and Investment C sold for $7.5 million
Year 4: FMV of Investment B determined to be
$8.75 million
Year 5: Investment B sold for $5.0 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $1.45 million capital gains
incentive fee 20.0% multiplied by $7.25 million
($8.5 million realized capital gains on Investment A less
$1.25 million unrealized capital depreciation on Investment
B)
Year 3: $0.35 million capital gains
incentive
fee(1)
$1.8 million (20.0% multiplied by $9.0 million
($9.75 million cumulative realized capital gains less
$0.75 million unrealized capital depreciation)) less
$1.45 million capital gains incentive fee received in Year 2
-87-
Year 4: None
Year 5: None $1.45 million
(20.0% multiplied by $7.25 million (cumulative realized
capital gains of $9.75 million less realized capital losses
of $2.5 million)) is less than $1.8 million cumulative
capital gains incentive fee paid in Year 2 and Year
3(2)
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* |
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The hypothetical amounts of returns shown are based on a
percentage of our total net assets and assume no leverage. There
is no guarantee that positive returns will be realized and
actual returns may vary from those shown in this example. |
|
(1) |
|
As illustrated in Year 3 of Alternative 2 above, if we were to
be wound up on a date other than our fiscal year end of any
year, we may have paid aggregate capital gains incentive fees
that are more than the amount of such fees that would be payable
if we had been wound up on our fiscal year end of such year. |
|
(2) |
|
As noted above, it is possible that the cumulative aggregate
capital gains fee received by our investment advisor
($1.8 million) is effectively greater than
$1.45 million (20.0% of cumulative aggregate realized
capital gains less net realized capital losses or net unrealized
depreciation ($7.25 million)). |
Payment
of Our Expenses
All investment professionals of our investment advisor
and/or its
affiliates, when and to the extent engaged in providing
investment advisory and management services to us, and the
compensation and routine overhead expenses of personnel
allocable to these services to us, will be provided and paid for
by our investment advisor and not by us. We will bear all other
out-of-pocket costs and expenses of our operations and
transactions, including, without limitation, those relating to:
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organization;
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calculating our net asset value (including the cost and expenses
of any independent valuation firm);
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fees and expenses incurred by our investment advisor under the
Investment Advisory Agreement or payable to third parties,
including agents, consultants or other advisors, in monitoring
financial and legal affairs for us and in monitoring our
investments and performing due diligence on our prospective
portfolio companies or otherwise relating to, or associated
with, evaluating and making investments;
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interest payable on debt, if any, incurred to finance our
investments;
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offerings of our common stock and other securities;
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investment advisory fees and management fees;
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administration fees and expenses, if any, payable under the
Administration Agreement (including payments under the
Administration Agreement between us and our investment advisor
based upon our allocable portion of our investment
advisors overhead in performing its obligations under the
Administration Agreement, including rent and the allocable
portion of the cost of our officers, including a chief
compliance officer, chief financial officer, if any, and their
respective staffs);
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transfer agent, dividend agent and custodial fees and expenses;
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federal and state registration fees;
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all costs of registration and listing our shares on any
securities exchange;
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U.S. federal, state and local taxes;
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independent directors fees and expenses;
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costs of preparing and filing reports or other documents
required by the SEC or other regulators including printing costs;
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costs of any reports, proxy statements or other notices to
stockholders, including printing and mailing costs;
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-88-
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our allocable portion of any fidelity bond, directors and
officers/errors and omissions liability insurance, and any other
insurance premiums;
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direct costs and expenses of administration, including printing,
mailing, long distance telephone, copying, secretarial and other
staff, independent auditors and outside legal costs;
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proxy voting expenses; and
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all other expenses reasonably incurred by us or our investment
advisor in connection with administering our business.
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Duration
and Termination
Unless terminated earlier as described below, the Investment
Advisory Agreement will continue in effect for a period of two
years from its effective date. It will remain in effect from
year to year thereafter if approved annually by our board of
directors or by the affirmative vote of the holders of a
majority of our outstanding voting securities, and, in either
case, if also approved by a majority of our directors who are
not interested persons. The Investment Advisory
Agreement automatically terminates in the event of its
assignment, as defined in the 1940 Act, by our investment
advisor and may be terminated by either party without penalty
upon not less than 60 days written notice to the
other. The holders of a majority of our outstanding voting
securities may also terminate the Investment Advisory Agreement
without penalty. See Risk Factors Risks
Relating to our Business and Structure We will be
dependent upon our investment advisors managing members
and our executive officers for our future success. If our
investment advisor were to lose any of its managing members or
we lose any of our executive officers, our ability to achieve
our investment objective could be significantly harmed.
Indemnification
The Investment Advisory Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, our investment advisor and its and its
affiliates respective officers, directors, members,
managers, partners, stockholders and employees are entitled to
indemnification from us from and against any claims or
liabilities, including reasonable legal fees and other expenses
reasonably incurred, arising out of or in connection with our
business and operations or any action taken or omitted on our
behalf pursuant to authority granted by the Investment Advisory
Agreement.
Administration
Agreement
Pursuant to an Administration Agreement, Fidus Investment
Advisors, LLC will act as our administrator and will furnish us
with office facilities and equipment and clerical, bookkeeping
and record keeping services at such facilities. Under the
Administration Agreement, our investment advisor will perform,
or oversee the performance of, our required administrative
services, which include being responsible for the financial
records that we are required to maintain and preparing reports
to our stockholders and reports filed with the SEC. In addition,
our investment advisor will assist us in determining and
publishing our net asset value, overseeing the preparation and
filing of our tax returns and the printing and dissemination of
reports to our stockholders, and generally overseeing the
payment of our expenses and the performance of administrative
and professional services rendered to us by others. Under the
Administration Agreement, our investment advisor will also
provide managerial assistance on our behalf to those portfolio
companies that have accepted our offer to provide such
assistance. Payments under the Administration Agreement will be
equal to an amount based upon our allocable portion (subject to
the review and approval of our board of directors) of our
investment advisors overhead in performing its obligations
under the Administration Agreement, including rent and our
allocable portion of the cost of our officers, including our
chief financial officer and chief compliance officer and their
respective staffs. The Administration Agreement will have an
initial term of two years and may be renewed with the
approval of our board of directors or by a vote of the holders
of a majority of our outstanding voting securities, and, in
either case, if also approved by a majority of our directors who
are not interested persons. The Administration
Agreement may be terminated by either party without penalty upon
60 days written
-89-
notice to the other party. The holders of a majority of our
outstanding voting securities may also terminate the
Administration Agreement without penalty. To the extent that our
investment advisor outsources any of its functions we will pay
the fees associated with such functions on a direct basis
without profit to our investment advisor.
Indemnification
The Administration Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, our investment advisor and its and its
affiliates respective officers, directors, members,
managers, stockholders and employees are entitled to
indemnification from us from and against any claims or
liabilities, including reasonable legal fees and other expenses
reasonably incurred, arising out of or in connection with our
business and operations or any action taken or omitted on our
behalf pursuant to authority granted by the Administration
Agreement.
License
Agreement
We intend to enter into a license agreement with Fidus Partners,
LLC under which Fidus Partners, LLC will grant us a
non-exclusive (provided that there is not a change in control of
Fidus Partners, LLC), royalty-free license to use the name
Fidus. Under this agreement, we will have a right to
use the Fidus name for so long as our investment
advisor remains our investment advisor. Other than with respect
to this limited license, we will have no legal right to the
Fidus name. This license agreement will remain in
effect for so long as our investment advisor remains our
investment advisor.
-90-
RELATED-PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Immediately prior to our election to be treated as a business
development company under the 1940 Act and the closing of this
offering, we will acquire Fidus Mezzanine Capital, L.P. through
the merger of Fidus Mezzanine Capital, L.P. with our
wholly-owned subsidiary and, as a result, we will acquire 100.0%
of the limited partnership interests in Fidus Mezzanine Capital,
L.P. In addition, we will acquire Fidus Mezzanine Capital GP,
LLC, Fidus Mezzanine Capital, L.P.s general partner,
through a merger of Fidus Mezzanine Capital GP, LLC with and
into our wholly-owned subsidiary and, as a result, we will
acquire 100.0% of the general partnership interests in Fidus
Mezzanine Capital, L.P. Fidus Mezzanine Capital GP, LLCs
partnership interest in Fidus Mezzanine Capital, L.P. will be
converted into shares of our common stock on the same terms as
the partnership interests held by the limited partners. The
members of Fidus Mezzanine Capital GP, LLC will each receive a
pro rata portion of these shares of our common stock in exchange
for their interest in Fidus Mezzanine Capital GP, LLC.
The members of Fidus Mezzanine Capital GP, LLC, including
Messrs. E. Ross, J. Ross, Comer, Tierney, Grigg, Dockery
and Imbrogno, currently control Fidus Mezzanine Capital GP, LLC
and, through their control of Fidus Mezzanine Capital GP, LLC,
Fidus Mezzanine Capital, L.P. Mr. E. Ross will be the
chairman of our board of directors and the chairman of our
investment advisors investment committees. In addition to
Mr. E. Ross, Messrs. J. Ross, Comer, Tierney,
Grigg, Dockery and Imbrogno are investment professionals of our
investment advisor. As a result, the amount of consideration to
be received by the limited partners of Fidus Mezzanine Capital,
L.P. and the members of Fidus Mezzanine Capital GP, LLC in the
formation transactions has not been determined through
arms-length negotiations. However, our board of directors,
which will consist of a majority of
non-interested
directors prior to the consummation of the formation
transactions, will approve the consideration to be received in
the formation transactions and all other related party
transactions that have not been determined through
arms-length
negotiations.
In addition, upon the consummation of the formation
transactions, certain of the members of Fidus Mezzanine Capital
GP, LLC will become members of our investment advisor and will
each receive a portion of the profits of our investment advisor.
The members of Fidus Mezzanine Capital GP, LLC will receive a
preference in the payment of the profits of our investment
advisor, such that they will receive at least 50.0% of the
annual net profits of our investment advisor, until such time as
they receive, in the aggregate, $11.0 million, and the
members of our investment advisor, which will also include the
members of Fidus Mezzanine Capital GP, LLC, will receive the
remaining net profits. Upon payment of such preference, the
members of Fidus Mezzanine Capital GP, LLC, which also includes
certain of the members of our investment advisor, will receive
20.0% of the annual net profits of our investment advisor, and
the members of our investment advisor, which will also include
the members of Fidus Mezzanine Capital GP, LLC, will receive the
remaining net profits.
Upon consummation of the formation transactions, Fidus Mezzanine
Capital, L.P. will terminate its investment advisory agreement
with Fidus Capital, LLC and we will enter into the Investment
Advisory Agreement with Fidus Investment Advisors, LLC. The
investment professionals of Fidus Capital, LLC are also the
investment professionals of Fidus Investment Advisors, LLC, our
investment advisor.
Investment
Advisory Agreement
Under the Investment Advisory Agreement with our investment
advisor, we will pay our investment advisor a management fee and
incentive fee. The incentive fee will be computed and paid on
income that we may not have yet received in cash. This fee
structure may create an incentive for our investment advisor to
invest in certain types of securities that may have a high
degree of risk. Additionally, we rely on investment
professionals from our investment advisor to assist our board of
directors with the valuation of our portfolio investments. Our
investment advisors management fee and incentive fee are
based on the value of our investments and there may be a
conflict of interest when personnel of our investment advisor
are involved in the valuation process for our portfolio
investments.
Administration
Agreement
Pursuant to the Administration Agreement, our investment advisor
will furnish us with office facilities and equipment and
clerical, bookkeeping and record keeping services at such
facilities. Under the Administration Agreement, our investment
advisor will perform, or oversee the performance of, our
required
-91-
administrative services, which include being responsible for the
financial records that we are required to maintain and preparing
reports to our stockholders and reports filed with the SEC. In
addition, our investment advisor will assist us in determining
and publishing our net asset value, oversee the preparation and
filing of our tax returns and the printing and dissemination of
reports to our stockholders, and generally oversee the payment
of our expenses and the performance of administrative and
professional services rendered to us by others. Under the
Administration Agreement, our investment advisor will also
provide managerial assistance on our behalf to those portfolio
companies that have accepted our offer to provide such
assistance. Payments under the Administration Agreement will be
equal to an amount based upon our allocable portion (subject to
the review and approval of our board of directors) of our
investment advisors overhead in performing its obligations
under the Administration Agreement, including rent and our
allocable portion of the cost of our officers, including our
chief financial officer and chief compliance officer and their
respective staffs.
Conflicts
of Interests
Our investment advisor may in the future manage investment
vehicles with similar or overlapping investment strategies and
will put in place a conflict-resolution policy that addresses
the co-investment restrictions set forth under the 1940 Act and
the allocation of investment opportunities. The 1940 Act
generally prohibits us from making certain negotiated
co-investments with affiliates unless we first obtain an order
from the SEC permitting us to do so. Where co-investments can be
made, or where an investment opportunity becomes available to
one investment vehicle managed by our investment advisor, then
an equitable allocation must be made with respect to the
investment.
Our investment advisor will seek to ensure the equitable
allocation of investment opportunities when we are able to
invest alongside other accounts managed by our investment
advisor. When we invest alongside such other accounts as
permitted, such investments will be made consistent with our
investment advisors allocation policy. Under this
allocation policy, a fixed percentage of each opportunity, which
may vary based on asset class and from time to time, will be
offered to us and similar eligible accounts, as periodically
determined by our investment advisor and approved by our board
of directors, including our independent directors. The
allocation policy will provide that allocations among us and
other accounts will generally be made pro rata based on each
accounts capital available for investment, as determined,
in our case, by our board of directors, including our
independent directors. It will be our policy to base our
determinations as to the amount of capital available for
investment based on such factors as the amount of cash on hand,
existing commitments and reserves, if any, the targeted leverage
level, the targeted asset mix and diversification requirements
and other investment policies and restrictions set by our board
of directors, or imposed by applicable laws, rules, regulations
or interpretations. We expect that these determinations will be
made similarly for other accounts.
In situations where co-investment with other entities managed by
our investment advisor is not permitted or appropriate, such as
when there is an opportunity to invest in different securities
of the same issuer, our investment advisor will need to decide
whether we or such other entity or entities will proceed with
the investment. Our investment advisor will make these
determinations based on an allocation policy that will generally
require that such opportunities be offered to eligible accounts
on a basis that will be fair and equitable over time, including,
for example, through random or rotational methods.
In addition, certain members of our investment advisor and its
investment committees are also members of Fidus Partners, LLC,
an investment banking firm. Fidus Partners, LLC may in the
future serve as an advisor to our portfolio companies and we may
invest in companies that Fidus Partners, LLC is advising. Fidus
Partners, LLC may receive fees in connection with these advisory
services, subject to regulatory restrictions imposed by the 1940
Act.
-92-
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
After this offering, no person will be deemed to control us, as
such term is defined in the 1940 Act. The following table sets
forth on a pro forma, as adjusted basis, as of the time of
completion of the offering and consummation of the formation
transactions, information with respect to the beneficial
ownership of our common stock by:
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each person known to us to beneficially own more than 5.0% of
the outstanding shares of our common stock;
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each of our directors and executive officers; and
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all of our directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the
federal securities laws and includes voting or investment power
with respect to the securities. Percentage of beneficial
ownership is based on 8,726,521 shares of our common stock
outstanding at the time of the consummation of the formation
transactions and this offering.
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Shares Beneficially Owned Immediately After the
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Formation Transactions
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and This Offering
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Name and
Address(3)
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Number(1)
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Percentage(2)
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Pinebridge Secondary Partners II Holdings,
L.P.(4)
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1,162,854
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13.3%
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Interested Directors:
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Edward H. Ross
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154,513
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1.8%
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Thomas C. Lauer
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64,707
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0.7%
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Independent Directors:
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Wayne F. Robinson
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Charles D. Hyman
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13,005
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0.1%
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Charles G. Phillips
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Executive Officers Who Are Not Directors:
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Cary L. Schaefer
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18,535
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0.2%
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All officers and directors as a group (6 persons)
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250,760
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2.8%
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(1) |
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Beneficial ownership has been determined in accordance with
Rule 13d-3
of the Exchange Act. |
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(2) |
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Based on a total of 8,726,521 shares of our common stock
issued and outstanding as of the closing of this offering. |
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(3) |
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The address for each of our officers and directors is
c/o Fidus
Investment Corporation, 1603 Orrington Avenue, Suite 820,
Evanston, Illinois 60201. |
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(4) |
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The address for Pinebridge Secondary Partners II Holdings, L.P.
is 399 Park Avenue,
4th
Floor, New York, New York 10022. We have been advised that
Pinebridge Secondary Partners II Holdings, L.P. owns all shares
both of record and beneficially. |
-93-
The following table sets forth, as of the date of the completion
of this offering, the dollar range of our equity securities
expected to be beneficially owned by each of our directors. We
are not part of a family of investment companies, as
that term is defined in the 1940 Act.
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Dollar Range of Equity Securities
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Name of Director
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in Fidus Investment
Corporation(1)
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Interested Directors:
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Edward H. Ross
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Over $100,000
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Thomas C. Lauer
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Over $100,000
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Independent Directors:
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Wayne F. Robinson
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None
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Charles D. Hyman
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Over $100,000
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Charles G. Phillips
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None
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(1) |
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Dollar ranges are as follows: None, $1 $10,000,
$10,001 $50,000, $50,001 $100,000, or over
$100,000. |
-94-
DIVIDEND
REINVESTMENT PLAN
We have adopted a dividend reinvestment plan that provides for
reinvestment of our dividends and other distributions on behalf
of our stockholders, unless a stockholder elects to receive cash
as provided below. As a result, if our board of directors
authorizes, and we declare, a cash dividend or other
distribution, then our stockholders who have not opted
out of our dividend reinvestment plan will have their cash
distribution automatically reinvested in additional shares of
our common stock, rather than receiving the cash distribution.
No action is required on the part of a registered stockholder to
have their cash dividend or other distribution reinvested in
shares of our common stock. A registered stockholder may elect
to receive an entire distribution in cash by notifying American
Stock Transfer & Trust, LLC, the plan administrator and our
transfer agent and registrar, in writing so that such notice is
received by the plan administrator no later than three days
prior to the payment date for distributions to stockholders. The
plan administrator will set up an account for shares acquired
through the plan for each stockholder who has not elected to
receive dividends or other distributions in cash and hold such
shares in non-certificated form. Upon request by a stockholder
participating in the plan, received in writing not less than
three days prior to the payment date, the plan
administrator will, instead of crediting shares to and/or
carrying shares in the participants account, issue a
certificate registered in the participants name for the
number of whole shares of our common stock and a check for any
fractional share.
Those stockholders whose shares are held by a broker or other
financial intermediary may receive dividends and other
distributions in cash by notifying their broker or other
financial intermediary of their election.
We intend to use primarily newly issued shares to implement the
plan, so long as our shares are trading at or above net asset
value. If our shares are trading below net asset value, we
intend to purchase shares in the open market in connection with
our implementation of the plan. The number of shares to be
issued to a stockholder is determined by dividing the total
dollar amount of the distribution payable to such stockholder by
the market price per share of our common stock at the close of
regular trading on The Nasdaq Global Market on the valuation
date fixed for such distribution. Market price per share on that
date will be the closing price for such shares on The Nasdaq
Global Market or, if no sale is reported for such day, at the
average of their reported bid and asked prices. The number of
shares of our common stock to be outstanding after giving effect
to payment of the dividend or other distribution cannot be
established until the value per share at which additional shares
will be issued has been determined and elections of our
stockholders have been tabulated.
There will be no brokerage charges or other charges to
stockholders who participate in the plan. The plan
administrators fees will be paid by us. If a participant
elects by written notice to the plan administrator to have the
plan administrator sell part or all of the shares held by the
plan administrator in the participants account and remit
the proceeds to the participant, the plan administrator is
authorized to deduct a $15.00 transaction fee plus a $0.10 per
share brokerage commissions from the proceeds.
Stockholders who receive dividends and other distributions in
the form of stock are subject to the same U.S. federal,
state and local tax consequences as are stockholders who elect
to receive their distributions in cash; however, since their
cash dividends will be reinvested, such stockholders will not
receive cash with which to pay any applicable taxes on
reinvested dividends. A stockholders basis for determining
gain or loss upon the sale of stock received in a dividend or
other distribution from us will be equal to the total dollar
amount of the distribution payable to the stockholder. Any stock
received in a dividend or other distribution will have a new
holding period for tax purposes commencing on the day following
the day on which the shares are credited to the
U.S. stockholders account.
Participants may terminate their accounts under the plan by
notifying the plan administrator via its website at
www.amstock.com or by filling out the transaction request form
located at bottom of their statement and sending it to the plan
administrator.
The plan may be terminated by us upon notice in writing mailed
to each participant at least 30 days prior to any record
date for the payment of any dividend by us. All correspondence
concerning the plan should be
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directed to the plan administrator by mail at Post Office Box
922, Wall Street Station, New York, New York 10269-0560, or by
the Plan Administrators Interactive Voice Response System
at 1-877-573-4005.
If you withdraw or the plan is terminated, you will receive the
number of whole shares in your account under the plan and a cash
payment for any fraction of a share in your account.
If you hold your common stock with a brokerage firm that does
not participate in the plan, you will not be able to participate
in the plan, and any dividend reinvestment may be effected on
different terms than those described above. Consult your
financial advisor for more information.
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MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material
U.S. federal income tax considerations applicable to us and
to an investment in our shares of common stock. This summary
does not purport to be a complete description of the income tax
considerations applicable to such an investment. For example, we
have not described certain considerations that may be relevant
to certain types of holders subject to special treatment under
U.S. federal income tax laws, including stockholders
subject to the alternative minimum tax, tax-exempt
organizations, insurance companies, dealers in securities,
pension plans and trusts, financial institutions,
U.S. stockholders (as defined below) whose functional
currency is not the U.S. dollar, persons who
mark-to-market
shares of our common stock and persons who hold our shares as
part of a straddle, hedge or
conversion transaction. This summary assumes that
investors hold our common stock as capital assets (within the
meaning of the Code). The discussion is based upon the Code,
Treasury regulations and administrative and judicial
interpretations, each as of the date of this prospectus and all
of which are subject to change, possibly retroactively, which
could affect the continuing validity of this discussion. We have
not sought and will not seek any ruling from the Internal
Revenue Service, or the IRS, regarding this offering. This
summary does not discuss any aspects of U.S. estate or gift
tax or foreign, state or local tax. It does not discuss the
special treatment under U.S. federal income tax laws that
could result if we invested in tax-exempt securities or certain
other investment assets.
For purposes of this discussion, a
U.S. stockholder means a beneficial owner of
shares of our common stock that is for U.S. federal income
tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States or any state thereof or
the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust if either a U.S. court can exercise primary
supervision over its administration and one or more
U.S. persons have the authority to control all of its
substantial decisions or the trust was in existence on
August 20, 1996, was treated as a U.S. person prior to
that date and has made a valid election to be treated as a
U.S. person.
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For purposes of this discussion, a
Non-U.S. stockholder
means a beneficial owner of shares of our common stock that is
not a U.S. stockholder.
If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds shares of our
common stock, the tax treatment of a partner in the partnership
will generally depend upon the status of the partner and the
activities of the partnership. A prospective investor that is a
partner in a partnership that will hold shares of our common
stock should consult its tax advisors with respect to the
purchase, ownership and disposition of shares of our common
stock.
Tax matters are very complicated and the tax consequences to
an investor of an investment in our shares of common stock will
depend on the facts of his, her or its particular situation. We
urge investors to consult their own tax advisors regarding the
specific consequences of such an investment, including tax
reporting requirements, the applicability of U.S. federal,
state, local and foreign tax laws, eligibility for the benefits
of any applicable tax treaty, and the effect of any possible
changes in the tax laws.
Election
to Be Taxed as a RIC
As a business development company, we intend to elect to be
treated as a RIC under Subchapter M of the Code. As a RIC, we
generally will not have to pay corporate-level federal income
taxes on any ordinary income or capital gains that we timely
distribute to our stockholders as dividends. To qualify as a
RIC, we must, among other things, meet certain
source-of-income
and asset diversification requirements (as described below). In
addition, we must distribute to our stockholders, for each
taxable year, at least 90.0% of our investment company
taxable income, which is generally our net ordinary income
plus the excess of realized net short-term capital gains over
realized net long-term capital losses (the Annual
Distribution Requirement).
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Taxation
as a RIC
If we:
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qualify as a RIC; and
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satisfy the Annual Distribution Requirement;
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then we will not be subject to U.S. federal income tax on
the portion of our investment company taxable income and net
capital gain, defined as net long-term capital gains in excess
of net short-term capital losses, we distribute to stockholders.
We will be subject to U.S. federal income tax at the
regular corporate rates on any net income or net capital gain
not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4.0% nondeductible federal excise tax on
our undistributed income unless we distribute in a timely manner
an amount at least equal to the sum of (a) 98.0% of our
ordinary income for each calendar year, (b) 98.2% of our
capital gain net income (both long-term and short-term) for the
one-year period ending October 31 in that calendar year and
(c) any income realized, but not distributed, in the
preceding year (the Excise Tax Avoidance
Requirement). For this purpose, however, any ordinary
income or capital gain net income retained by us that is subject
to corporate income tax for the tax year ending in that calendar
year will be considered to have been distributed by year end. We
currently intend to make sufficient distributions each taxable
year to satisfy the Excise Tax Avoidance Requirement.
In order to qualify as a RIC for U.S. federal income tax
purposes, we must, among other things:
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elect to be treated as a RIC;
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meet the Annual Distribution Requirement;
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qualify to be treated as a business development company under
the 1940 Act at all times during each taxable year;
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derive in each taxable year at least 90.0% of our gross income
from dividends, interest, payments with respect to certain
securities loans, gains from the sale of stock or other
securities, or other income derived with respect to our business
of investing in such stock or securities, and net income derived
from interests in qualified publicly-traded
partnerships (partnerships that are traded on an
established securities market or tradable on a secondary market,
other than partnerships that derive 90.0% of their income from
interest, dividends and other permitted RIC income) (the
90% Income Test); and
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diversify our holdings so that at the end of each quarter of the
taxable year:
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at least 50.0% of the value of our assets consists of cash, cash
equivalents, U.S. government securities, securities of
other RICs and other securities if such other securities of any
one issuer do not represent more than 5.0% of the value of our
assets or more than 10.0% of the outstanding voting securities
of the issuer (which for these purposes includes the equity
securities of a qualified publicly-traded
partnership); and
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no more than 25.0% of the value of our assets is invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer or of two or more
issuers that are controlled, as determined under applicable tax
rules, by us and that are engaged in the same or similar or
related trades or businesses or in the securities of one or more
qualified publicly-traded partnerships (the
Diversification Tests).
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To the extent that we invest in entities treated as partnerships
for U.S. federal income tax purposes (other than a
qualified publicly-traded partnership), we generally
must include our allocable share of the items of gross income
derived by the partnerships for purposes of the 90% Income Test,
and such gross income that is derived from a partnership (other
than a qualified publicly-traded partnership) will
be treated as qualifying income for purposes of the 90% Income
Test only to the extent that such income is attributable to
items of income of the partnership that would be qualifying
income if realized by us directly. In addition, we generally
must take into account our proportionate share of the assets
held by partnerships (other than a qualified
publicly-traded partnership) in which we are a partner for
purposes of the Diversification Tests.
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In order to meet the 90% Income Test, we may establish one or
more special purpose corporations to hold assets from which we
do not anticipate earning dividend, interest or other qualifying
income under the 90% Income Test. Any investments held through a
special purpose corporation would generally be subject to
U.S. federal income taxes and other taxes, and therefore
would be expected to achieve a reduced after-tax yield.
We may be required to recognize taxable income in circumstances
in which we do not receive a corresponding payment in cash. For
example, if we hold debt obligations that are treated under
applicable tax rules as having original issue discount (such as
debt instruments with
payment-in-kind
interest or, in certain cases, increasing interest rates or
issued with warrants), we must include in income each year a
portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing
such income is received by us in the same taxable year. We may
also have to include in our income other amounts that we have
not yet received in cash, such as deferred loan origination fees
that are paid after origination of the loan or are paid in
non-cash compensation such as warrants or stock. We anticipate
that a portion of its income may constitute original issue
discount or other income required to be included in taxable
income prior to receipt of cash.
Because any original issue discount or other amounts accrued
will be included in our investment company taxable income for
the year of the accrual, we may be required to make a
distribution to our stockholders in order to satisfy the Annual
Distribution Requirement, even though we will not have received
any corresponding cash amount. As a result, we may have
difficulty meeting the Annual Distribution Requirement. We may
have to sell some of our investments at times
and/or at
prices we do not consider advantageous, raise additional debt or
equity capital or forgo new investment opportunities for this
purpose. If we are not able to obtain cash from other sources,
we may fail to qualify for RIC tax treatment and thus become
subject to corporate-level federal income tax.
In addition, our taxable income will include the income of Fidus
Mezzanine Capital, L.P. (and possibly other subsidiaries). Fidus
Mezzanine Capital, L.P.s ability to make distributions to
us is limited by the Small Business Investment Act of 1958. As a
result, in order to qualify and maintain our status as a RIC, we
may be required to make distributions attributable to Fidus
Mezzanine Capital, L.P.s income without receiving cash
distributions from it with respect to such income. We can make
no assurances that Fidus Mezzanine Capital, L.P. will be able to
make, or not be limited in making, distributions to us. If we
are unable to satisfy the Annual Distribution Requirement, we
may fail to qualify or maintain our RIC status, which would
result in the imposition of corporate-level federal income tax
on our entire taxable income without regard to any distributions
made by us. We intend to retain a portion of the net proceeds of
this offering to make cash distributions to enable us to meet
the Annual Distribution Requirement.
Gain or loss realized by us from warrants acquired by us as well
as any loss attributable to the lapse of such warrants generally
will be treated as capital gain or loss. Such gain or loss
generally will be long-term or short-term, depending on how long
we held a particular warrant.
Our investments in
non-U.S. securities
may be subject to
non-U.S. income,
withholding and other taxes. In that case, our yield on those
securities would be decreased. Stockholders will generally not
be entitled to claim a credit or deduction with respect to
non-U.S. taxes
paid by us.
If we purchase shares in a passive foreign investment
company, (a PFIC), we may be subject to
U.S. federal income tax on a portion of any excess
distribution or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by us
to our stockholders. Additional charges in the nature of
interest may be imposed on us in respect of deferred taxes
arising from such distributions or gains. If we invest in a PFIC
and elect to treat the PFIC as a qualified electing
fund under the Code (a QEF), in lieu of the
foregoing requirements, we will be required to include in income
each year a portion of the ordinary earnings and net capital
gain of the QEF, even if such income is not distributed to us.
Alternatively, we can elect to
mark-to-market
at the end of each taxable year our shares in a PFIC; in that
case, we will recognize as ordinary income any increase in the
value of such shares and as ordinary loss any decrease in such
value to the extent it does not exceed prior increases included
in income. Under either election, we may be required to
recognize in a year income in excess of our distributions from
PFICs and our proceeds from
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dispositions of PFIC stock during that year, and such income
will be taken into account for purposes of the Annual
Distribution Requirement and the 4.0% federal excise tax.
Certain of our investment practices may be subject to special
and complex U.S. federal income tax provisions that may,
among other things, (1) treat dividends that would
otherwise constitute qualified dividend income as non-qualified
dividend income, (2) disallow, suspend or otherwise limit
the allowance of certain losses or deductions, (3) convert
lower-taxed long-term capital gain into higher-taxed short-term
capital gain or ordinary income, (4) convert an ordinary
loss or a deduction into a capital loss (the deductibility of
which is more limited), (5) cause us to recognize income or
gain without receipt of a corresponding distribution of cash,
(6) adversely affect the time as to when a purchase or sale
of stock or securities is deemed to occur, (7) adversely
alter the characterization of certain complex financial
transactions and (8) produce income that will not be
qualifying income for purposes of the 90% Income Test. We intend
to monitor our transactions and may make certain tax elections
to mitigate the potential adverse effect of these provisions,
but there can be no assurance that any adverse effects of these
provisions will be mitigated.
Under Section 988 of the Code, gain or loss attributable to
fluctuations in exchange rates between the time we accrue
income, expenses or other liabilities denominated in a foreign
currency and the time we actually collect such income or pay
such expenses or liabilities is generally treated as ordinary
income or loss. Similarly, gain or loss on foreign currency
forward contracts and the disposition of debt denominated in a
foreign currency, to the extent attributable to fluctuations in
exchange rates between the acquisition and disposition dates, is
also treated as ordinary income or loss.
Although we do not expect to do so, we will be authorized to
borrow funds and to sell assets in order to satisfy the Annual
Distribution Requirement and avoid
corporate-level U.S. federal income tax or the 4.0%
federal excise tax. However, under the 1940 Act, we are not
permitted to make distributions to our stockholders while our
debt obligations and other senior securities are outstanding
unless certain asset coverage tests are met.
Moreover, our ability to dispose of assets to meet the Annual
Distribution Requirement and avoid
corporate-level U.S. federal income tax and the 4.0%
federal excise tax may be limited by (1) the illiquid
nature of our portfolio
and/or
(2) other requirements relating to our status as a RIC,
including the Diversification Tests. If we dispose of assets in
order to meet the Annual Distribution Requirement or to avoid
corporate-level U.S. federal income tax or the 4.0%
federal excise tax, we may make such dispositions at times that,
from an investment standpoint, are not advantageous.
If we fail to satisfy the Annual Distribution Requirement or
otherwise fail to qualify as a RIC in any taxable year, we will
be subject to tax in that year on all of our taxable income,
regardless of whether we make any distributions to our
stockholders. In that case, all of such income will be subject
to corporate-level U.S. federal income tax, reducing
the amount available to be distributed to our stockholders. See
Failure To Qualify as a RIC.
As a RIC, we will not be allowed to carry forward or carry back
a net operating loss for purposes of computing our investment
company taxable income in other taxable years. U.S. federal
income tax law generally permits a RIC to carry forward
(i) the excess of the RICs net short-term capital
loss over its net long-term capital gain for a given year as a
short-term capital loss arising on the first day of the
following year and (ii) the excess of the RICs net
long-term capital loss over its net short-term capital gain for
a given year as a long-term capital loss arising on the first
day of the following year.
As described above, to the extent that we invest in equity
securities of entities that are treated as partnerships for
U.S. federal income tax purposes, the effect of such
investments for purposes of the 90% Income Test and the
Diversification Tests will depend on whether or not the
partnership is a qualified publicly-traded
partnership (as defined in the Code). If the partnership
is a qualified publicly-traded partnership, the net
income derived from such investments will be qualifying income
for purposes of the 90% Income Test and will be
securities for purposes of the Diversification
Tests. If the partnership, however, is not treated as a
qualified publicly-traded partnership, then the
consequences of an investment in the partnership will depend
upon the amount and type of income and assets of the partnership
allocable to us. The income derived from such investments may
not be qualifying income for purposes of the 90% Income Test
and, therefore, could adversely affect our qualification as a
RIC. We intend to monitor our investments in
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equity securities of entities that are treated as partnerships
for U.S. federal income tax purposes to prevent our
disqualification as a RIC.
Failure
to Qualify as a RIC
If we were unable to qualify for treatment as a RIC, we would be
subject to tax on all of our taxable income at regular corporate
rates. We would not be able to deduct distributions to
stockholders, nor would they be required to be made.
Distributions, including distributions of net long-term capital
gain, would generally be taxable to our stockholders as dividend
income (at a maximum U.S. federal income tax rate of 15.0%
(currently through 2012) in the case of
U.S. individual stockholders) to the extent of our current
and accumulated earnings and profits. Subject to certain
limitations under the Code, corporate distributees would be
eligible for the dividends received deduction. Distributions in
excess of our current and accumulated earnings and profits would
be treated first as a return of capital to the extent of the
stockholders tax basis, and any remaining distributions
would be treated as a capital gain. If we fail to qualify as a
RIC for a period greater than two taxable years, to qualify as a
RIC in a subsequent year we may be subject to regular corporate
tax on any net built-in gains with respect to certain of our
assets (i.e., the excess of the aggregate gains,
including items of income, over aggregate losses that would have
been realized with respect to such assets if we had been
liquidated) that we elect to recognize on requalification or
when recognized over the next ten years.
The remainder of this discussion assumes that we qualify as a
RIC and have satisfied the Annual Distribution Requirement.
Taxation
of U.S. Stockholders
Whether an investment in shares of our common stock is
appropriate for a U.S. stockholder will depend upon that
persons particular circumstances. An investment in shares
of our common stock by a U.S. stockholder may have adverse
tax consequences. The following summary generally describes
certain U.S. federal income tax consequences of an
investment in shares of our common stock by taxable
U.S. stockholders and not by U.S. stockholders that
are generally exempt from U.S. federal income taxation.
U.S. stockholders should consult their own tax advisors
before making an investment in our common stock.
Distributions by us generally are taxable to
U.S. stockholders as ordinary income or capital gains.
Distributions of our investment company taxable
income (which is, generally, our net ordinary income plus
net short-term capital gains in excess of net long-term capital
losses) will be taxable as ordinary income to
U.S. stockholders to the extent of our current or
accumulated earnings and profits, whether paid in cash or
reinvested in additional shares of our common stock. For the tax
years beginning on or before December 31, 2012, to the
extent such distributions paid by us to non-corporate
stockholders (including individuals) are attributable to
dividends from U.S. corporations and certain qualified
foreign corporations, such distributions generally will be
eligible for a maximum U.S. federal income tax rate of
15.0% (currently through 2012). In this regard, it is
anticipated that distributions paid by us will generally not be
attributable to dividends and, therefore, generally will not
qualify for the preferential U.S. federal income tax rate.
Distributions of our net capital gains (which is generally our
realized net long-term capital gains in excess of realized net
short-term capital losses) properly designated by us as
capital gain dividends will be taxable to a
U.S. stockholder as long-term capital gains (at a maximum
U.S. federal income tax rate of 15.0% (currently through
2012) in the case of individuals, trusts or estates),
regardless of the U.S. stockholders holding period
for his, her or its common stock and regardless of whether paid
in cash or reinvested in additional common stock. Distributions
in excess of our earnings and profits first will reduce a
U.S. stockholders adjusted tax basis in such
stockholders common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such
U.S. stockholder. Stockholders receiving dividends or
distributions in the form of additional shares of our common
stock purchased in the market should be treated for
U.S. federal income tax purposes as receiving a
distribution in an amount equal to the amount of money that the
stockholders receiving cash dividends or distributions will
receive, and should have a cost basis in the shares received
equal to such amount. Stockholders receiving dividends in newly
issued shares of our common stock will be treated as receiving a
distribution equal to the value of the shares received and
should have a cost basis of such amount.
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Although we currently intend to distribute any net long-term
capital gains at least annually, we may in the future decide to
retain some or all of our net long-term capital gains but
designate the retained amount as a deemed
distribution. In that case, among other consequences, we
will pay tax on the retained amount, each U.S. stockholder
will be required to include their share of the deemed
distribution in income as if it had been distributed to the
U.S. stockholder and the U.S. stockholder will be
entitled to claim a credit equal to their allocable share of the
U.S. federal corporate income tax paid on the deemed
distribution by us. The amount of the deemed distribution net of
such tax will be added to the U.S. stockholders tax
basis for their common stock. Since we expect to pay
U.S. federal corporate income tax on any retained capital
gains at our regular U.S. federal corporate income tax
rate, and since that rate is in excess of the maximum
U.S. federal income tax rate currently payable by
individuals on long-term capital gains, the amount of
U.S. federal corporate income tax that individual
stockholders will be treated as having paid and for which they
will receive a credit will exceed the U.S. federal income
tax they owe on the retained net capital gain. Such excess
generally may be claimed as a credit against the
U.S. stockholders other U.S. federal income tax
obligations or may be refunded to the extent it exceeds a
stockholders liability for U.S. federal income tax. A
stockholder that is not subject to U.S. federal income tax
or otherwise required to file a U.S. federal income tax
return would be required to file a U.S. federal income tax
return on the appropriate form in order to claim a refund for
the taxes we paid. In order to utilize the deemed distribution
approach, we must provide written notice to our stockholders
prior to the expiration of 60 days after the close of the
relevant taxable year. We cannot treat any of our investment
company taxable income as a deemed distribution.
For purposes of determining (a) whether the Annual
Distribution Requirement is satisfied for any year and
(b) the amount of capital gain dividends paid for that
year, we may, under certain circumstances, elect to treat a
dividend that is paid during the following taxable year as if it
had been paid during the taxable year in question. If we make
such an election, the U.S. stockholder will still be
treated as receiving the dividend in the taxable year in which
the distribution is made. However, any dividend declared by us
in October, November or December of any calendar year, payable
to stockholders of record on a specified date in such a month
and actually paid during January of the following year, will be
treated as if it had been received by our U.S. stockholders
on December 31 of the year in which the dividend was declared.
We will have the ability to declare a large portion of a
distribution in shares of our common stock to satisfy the Annual
Distribution Requirement. If a portion of such distribution is
pai